Deficit, schmeficit…[try saying that 3 times fast]

April 22nd, 2018 at 3:14 pm

In my not-at-all-humble opinion, we need many more articles like this one by the WaPo’s Jeff Stein on the so-called deficit owls. They’re the opposite of deficit hawks, the first to ask “so what?” when the typical DC pundit bemoans the trillion dollar deficits we’re now looking at in coming years. (Why that makes them deficit ‘owls,’ as opposed to deficit ‘doves,’ I don’t know, and no, I’m not going to Google it.)

“So what?” is, in fact, a very useful, important question in this space. While I do not dwell in the same fiscal what-me-worry zone as the owls, the evidence has long been on their side. Moreover, they’re trying to prevent one ongoing and highly damaging policy error, and one nasty political tactic.

The policy error is the tendency toward budget austerity. That may sound dissonant given the rising deficits and debt I just mentioned, but when the government really needed to spend more, during and shortly after the Great Recession, the hawks won the argument, leading to considerable and avoidable human suffering. And, of course, it was much worse in Europe.

Even today, the hawks implicitly argue, with little economic rationale, for dis-investing in our current generation of children, for example, on behalf of “our grandchildren.” Again, how this makes economic sense has never approached coherency, at least none that I could discern.

The political tactic is to use the deficit–which, by revealed preferences, most conservatives don’t care a whit about–as a cudgel to beat up on spending programs. Though a shameless violation of Bernstein rule (“if you voted for the tax cut, you can’t complain about the deficit”), this play is glaringly obvious every benighted day in Swampville.

So where do I depart from the owls?

Part of the problem is that they’re just way too sure they’re right. Or, more precisely, they’re too sure that the fact that they’ve been right about the past means they’ll be right about the future.

Economics being what it is, there are no constant elasticities. Variables that have been uncorrelated for long periods can begin to move together. We’ve been living through a long period of low global interest rates and inflation, with central banks very much in the mix, marked by robust global supply chains and capital flows driven by excess savings over productive investments (which some call “secular stagnation”).

Throughout this period, there’s been no correlation to speak of between interest rates/inflation and deficits, something the owls have long understood and the hawks have long denied. But that said, I’m congenitally wary of economists who strongly assert that Y as a function of X will continue to behave as it has in the past. Their confidence on this point spooks me.

Next, while the owls do not deny that deficit spending at full employment can lead to overheating, they assume that bringing the heat back down occurs seamlessly. In the WaPo piece, they appear to argue that the Fed steps in, raises rates, and always achieves a soft landing. I’m skeptical.

Finally, the owls downplay the political economy of the impact of deficits. I recently elaborated on this point, also in the WaPo:

The economists Christine and David Romer recently released an important paper on these issues, showing that when countries have higher debt-to-GDP ratios, they do less to offset negative economic shocks. In that sense, a country with a debt ratio of 80 percent has less perceived fiscal space than one with a ratio of 40 percent. Empirically, the Romers find that countries with fiscal space (low debt ratios) apply anti-recessionary fiscal policy much more aggressively than countries without fiscal space. And it makes a big difference: “The fall in GDP with fiscal space is just 1.4 percent. The fall in GDP following a crisis without fiscal space reaches a maximum of 8.1 percent.”

The owls are 100% right on the economics here. But the sad truth is that it’s too often perceived, not actual, fiscal space that matters in the downturn.

Furthermore, my experience in decades of budget fights is that it will always be much harder to support and legislate the spending we need and want when we’re staring down increasing structural deficits (i.e., ones that grow even at full employment).

I’m not sure if that makes me a “howl” (hawkish owl), and I want to be mindful not to overstate any of these caveats. To say the owls have a better track record than the hawks in terms of predicting the economic impacts of both deficits and austerity is a trillion dollar understatement.

But the larger points are a) we really need to have a robust, ongoing discussion about when and why deficits matter, and b) every time someone asserts, without evidence, that of course deficits are awful and you’re some kind of public enemy for not agreeing with them, that someone should be ignored.

