Economic reporting is far too focused on short-term fluctuations that often have little relationship to the underlying trend growth in the economy. Last fall this focus led to many celebrations of a turn around in the economy with many pronouncements that the United States was back on top in terms of growth.
The celebrations quickly turned to despair as bad winter weather led to a drop in GDP in the first quarter. There was much hand-wringing over why consumers were not spending their dividend from lower gas prices. (Somehow the hand-wringers never bothered to notice that consumption was at a near record high as a share of the GDP.)
This hand-wringing hit its peak earlier this month with this “letter to stingy American consumers” in the Wall Street Journal. In the letter the WSJ begged consumers to start spending again. Apparently they got the message retroactively. The Commerce Department reported today that retail sales jumped 1.2 percent in May, with April’s data revised up from no change to an increase of 0.2 percent.
So it looks like consumers are again spending their cheap-gas dividend and the economy is safely back on its slow growth track. Needless to say, we will probably have another round of celebrations as people look at the strong growth in May and tout a new boom, forgetting that the cause is a bounceback from the winter weakness. At least it gives economists and economics reporters something to do.
Economic reporting is far too focused on short-term fluctuations that often have little relationship to the underlying trend growth in the economy. Last fall this focus led to many celebrations of a turn around in the economy with many pronouncements that the United States was back on top in terms of growth.
The celebrations quickly turned to despair as bad winter weather led to a drop in GDP in the first quarter. There was much hand-wringing over why consumers were not spending their dividend from lower gas prices. (Somehow the hand-wringers never bothered to notice that consumption was at a near record high as a share of the GDP.)
This hand-wringing hit its peak earlier this month with this “letter to stingy American consumers” in the Wall Street Journal. In the letter the WSJ begged consumers to start spending again. Apparently they got the message retroactively. The Commerce Department reported today that retail sales jumped 1.2 percent in May, with April’s data revised up from no change to an increase of 0.2 percent.
So it looks like consumers are again spending their cheap-gas dividend and the economy is safely back on its slow growth track. Needless to say, we will probably have another round of celebrations as people look at the strong growth in May and tout a new boom, forgetting that the cause is a bounceback from the winter weakness. At least it gives economists and economics reporters something to do.
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Several news articles have reported on the potential costs of the Obama administration’s plans to forgive some of the student debt associated with Corinthian Colleges. Corinthian is a for-profit college that recently went bankrupt. It has been accused of using fraudulent tactics to get students to take out large loans to pay for its tuition.
In projecting the costs to the government, these pieces neglect to take account of the positive effect on incentives that eliminating this debt would have. As it stands, heavily indebted students could expect to have a large portion of any money they earn taken away from them to repay their debts. This acts as a strong disincentive to work (or possibly an incentive to work off the books) in the same way that a high tax rate would provide a disincentive to work.
It is reasonable to believe that these former students will work more and pay more taxes if their debt is forgiven. This would offset some of the money that the government would lose by forgiving the debt. While this offset is not likely to be close to the face value of the debt, it is very plausible that in many cases the additional tax revenue would be comparable to what the government would eventually collect on the debt if it were not forgiven. (Much of the debt will never be repaid regardless of whether the government forgives it.) In other words, forgiving the debt of former Corinthian students may be much less than indicated in these pieces.
Several news articles have reported on the potential costs of the Obama administration’s plans to forgive some of the student debt associated with Corinthian Colleges. Corinthian is a for-profit college that recently went bankrupt. It has been accused of using fraudulent tactics to get students to take out large loans to pay for its tuition.
In projecting the costs to the government, these pieces neglect to take account of the positive effect on incentives that eliminating this debt would have. As it stands, heavily indebted students could expect to have a large portion of any money they earn taken away from them to repay their debts. This acts as a strong disincentive to work (or possibly an incentive to work off the books) in the same way that a high tax rate would provide a disincentive to work.
It is reasonable to believe that these former students will work more and pay more taxes if their debt is forgiven. This would offset some of the money that the government would lose by forgiving the debt. While this offset is not likely to be close to the face value of the debt, it is very plausible that in many cases the additional tax revenue would be comparable to what the government would eventually collect on the debt if it were not forgiven. (Much of the debt will never be repaid regardless of whether the government forgives it.) In other words, forgiving the debt of former Corinthian students may be much less than indicated in these pieces.
