Poverty, median income, hth ins #’s for 2015 out tomorrow AM

September 12th, 2016 at 9:31 am

Tomorrow the Census Bureau releases its annual report that allows us to drill down on how many different family types are doing in the current expansion. I’ve written up my expectations over at WaPo.

As you see, I believe the combination of very low inflation last year and the tightening job market will have lowered poverty and lifted middle-class incomes. It’s also important to look at the alternative poverty measure that the Census Bureau will release tomorrow, since it captures more policy inputs (the value of SNAP benefits, refundable tax credits) than the official rate.

I strongly suspect the Census data to show the ongoing decline in the percent of Americans without health insurance. Numerous other data sources have already revealed this finding for 2015 (see figure below, e.g.), prompting this text which I excerpt here as well:

I don’t mean to be dramatic, but given that health-care reform — Obamacare, if you prefer — is a complex policy thrown into a complex sector in a complex world, I think an objective person would be hard-pressed to find a more dramatic example of a policy having its intended consequence of reducing the share of Americans without health coverage. No one’s saying the Affordable Care Act doesn’t need some work — recalibration is how I think of it. But trust me when I tell you, that trend reversal you see in the figure below — a trend I believe will be further corroborated in tomorrow’s data — is one of the greatest successes of modern politics and policy.

I hope to have my write-up of tomorrow’s results up at WaPo a few hours after the 10AM release.

 

New paper from our full employment project: Binder/Rodrigue on updating Fed toolbox

September 9th, 2016 at 8:11 am

Last week, the Center on Budget and Policy Priorities’ Full Employment Project published an important new paperMonetary Rules and Targets: Finding the Best Path to Full Employment—by Haverford’s Carola Binder and Alex Rodrigue (B&R).

The paper takes a close look at a critical aspect of how the Federal Reserve makes decisions about monetary policy: the rules and benchmarks that guide them in meeting their dual mandate of full employment and stable prices. B&R’s work is timely because the Fed’s old toolbox needs an update.

First, as B&R show, the Fed has been missing their 2 percent inflation target for about four years running. Importantly, this downside miss has persisted even as actual unemployment has fallen to match the Fed’s estimate of the “natural rate”—i.e., their estimate of the lowest unemployment rate consistent with stable inflation, which may well be too high.

Second, recent and new work by macroeconomists Larry Summers, John Williams, Olivier Blanchard, and others shows that interest rates across the globe appear to have undergone a structural downshift in recent years. Another key Fed parameter—their neutral interest rate target (the rate that is neither stimulative nor contractionary)—is also likely to decline. Both of these developments must ultimately be reflected in Fed policy.

Third, B&R point out that some outsiders are pushing the Fed to rely on some version of the “Taylor rule,” an equation derived by economist John Taylor that describes the Fed’s historical rate-setting behavior as a function of inflation and economic slack. But B&R argue that adherence to a rigid, simple equation would undermine the Fed’s discretion at crucial economic moments: “Following the Great Recession, for example, the original form of the Taylor rule would have directed the Fed to raise interest rates above zero in 2011, years before the labor market recovery was near completion, which would have slowed the recovery even further.”

So what tools should be in an updated Fed toolbox? B&R provide a useful table, shown below, which summarizes a set of monetary policy rules and targets along with the authors’ judgements as to which tools are best for hitting full employment. The two targeting rules they view as most promising in that regard are nominal GDP targeting and nominal wage targeting.

Under NGDP targeting, the Fed “would choose and announce either a target growth rate for NGDP or a target path for NGDP and adjust its policy rate to help achieve the target in the medium run; the bank would lower rates if NGDP were below target and raise them if NGDP were above target.” Since wages are the largest component of nominal GDP, targeting aggregate wages would resemble NGDP targeting, while wage targeting could alternatively focus on the growth rate of nominal wages (as B&R note, Josh Bivens has suggested 3.5 percent for an average nominal wage growth target).

Because nominal growth equals real growth plus inflation, both nominal wage and NGDP targets implicitly account for inflation while also focusing on indicators more likely to promote the goal of full employment. B&R observe that an NGDP target could have highlighted the need for more expansionary monetary policy between 2007 and 2009, potentially spurring policymakers to action sooner and easing the severity of the Great Recession.