Employment Breakeven Levels: They’re higher than most of us thought

April 16th, 2018 at 3:32 pm

Recent writings underscore an important hole in economists’ knowledge base: we know neither the natural rate of unemployment nor the potential level of GDP. I mean, we’ve got estimates for days, but an honest confidence interval around them renders them useless as policy guidelines.

As Alan Blinder recently put it:

“For [the natural rate] to be useful you have to have at least a little confidence you know the number. You don’t need to know it to two decimal places, but within a reasonable range. If your range is 2.5 to 7, that doesn’t tell you anything.”

This post is about a related number that we don’t quite have right, either, one I wrote about a couple of years back: the jobs breakeven level (BL), or the monthly, net change in payroll employment that’s consistent with a stable unemployment rate. Though not as big a deal as the “natural” rate of unemployment, to which it’s closely related, the BL is an important piece of datum that provides insight into one of the most important questions in econ policy today: how much more room-to-run exists in the job market?

Back in mid-2016, when I was writing about this, economists thought the BL was roughly between 50,000-100,000 (note that this SF Fed analysis uses a natural rate of 5%, clearly too high, and one way to underestimate BLs). In fact, I wrote my piece to warn people not to be too worried if monthly payroll gains started coming in well below 200,000. Though I hedged my bet in a way I’ll get to in a moment, the dominant argument was that gains of around 100,000 were consistent with stable unemployment in the mid-4’s—the lowest rate thought to be consistent with stable inflation—along with labor force participation and working-age population growth around where they were back then.

This prediction now looks off. For the past six months, the jobless rate has held at 4.1% while payrolls are up an average of 211,000 per month, on net. Why hasn’t faster job growth led to lower unemployment, as most economists would have predicted a few years back?

The answer must be that there’s more labor market capacity than folks thought there was. Here’s one, simple way to look at it.

PR=PR/EMP * EMP/LF * LF/Pop * Pop

…where PR is payrolls, EMP is employment from the Household Survey, LF is the labor force (so EMP/LF = 1 – unemp rate; because EMP/LF + UN/LF = 1), and Pop is the working-age population (LF/Pop is thus the participation rate). Cancel everything out and you’re left with payrolls, which you can difference to get your monthly BLs.

If you think we’re pretty much at capacity, then your BL is solely a function of your expectations about population growth. The first line of the table below shows those numbers in May 2016, when I wrote my post. These generated a BL of about 100K.

PR/EMP EMP/LF (or 1-un rate) LF/Pop Pop*
May-16 95.3% 95.3% 62.6% 0.80%
Mar-18 95.5% 95.9% 62.9% 0.84%

*Annualized population growth rates; the top number is what I plugged in; the bottom number is the pace of pop growth between these two dates.

But if you think the jobless rate might fall further or the labor force participation rate might rise, then you’d predict higher BLs. In one scenario we ran from the earlier post, we predicted BLs of 200,000, based on an unemployment rate of 4% and LFPR of 63.5%.

Before I pat myself on the back for that prescient forecast, recognize, that as the 2nd line in the table above reveals, while the LFPR is up, it’s still well below 63.5%. The population growth rate is a little faster, so that makes a difference, as does the first factor in the table, which is just a conversation factor to go from the HH survey numbers to the payroll ones.

But there’s another important capacity change, unforeseen by many: the climbing of the prime-age (25-54) employment rate and LFPR. Neither are back to their pre-recession peaks, but especially the prime-age employment rate is clawing its way back. In fact, prime-agers have recovered 4.4 out of 5.5 percentage points, or 80%, of their decline over the course of the recession. Prime-age men, whose employment rates have suffered a longer-term decline, have made back 76% of their loss; women have done better, clawing back 90%.

So, economists need to update their BLs to accommodate some unknown degree of labor supply that we formerly discounted.

OK, caveat-time. As noted, while the cyclical part of the prime-age guys employment rate looks better than expected, the structural decline is real (see figure below). That said, I’m increasingly off the mindset that separating structural from cyclical is yet another area where economists are fuzzy (this great Yagan paper underscored that point for me). Be careful about writing people off; the reach of really strong labor demand may pull more people in than we tend to think.