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There is a widely circulated story in policy circles that public sector unions are to blame for underfunded public pensions. The story is that the unions effectively make deals with politicians they support to get generous pensions and leave the funding for people to deal with in the future.
In fact, there is little evidence to support this story, as many states with weak or no public sector unions rank near the bottom in pension funding, while some states with strong unions, like New York and Wisconsin, have pensions that are near full funding. Nonetheless, the story is still widely believed.
A ruling by New Jersey’s Supreme Court yesterday should help to kill this story once and for all. The basic issue was whether the unions could hold the governor to an agreement where he had agreed to make payments into the pension funds in exchange for concessions from the workers. The court said no, the governor and the legislature could not be bound by any deal.
In other words, whether or not required payments are made to pensions, at least in New Jersey, is entirely up to the legislature and the governor. The unions have no voice in the matter.
It should be pretty hard to blame the unions in this situation, but that doesn’t mean folks will stop doing it.
There is a widely circulated story in policy circles that public sector unions are to blame for underfunded public pensions. The story is that the unions effectively make deals with politicians they support to get generous pensions and leave the funding for people to deal with in the future.
In fact, there is little evidence to support this story, as many states with weak or no public sector unions rank near the bottom in pension funding, while some states with strong unions, like New York and Wisconsin, have pensions that are near full funding. Nonetheless, the story is still widely believed.
A ruling by New Jersey’s Supreme Court yesterday should help to kill this story once and for all. The basic issue was whether the unions could hold the governor to an agreement where he had agreed to make payments into the pension funds in exchange for concessions from the workers. The court said no, the governor and the legislature could not be bound by any deal.
In other words, whether or not required payments are made to pensions, at least in New Jersey, is entirely up to the legislature and the governor. The unions have no voice in the matter.
It should be pretty hard to blame the unions in this situation, but that doesn’t mean folks will stop doing it.
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No one expects much consistency from Washington politicians or the Washington Post, but the latest episode in the Trans-Pacific Partnership (TPP) should be over the top even for this crew. Wikileaks published the text of a leaked health care annex. The annex spells out a set of rules that public health care programs must follow in deciding which drugs and procedures to cover. This will be subject to review and in principle can be contested through the investor state dispute settlement (ISDS) tribunals.
This means that if Pfizer comes up with a drug, for which it charges $150,000 per treatment, that is no more effective than the generic that costs $100 per treatment, it can contest the decision of Medicare or another country’s health service not to pay for it. And, if it loses in the review process, it can take the complaint to an ISDS panel where it will get to appoint one of the three members.
Needless to say, this process is likely to raise the costs of Medicare and other public health systems considerably. That will undoubtedly lead to more calls for austerity from folks like the WaPo and other supporters of TPP, since we all know we can’t afford the exploding cost of Medicare.
No one expects much consistency from Washington politicians or the Washington Post, but the latest episode in the Trans-Pacific Partnership (TPP) should be over the top even for this crew. Wikileaks published the text of a leaked health care annex. The annex spells out a set of rules that public health care programs must follow in deciding which drugs and procedures to cover. This will be subject to review and in principle can be contested through the investor state dispute settlement (ISDS) tribunals.
This means that if Pfizer comes up with a drug, for which it charges $150,000 per treatment, that is no more effective than the generic that costs $100 per treatment, it can contest the decision of Medicare or another country’s health service not to pay for it. And, if it loses in the review process, it can take the complaint to an ISDS panel where it will get to appoint one of the three members.
Needless to say, this process is likely to raise the costs of Medicare and other public health systems considerably. That will undoubtedly lead to more calls for austerity from folks like the WaPo and other supporters of TPP, since we all know we can’t afford the exploding cost of Medicare.
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Just kidding, in a piece noting high levels of youth disengagement from the labor market (neither employed, nor looking for work) Samuelson complains:
“Those with jobs subsidize their usually better-off elders through Social Security and Medicare payroll taxes.”
Of course workers pay for these benefits. On average workers pay slightly more for their Social Security than the benefits they can expect to get back in retirement. They pay less than the cost of Medicare benefits, but this is because protectionists dominate policy in the United States and keep trade barriers in place that keep health care costs close to twice as high in other wealthy countries. Therefore it would be more accurate to say that their payroll taxes subsidize the income of doctors and drug companies.
