Musical Interlude: An old fav (from 1788)

February 27th, 2015 at 4:07 pm

OK, I know some consider this Mozart piano sonata as just a simple ditty for kids to work out on (Mozart himself described it as “for beginners”). But I found an old CD of it the other day played by none other than my fav pianist for this sort of thing–Alicia De Larrocha–and upon listening to it I was transported to a far, far better place. And now, you may join me there!

Middle Class Economics: Josh Barro nails some critical points

February 26th, 2015 at 11:16 am

Josh Barro does an excellent job describing many of the key points about the challenges of crafting what politicians are calling “middle-class economics.” As I see it, they’re talking about policies that reconnect overall economic growth and the prosperity of the middle class. Though median household incomes have been rising in recent years, as best we can tell, they’re still down 1.5% in real terms over the recovery and about 3% below their pre-recession peak (these are not gov’t data; they come from the private firm Sentier Research). Meanwhile real GDP’s up 14%, corporate profitability is up about 50%, and equity markets have about doubled in real terms.

Barro points out that in recent years, the federal government racked up quite a good track record of insulating the poor from the ravages of the Great Recession (see here, e.g., and here for longer term evidence). And minimum wage policies, supported by states both blue and red, as well as President Obama and Congressional D’s, have a good track record of boosting the pay of low-wage workers with few of the unintended consequences opponents rail about.

But that’s the poor. Which gov’t policies can replace the eroding glue that in earlier periods linked middle class earnings to rising productivity?

Well, the first thing, as I and every other Keynesian-oriented economist have endlessly stressed, is Congress could maybe not screw things up, i.e., stay out of the way, i.e., do no harm. No austerity—premature deficit reduction—which shaved 1.5% off of real GDP growth in 2013, no fiscal cliffs, debt ceiling, government shutdowns. If you can’t get out and push, then just go name a post office or something.

Second, bless his heart, Barro emphasizes full employment. Working-age households have no better friend than tight labor markets that push employers to raise compensation to get and keep the workers they need to meet strong demand or risk leaving profits on the table.

However, Josh also emphasized that it’s not clear what government can do to help achieve that goal. It’s mostly the Fed, he argues. Here I think he overlooks something important, as I’ll explain in a moment.

But here’s a lovely passage about what government can do, one I haven’t seen prominently displayed outside of Dean Baker, who won’t shut up about it:

Another way Washington can push up wages is by making it easier to work less. The Affordable Care Act is already doing this by decoupling health insurance from full-­time work, making it affordable for more parents to work part-­time and more workers to retire before they reach Medicare eligibility at 65. If people no longer feel the need to work just for the health benefits, employers will have to induce them into the labor market with higher wages or other improvements.

In the hands of relentless Obamacare critics, “making it easier to work less” is an abomination because it lowers GDP. But when it’s voluntary, as is the case here, it raises national welfare, an obscure way of saying it makes people happier! What the *$??!!#* do we care about: GDP or happiness!

As noted, I think there’s one thing Josh misses that government could do to make a real difference in the economic lives of middle class workers: lower the trade deficit by pushing back against competitors who manage their currencies in order to subsidize their exports to us and tax our exports to them.

As I argued in various pieces, there’s a lot the government could do to realign exchange rates to enhance our competitiveness. Most timely would be a chapter on actionable steps against currency manipulation in the Trans Pacific Partnership trade agreement currently under negotiation. Other ideas include “a tax on the imports of offending countries, fines, the temporary canceling of certain trade privileges and my favorite, reciprocal currency intervention: If countries can go into currency markets and buy dollars, then we must be able to do the same with their currency. That’s not currently possible with China and other countries, which use capital controls to block such large purchases.”

But would this really help the middle class? Absolutely, and through the key channel discussed above: it’s just very hard to get to full employment when you’re dragging around trade deficits of the magnitude we’ve run for decades now.

Allow me to share two slides on this, both of which I’ll bet you’ve never seen before, with the caveat that a few lines obviously don’t tell the full story; they’re suggestive, not dispositive. The first shows that over the period when the trade deficit averaged about zero as a share of GDP, we were at full employment (meaning the actual rate was at or below CBO’s estimate of the full employment rate) 69% of the time. But since the latter 1970s the trade deficit has averaged -2.5% of GDP (3% since 2000) and we’ve only been at full employment 29% of the time (!!).