Source: BLS

Also, while payrolls continue to chug along posting numbers that are about 2x of most economists BLs from a few years back, in percentage terms, their growth is decelerating, from around 2% back in 2015 to around 1.5% now, much as we’d expect as we close in on full employment, whatever that much-sought-after state looks like.

But the punchline remains: the fact that we’ve been adding an average of ~200K jobs a month, while unemployment sticks around 4%, along with, importantly, tame wage and price outcomes, means that we must not yet be at full employment.

Three pieces on why work requirements won’t work

April 16th, 2018 at 8:52 am

The Trump admin and their allies in Congress are trying to add work requirements to anti-poverty programs. A number of excellent sources explain why this won’t work, where “work” means help poor adults move closer to self-sufficiency. Of course, if the goal is to simply kick people of the rolls, which for some legislators, I’m certain is the case…well, then I guess it could work.

First, this efficient WaPo editorial gives you the facts and the numbers behind why this pursuit of work requirements is folly, either in terms of budgetary savings or improving the poor’s living standards.

Next, for a deep dive into the issue, this testimony by the Urban Institute’s Heather Hahn is one-stop-shopping for granular evidence, down to the level of caseworkers, as to why work requirements are so ill-advised.

Finally, there’s my piece on this in WaPo this AM, which gets into the fact that we’ve got better evidence than every before (see Hahn’s piece, along with the links to my CBPP colleagues) that, in fact, able-bodied poor people already work. Given the nature of the stressors and labor market barriers they face, their connection to the job market often needs to be strengthened, but work requirements likely will, as Hahn shows, have the opposite effect.

My broader point is: Despite some of the best evidence we’ve ever had showing that neither trickle-down tax cuts nor work requirements will work, conservatives continue trying to solve the problem that the poor have too much and the rich have too little.

Real wages for mid-wage workers actually haven’t grown much over the past couple of years.

April 12th, 2018 at 11:52 am

We always talk a lot about wage growth on jobs day because, you know, it’s jobs day. But later in the month, when the inflation numbers for the previous month are released, we should really say something about real, as in inflation-adjusted, wage growth. After all, what matters most to people is the buying power of their paychecks, right?

When the BLS real earnings report came out yesterday, I saw that Trump’s economic advisers tweeted out this pat-on-the-back:

But their claims should not be taken seriously. First, these are jumpy, monthly numbers, so you want to look at the longer-term trend, and second, the bit about prices falling is particularly weird. Deflation is clearly not upon the land—that’s a monthly blip.

The figure below plots the real, hourly wages for middle-wage workers: the 82% of the workforce that are production workers in factories and non-managers in services. Since around 2016, real wages have actually pretty stagnant. It’s bad economics to measure trends over presidential terms, but given the CEA’s tweet, note that since December 2016, the real hourly wages of middle-wage workers are up only 0.2%. These folks are working more hours per week, so their real weekly earnings did a tiny bit better, up 0.5%, but the technical term for that is bupkes.

Source: BLS

You’re probably wondering what caused that unusual real-wage jump in the last recession. Real wage movements tend to be pretty smooth relative to price changes, which can be volatile when there’s a shock to some commodity, often energy. In fact, energy costs tanked in 2008, and that led to a sharp decline in the price index (note: I’m mimicking BLS and using the CPI-W to deflate this wage series; not quite sure why they use this rather than the regular CPI but it doesn’t affect the results).

The next figure plots nominal wage and price growth, year-over-year, showing how that big uptick during the downturn was driven by a large, negative price spike.

Source: BLS

This figure also reveals something that many of us have grown concerned about: even as we close in on full employment, we’re not seeing much acceleration in nominal (and, as Figure 1 showed, real) hourly wage growth over the past couple of years. I think there are three reasons for this. In order of importance: there’s still slack in the job market, productivity growth is slow, and inflation is low (faster price growth tends to correlate with faster nominal wage growth).