It is true that in the current year Social Security and Medicare beneficiaries are not paying for their benefits, but if we ignore past payments, as Samuelson appears to be doing, then we should also ignore the fact that Peter Peterson and other wealthy people paid for the government bonds they own. From this perspective, we can then say that the interest paid on government bonds is simply a subsidy to the people who collect it.
Samuelson is right to note the high rates of non-employment among young people. The obvious solution would be to have government have big stimulus programs that could employ millions of young people. Unfortunately, deficit hawks (like Robert Samuelson) have forced government to go in the opposite direction and pursue policies of austerity.
In light of Samuelson’s complain about subsidies for the old, it is worth noting his comment:
“To be sure, there are correctives. … Older workers will retire or die, opening up permanent slots for the young.”
The rate at which older workers retire will depend in large part on whether they can survive on their Social Security benefits. If these are made less generous, then we would expect fewer older workers to retire, leaving fewer jobs for young people.
Just kidding, in a piece noting high levels of youth disengagement from the labor market (neither employed, nor looking for work) Samuelson complains:
“Those with jobs subsidize their usually better-off elders through Social Security and Medicare payroll taxes.”
Of course workers pay for these benefits. On average workers pay slightly more for their Social Security than the benefits they can expect to get back in retirement. They pay less than the cost of Medicare benefits, but this is because protectionists dominate policy in the United States and keep trade barriers in place that keep health care costs close to twice as high in other wealthy countries. Therefore it would be more accurate to say that their payroll taxes subsidize the income of doctors and drug companies.
It is true that in the current year Social Security and Medicare beneficiaries are not paying for their benefits, but if we ignore past payments, as Samuelson appears to be doing, then we should also ignore the fact that Peter Peterson and other wealthy people paid for the government bonds they own. From this perspective, we can then say that the interest paid on government bonds is simply a subsidy to the people who collect it.
Samuelson is right to note the high rates of non-employment among young people. The obvious solution would be to have government have big stimulus programs that could employ millions of young people. Unfortunately, deficit hawks (like Robert Samuelson) have forced government to go in the opposite direction and pursue policies of austerity.
In light of Samuelson’s complain about subsidies for the old, it is worth noting his comment:
“To be sure, there are correctives. … Older workers will retire or die, opening up permanent slots for the young.”
The rate at which older workers retire will depend in large part on whether they can survive on their Social Security benefits. If these are made less generous, then we would expect fewer older workers to retire, leaving fewer jobs for young people.
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The Washington Post ran a column by Steven Woloshin and Lisa Schwartz complaining about drug companies inventing diseases to market their products for unapproved uses. The immediate target is the marketing campaign for testosterone supplements to treat “Low-T.” Low-T comes down to a set of symptoms that are essentially those associated with aging. Aging cannot be treated effectively with testosterone supplements.
While the column calls for more effective regulation from the Food and Drug Administration, the underlying problem are patent monopolies that allow companies to make enormous profits by pushing their drugs for unapproved uses. When a patent monopoly provides such incredible incentives (patent protected drugs can sell for prices that are several thousand percent above the free market price), it is unrealistic to think that government regulation will be effective in changing behavior.
This is like the Soviet Union trying to prevent people from selling blue jeans on the black market. It didn’t work. In the case of patent protected drugs, the incentives are much larger. And, the health costs can be enormous, since the drugs being pushed may actually be harmful.
The Washington Post ran a column by Steven Woloshin and Lisa Schwartz complaining about drug companies inventing diseases to market their products for unapproved uses. The immediate target is the marketing campaign for testosterone supplements to treat “Low-T.” Low-T comes down to a set of symptoms that are essentially those associated with aging. Aging cannot be treated effectively with testosterone supplements.
While the column calls for more effective regulation from the Food and Drug Administration, the underlying problem are patent monopolies that allow companies to make enormous profits by pushing their drugs for unapproved uses. When a patent monopoly provides such incredible incentives (patent protected drugs can sell for prices that are several thousand percent above the free market price), it is unrealistic to think that government regulation will be effective in changing behavior.
This is like the Soviet Union trying to prevent people from selling blue jeans on the black market. It didn’t work. In the case of patent protected drugs, the incentives are much larger. And, the health costs can be enormous, since the drugs being pushed may actually be harmful.