Another useful tool reviewed by B&R, especially in the current environment, is price-level targeting. Under price-level targeting, the Fed targets a path for the price level over time. For example, they may decide it’s optimal for the economy if the price index is around 100 today, 103 next year and 106 the year after that. The useful attribute to level targeting is that if instead of hitting 103 next year, the price level is only 102, the public expects the Fed to employ stimulative monetary policy until inflation is back on its path.

How does that differ from current practices and what are its advantages? The Fed currently targets a 2 percent inflation rate, but it is ambiguous as to whether this is an average target (meaning that if you’re below it for a while you then need to be above it for a time) or a ceiling. If Fed officials view it as a ceiling, as their statements sometimes suggest, they’ll likely tighten monetary policy once they hit it even if they’ve been missing 2 percent for years and tightening means slowing job and wage growth that has eluded too many workers in recent recoveries. Under price-level targeting, there is no such ambiguity. If inflation is below the target path, the Fed tries to increase price growth, regardless of the percent change in prices.

We hope Fed officials and others concerned about the intersection between monetary policy and full employment carefully consider the typology offered in B&R’s paper. The authors have done some very useful work in illuminating the policy path toward full employment.

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A small and obvious point about high-visibility campaigns in capitalist economies…

September 8th, 2016 at 12:08 pm

There’s a lot of justified buzz about what a bad job Matt Lauer did in his interview of the candidates last night. Jon Chait labeled Lauer’s decisions about what to focus on and his failure of critical follow-ups as “pathetic” and I agree. Awfully hard to make this democracy thing work when the information intermediaries fail to do their job.

But what, exactly, is that job? Is it not perfectly rationale for high-ranking members of the media–information gatekeepers with the power to influence election outcomes–to gin up a close horse race?

The is not a Palin-bash of the “lame-stream” media. I’m sure there’s a selection bias in play, but I work with the media every day and have almost uniformly good experiences with people trying to understand and convey their and my best understanding of what’s actually going on in the economy.

I’m just making the obvious point that the Lauer-level media has a financial incentive to do what they can to both keep the race closer than it might otherwise be and avoid the appearance of taking sides. I’m not sure they respond to those incentives but it would certainly explain why you’d be hesitant to check facts and go easier on the candidate that’s behind in the polls.

It would also explain Chris Wallace’s recent assertion that he would not try to call out falsehoods when he moderates one of the presidential debates: “That’s not my job…I do not believe that it’s my job to be a truth squad.”

Such a position underscores that key intermediaries do not view this process to be about providing the electorate with the information we need to make an informed choice.

Which begs the question, what is it about? Well, I’ve long found that you’ll rarely go wrong if you follow the money, and the incentives push the wrong way here, where the right way is informed journalists pushing candidates to honestly represent their positions and when they won’t, calling them on it.

The non-mystery of declining employment rates for prime-age workers

September 7th, 2016 at 6:15 pm

Allow me to pile on alongside Dean Baker on this alleged mystery-of-the-missing-men, the theme of an NPR story that Dean critiques. There’s little mystery here: the driving factor is the loss of employment opportunities, or what economists call weak labor demand, particularly for non-college-educated, prime-age (25-54) workers. It’s not the only factor, but it’s the main one. There are various ways to show this, but the one I find most intuitive, as it’s kinda staring us in the face, is the cyclical pattern of the employment rates of prime-aged men, which I’ll get to below.

A caveat: this being economics, I want to be careful not to over-claim. There are, of course, other factors in play and no one has smoking-gun evidence that demand explains everything. But nothing ever explains everything in economics, and you should be suspicious of those who claim otherwise.

That said, I recently wrote something on this issue, out soon, critiquing new work by Nick Eberstadt, who’s cited in the NPR piece and has a book on this coming out soon (summarized here). Nick was kind enough to include a response by yours truly in the book. His evidence of the long-term decline in men’s employment rates, by the way, is far-reaching and well-constructed. But we disagree on the diagnosis.

This is a problem, because when you downplay the straightforward demand-side story, you end up emphasizing supply-side stories about disability insurance, the safety net, and other less important explanations which lead you to prescriptions that are ineffective at best and harmful at worst.

For those of us who’ve tracked this phenomenon for a while, the recent report by the Council of Economic Advisors is among the most thorough analyses out there. The CEA finds that “reductions in labor supply—in other words, prime-age men choosing not to work for a given set of labor market conditions—explain relatively little of the long-run trend…In contrast, reductions in the demand for labor, especially for lower-skilled men, appear to be an important component of the decline in prime-age male labor force participation.” (My bold.)