Second, since our trade deficits have always been in manufactured goods (we maintain a small surplus in services), I’ve plotted the same trade deficit/GDP against the real manufacturing compensation of blue-collar workers. When the trade deficit averaged zero, manufacturing comp rose at a steady clip. Once we started running persistent deficits, it stagnated.

Again, these relationships are not as simple as the figures suggest, but much careful research confirms the facts and assertions I’ve made: our persistent trade deficits make it a lot harder to get to full employment, and as such, they’ve contributed to the challenge of middle class economics. Furthermore, government action against manipulation must be part of a reconnection agenda (a subtle plug for my new book, out soon, which devotes a phat chapter to this issue).

Full Employment and Trade Deficit

Trade Deficit and Manufacturing Comp

One last point. Does anyone know who coined the term “middle-class economics?” As far as I can tell, it comes from the writing of the Seattle entrepreneur and generally cool guy Nick Hanauer.

The first forum of the Middle Class Prosperity Project

February 24th, 2015 at 5:45 pm

I just got back from presenting this text and these figures at a this Senate forum on inequality, mobility, and middle-class prosperity and the lack thereof, with a heavy emphasis on policy. The project is the brainchild of Sen. Elizabeth Warren and Congressman Elijah Cummings, and I strongly recommend listening to what they had to say, along with that of my fellow panelists.

Looking forward to seeing where they take this project. They’re deeply engaged in the issues and I thought Rep. Cummings remarks at the end in response the question “why bother?” were resonant. And you would be awfully hard pressed to find someone speaking with more authority and passion on the need to reconnect growth and prosperity than Sen. Warren.

Larry Mishel nails a key point: tax cuts are palliatives, not cures.

February 24th, 2015 at 8:50 am

I don’t think you need a crystal ball to predict that whoever runs for president in 2016 will have some sort of tax cut at the heart of their platform, probably targeted at the middle class, and I’m talking both D’s and R’s. It will likely be pitched as a response to middle-class wage and income stagnation, and as such, I certainly understand the motivation. The disconnect between growth and middle-class prosperity is the motivation for my own tax cut proposal new book, The Reconnection Agenda: Reuniting Growth and Prosperity, hopefully out within the next few months.

But I actually say little about tax cuts as a solution to the fundamental disconnect, for reasons Larry Mishel articulated effectively in an NYT oped yesterday: “What has hurt workers’ paychecks is not what the government takes out, but what their employers no longer put in — a dynamic that tax cuts cannot eliminate.”

No question that some of the tax cuts we’ve been hearing about lately, such as those in the President’s budget to help pay for childcare or college, could help strapped families. The fact that a policy is palliative versus curative doesn’t mean it’s a bad idea.

But to get to the root of the disconnect, we need measures that strengthen workers’ bargaining power, from full employment supported by the Fed and investment-oriented fiscal policy, to improved labor standards and collective bargaining, to more balanced trade, and (I’d add) direct job creation and fair-hiring practices to reach the hardest to employ (each one of which gets a chapter in the forthcoming book).

One point I’d add to Larry’s excellent oped, and I think it’s important. This issue of wage and income stagnation is not quite the duality that our rhetoric suggests. That is, there’s no firewall between the primary distribution, or market outcomes, and the after-tax and transfer distribution. They’re related.

For example, this paper shows strong negative correlations between top tax rates and before-tax high-end compensation or income shares (see figure). One reason is that as top marginal tax rates go up, high earners have less incentive to push for super high salaries. E.G., a top rate of say, 70%, on income over some very high threshold disincentivizes the kind of super-numerary CEO pay packages we’ve seen evolve as top rates have come down. Of course, this result is conditional on few avenues for tax avoidance, which unfortunately does not describe our current tax code at all.

So sure, more progressive taxation is warranted, but to rely wholly or even mostly on that solution is to both further reduce our revenue base–very bad move–and to require annual trips back to the redistribution well…not, shall we say given current and probably at least near-term future politics, a promising strategy.

 

ceocomp_tax

Source: Piketty et al (see text for link)