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Paul Krugman questions whether there is an existence of positive relationship between equality and growth. He rightly cautions those on the left against being too quick to accept the existence of such a relationship.
He uses a simple graph showing the relationship between inequality and growth per working age person in the years 1985 to 2007. His takeaway is that there is not much of a positive relationship, but there clearly is no negative relationship between equality and growth. In other words, the people who argue that we need to have more inequality to support stronger growth have a hard case to make using this simple comparison.
I would suggest taking the analysis one step further. One big difference between countries over this period is the extent to which they opted to take the benefits from growth in more leisure time. There are large differences in the decline in the length of the average work year across countries.
Using the OECD data (which is not perfect for international comparisons) we find that relatively equal France saw a decline in average work hours of 10.2 percent over this period. Denmark had a decline of 5.3 percent, and West Germany had a drop of 15.9 percent. These would translate into annual increases in GDP per potential work hour of 0.5, 0.2, and 0.8 percentage points, respectively.
By contrast, in the relatively unequal U.K. the drop in average hours was 4.7 percent, in Canada 3.1 percent, and in the U.S. 2.2 percent. These translates in gains in annual GDP per potential hour worked of 0.2, 0.1, and 0.1 percentage points, respectively.
Would looking at GDP per potential hour worked strengthen the positive correlation between equality and growth? I don’t have time to check that one just now, but a quick eyeballing of the data suggests that it is possible. This still would not be conclusive evidence that equality is good for growth, but it would be interesting. And, it is an important reminder that there is nothing wrong with taking the benefits of higher productivity in the form of leisure rather than income. The planet will thank you for it.
Paul Krugman questions whether there is an existence of positive relationship between equality and growth. He rightly cautions those on the left against being too quick to accept the existence of such a relationship.
He uses a simple graph showing the relationship between inequality and growth per working age person in the years 1985 to 2007. His takeaway is that there is not much of a positive relationship, but there clearly is no negative relationship between equality and growth. In other words, the people who argue that we need to have more inequality to support stronger growth have a hard case to make using this simple comparison.
I would suggest taking the analysis one step further. One big difference between countries over this period is the extent to which they opted to take the benefits from growth in more leisure time. There are large differences in the decline in the length of the average work year across countries.
Using the OECD data (which is not perfect for international comparisons) we find that relatively equal France saw a decline in average work hours of 10.2 percent over this period. Denmark had a decline of 5.3 percent, and West Germany had a drop of 15.9 percent. These would translate into annual increases in GDP per potential work hour of 0.5, 0.2, and 0.8 percentage points, respectively.
By contrast, in the relatively unequal U.K. the drop in average hours was 4.7 percent, in Canada 3.1 percent, and in the U.S. 2.2 percent. These translates in gains in annual GDP per potential hour worked of 0.2, 0.1, and 0.1 percentage points, respectively.
Would looking at GDP per potential hour worked strengthen the positive correlation between equality and growth? I don’t have time to check that one just now, but a quick eyeballing of the data suggests that it is possible. This still would not be conclusive evidence that equality is good for growth, but it would be interesting. And, it is an important reminder that there is nothing wrong with taking the benefits of higher productivity in the form of leisure rather than income. The planet will thank you for it.
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That would appear to be the implication of his comment in a WSJ column that:
“Further, a recent study has shown that Germans and Americans spend the same amount of time working, but the proportion of taxable market time vs. nontaxable home work time is different. In other words, Germans work just as much, but more of their work is not captured in the taxable market.”
According to the OECD, the average work year for a German worker is just 77.6 percent as long as for a U.S. worker (1388 hours per year compared with 1788 hours per year). However their per capita income is more than 83 percent as high as in the United States.
If Germans are doing nontaxable home work then this would not be picked up in its official GDP data. If this nontaxable homework is on average at least 75 percent as productive as the taxable work that German’s perform, then a measure of GDP that included this work would show that Germany has a higher per capita income than the United States.
That would appear to be the implication of his comment in a WSJ column that:
“Further, a recent study has shown that Germans and Americans spend the same amount of time working, but the proportion of taxable market time vs. nontaxable home work time is different. In other words, Germans work just as much, but more of their work is not captured in the taxable market.”
According to the OECD, the average work year for a German worker is just 77.6 percent as long as for a U.S. worker (1388 hours per year compared with 1788 hours per year). However their per capita income is more than 83 percent as high as in the United States.