Real white-collar hourly pay* is up 1.4% since Trump took over (versus 0.2% for mid-wage workers; 1.7% real gains for white-collar weekly earnings, vs. 0.5% for mid-wage), so some of what’s going on here may be the unequal distribution of earnings. I should also caution that the Establishment Survey data I’m using are one among many different wage series. Some, like the BLS weekly earnings series by wage percentile, show strong growth among lower paid workers, a point wage analyst Elise Gould has convincingly tied to places that raise their minimum wages.

But, as far as middle-wage workers are concerned, most series show roughly similar dynamics to the figure above. So, not a lot to crow about re the trend in real earnings for most workers. They’re pretty much tracking inflation at this point, which is a recipe for wage stagnation, not pats-on-the-back.

*BLS doesn’t provide this variable, but because they provide the overall average and the production worker wage, along with their employment counts, you can back out what I’m calling the white-collar wage. I’ve asked BLS statisticians if they consider that a legit calculation and they haven’t said “no.”

Some lynx: Unions, CBO’s new baseline, the Bernstein Rule…

April 9th, 2018 at 7:49 pm

The teachers provide us with a teaching moment, over at WaPo. Their actions pose a stark reminder of the essential need for a strong, organized movement to push back on the forces promoting inequality, non-representative government, trickle down tax policy, and more.

CBO released their updated “baseline,” or estimate of the US gov’t’s fiscal outlook. If you like red ink, you’re in biz. Instead of deficits between 3 and 4% of GDP over the next few years, we’re looking at deficits of 4-5%.

As I’ve written in many places, when you’re closing in on full employment, you want your deficit/GDP to come down and your debt/GDP to stabilize and then fall. It’s not that I worry about “crowd out” so much–public borrowing hasn’t crowded out private borrowing for a long time, as evidenced by low, stable interest rates (rates are climbing off the mat a bit now, as I’d expect at this stage of the expansion).

It’s a) there’s a recession out there somewhere are we lack the perceived fiscal space to deal with it, and b) the larger point that this is all part and parcel of the strategy to starve the Treasury of revenues so as to force entitlement cuts.

Which brings me to this oped by a group of former Democratic chairs of the president’s CEA. It’s a perfectly reasonable call for a balanced approach to meeting our fiscal challenges, and, again, consistent with my view that as we close in on full employment, the deficit should move toward primary balance (another way of saying debt/GDP stabilization).

But two things from this piece, which is a critical response to an earlier oped by a “group of distinguished economists from the Hoover Institution.”

First, I didn’t realize that the Hoover’ites argued that the “entitlements are the sole cause of the problem, while the budget-busting tax bill that was passed last year is described as a ‘good first step.’”

This puts them in direct violation of the Bernstein Rule: if you supported the tax cut, you can’t complain about the deficit.

A few of my CBPP colleagues have a new piece out about everything that’s wrong with the tax bill, and in this context, look at the section on why “…the nation is facing long-term fiscal challenges that will require more revenue, not less.  The new law…weakens the tax system’s ability to deliver on its core responsibility: raising sufficient revenue to adequately finance critical national needs…”

It’s really that simple. According to CBO, even including macro offsets, the tax cuts add $1.85 trillion to the debt over the next decade. Readers know my rap on this. The ultimate target of Republican fiscal policy is Social Security, Medicare, Medicaid, SNAP–the “entitlements.” Since they can’t politically cut them outright, they must starve the Treasury of revenues and then argue, as the Hoover’ites do, that we have no choice. After all, look at those deficits (to which we just added $2 trillion)!

That’s some serious chutzpah.

My second point is that the entitlements are actually a somewhat arbitrary target. That is, as long as we’re running up the debt, we’re increasing not collecting the revenues necessary to support spending. That means one could just as easily argue “we can’t afford the military!” as “we can’t afford the safety net!”

It’s true that the entitlements are on automatic compared to other spending that must be appropriated, but does anyone think the Defense Dept. is going to take a significant hit because we’ve recklessly cut taxes? That there’s a rhetorical question.

The moral of the story is: don’t listen to people telling you what we can’t afford, especially after they rammed through a huge, complicated, loophole-ridden, revenue-wasting tax cut.