If Germans are doing nontaxable home work then this would not be picked up in its official GDP data. If this nontaxable homework is on average at least 75 percent as productive as the taxable work that German’s perform, then a measure of GDP that included this work would show that Germany has a higher per capita income than the United States.
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In his Upshot piece discussing the May jobs report, Neil Irwin noted both the healthy job growth and the implication for productivity growth. I was troubled by the same issue when I wrote up the jobs report yesterday.
The point here is quite simple, we are seeing relatively rapid job growth, just under 2.0 percent over the last year, when the rate of economic growth is quite weak. The drop in first quarter GDP was clearly an anomaly. (One of the great pointless economic debates of all time is whether the bad number is due to unusually bad weather or an inadequate seasonal adjustment.) But even pulling this out, we are looking at an economy that at best is only growing at a bit more than 2.0 percent annually.
The implication, as arithmetic fans everywhere are quick to point out, is that productivity growth is far under 1.0 percent and possibly close to zero. This seems really hard to believe. You don’t have to ascribe to the robots will take all our jobs view to believe that the trend rate of productivity has to be at least 1.5 percent and quite possibly over 2.0 percent.
Productivity had grown at almost a 3.0 percent annual rate from 1995 to 2005. While that may have been a one-time spurt, even in the years of the slowdown, from 1973 to 1995, productivity still grew at a 1.5 percent annual rate.
There is always a substantial cyclical element to productivity growth. Firms are less concerned about maximizing output per worker when workers are cheap and plentiful. There also is some skewing as desperate workers take jobs in low pay and low productivity sectors like restaurants. By my calculation, this skewing knocked about 0.2 percentage points off of annual productivity growth since 2007. That is some of the story, but clearly there is much else going on.
Anyhow, it is good to see people getting jobs, but we should want to see a better pace of productivity growth. It is also important to remember that we still have a long way to go on the jobs front. While a 5.5 percent unemployment rate may not sound too bad, the employment rate for prime age workers (ages 25-54) is still down by 3.0 percentage points from its pre-recession level and 4.0 percentage points from its 2000 level. It is not plausible that all of these people just decided that they don’t feel like working.
This means that we still have far to go before we have fully recovered from the downturn. The Fed should keep this in mind when it considers putting its foot on the brakes by raising interest rates.
In his Upshot piece discussing the May jobs report, Neil Irwin noted both the healthy job growth and the implication for productivity growth. I was troubled by the same issue when I wrote up the jobs report yesterday.
The point here is quite simple, we are seeing relatively rapid job growth, just under 2.0 percent over the last year, when the rate of economic growth is quite weak. The drop in first quarter GDP was clearly an anomaly. (One of the great pointless economic debates of all time is whether the bad number is due to unusually bad weather or an inadequate seasonal adjustment.) But even pulling this out, we are looking at an economy that at best is only growing at a bit more than 2.0 percent annually.
The implication, as arithmetic fans everywhere are quick to point out, is that productivity growth is far under 1.0 percent and possibly close to zero. This seems really hard to believe. You don’t have to ascribe to the robots will take all our jobs view to believe that the trend rate of productivity has to be at least 1.5 percent and quite possibly over 2.0 percent.
Productivity had grown at almost a 3.0 percent annual rate from 1995 to 2005. While that may have been a one-time spurt, even in the years of the slowdown, from 1973 to 1995, productivity still grew at a 1.5 percent annual rate.
There is always a substantial cyclical element to productivity growth. Firms are less concerned about maximizing output per worker when workers are cheap and plentiful. There also is some skewing as desperate workers take jobs in low pay and low productivity sectors like restaurants. By my calculation, this skewing knocked about 0.2 percentage points off of annual productivity growth since 2007. That is some of the story, but clearly there is much else going on.
Anyhow, it is good to see people getting jobs, but we should want to see a better pace of productivity growth. It is also important to remember that we still have a long way to go on the jobs front. While a 5.5 percent unemployment rate may not sound too bad, the employment rate for prime age workers (ages 25-54) is still down by 3.0 percentage points from its pre-recession level and 4.0 percentage points from its 2000 level. It is not plausible that all of these people just decided that they don’t feel like working.
This means that we still have far to go before we have fully recovered from the downturn. The Fed should keep this in mind when it considers putting its foot on the brakes by raising interest rates.
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