It is common, for example, to cite the generosity of the Disability Insurance program as a large contributor to the long-term decline in men’s work. But CEA shows that the magnitude of the increase of prime-age men on DI is too small to explain the lion’s share of the decline in work. Over a period where their participation rates fell 7.5 points (1967-2014), CEA finds disability rates go up from 1 to 3 percentage points. Of course, it would be extreme to conclude that none of that increase was warranted by actual disabilities (or conversely, that all of it was warranted). CEA’s analysis assigns less than half a percentage point (out of the 7.5 points just noted) to DI, suggesting it accounts for less than 10 percent of the decline in work.

Citing other safety net programs gets you no further, because they’ve become more, not less, conditioned on work.

But to me, just eyeballing the data returns a solid bit of demand-side evidence (“EPOP” in the chart’s title means employment-to-population ratio, or the employment rate). The figure below shows male employment rates with shaded recession bars and a trend line running through the series. The negative trend is obvious and suggests the depth of the problem. But the cyclicality around the trend is equally clear. Simply put, prime-age guys get whacked by recessions (and the less educated they are, the harder they get hit); then, as demand strengthens, they slowly start to climb back.

Source: BLS, linear trend

Source: BLS, linear trend

Most recently, these guys have climbed 2/3’s of the way back from their losses in the Great Recession. In recent downturns, they’ve made in most of the way back: in 1979, their EPOP was 91 percent; in 1989, 90 percent; in 2007, 88 percent. None of this denies the negative trend which is real and serious. But this series is a ratchet, not a straight line.

The reason that’s important is because it suggests they’re not lost to the labor market: these guys still respond to demand shocks in both directions. In other work, I’ve shown that less educated prime-age men are more responsive to stronger demand—their employment rates are more cyclical—than those with higher levels of education (see table 3 here). The coefficient on the demand variable for prime-age men with terminal high school degrees in this work was 1.12 (t-stat: 22.28). For those with advanced college degrees, the coefficient was 0.23 (t-stat: 5.37).

Here’s another figure that might surprise you. To estimate the extent of cyclicality in the employment rate series you see above, I regressed that series on a flexible trend and, to capture cyclical variation, the unemployment gap, or u – u*, where u is the unemployment rate and u* is CBO’s estimate of the natural rate. When u – u* is positive, there’s slack in the job market; when it’s negative, the job market is tight. Thus, we expect a negative coefficient (tighter job market, higher EPOP), which is what we get.

Source: See text.

Source: See text.

But if you start the regression with data from the late 1940s to the 1960s, add one observation at a time and rerun it (a rolling regression), you get the plot you see below. The fact that the coefficient falls as more observations are added (and also becomes more statistically significant) suggests an increasing cyclical response.

Here again, I don’t want to overplay the point—the coefficient on the unemployment gap grows by about 25 percent over the series. But if you read much of the commentary on “missing men,” you’d be quickly convinced that these guys are increasingly cut off from the job market, disconnected from work, and immune to stronger labor demand.

Final point: I fear some guys are. That is, shut out and disconnected. These are the guys with criminal records, who face, as Eberstadt discusses, extremely steep barriers getting back into the job market, and there are millions of them. They need targeted help finding their way back to work, alongside criminal justice reform that stops excessively punishing them for non-violent crimes.

Bottom line, no mystery, just the need for a lot more labor demand. And given the persistence of this trend and the extent to which the economy leaves these guys behind, I’m not at all sure we can count on the market to do this for us. At least for some of these guys, and as Dean says, some women too, we may well need to think in terms of direct job creation.

Uber hours, and some Labor Day housecleaning

September 5th, 2016 at 11:00 am

Noam Scheiber has an interesting piece up at the NYT on choices made by Uber drivers as to how many hours they work (Scheiber’s stuff on the evolving workplace is must-read journalism, IMHO). Apparently, some drivers work more when fares are low and less when they’re high (Uber boosts fares in periods of high demand). That choice drew this commentary (my bold):

“In one camp is a group of so-called behavioral economists who have found evidence that many taxi drivers work longer hours on days when business is slow and shorter hours when business is brisk — the opposite of what economic rationality, to say nothing of common sense, would seem to dictate.”

I don’t get is why this is such a theoretical or common-sense puzzle, i.e., why isn’t this simply a case of the “income effect” dominating the “substitution effect?” Microecon 101 posits that there are two countervailing forces affecting labor supply when your (after-tax) wage goes up. One, the substitution effect, says work more as the opportunity cost of not working just went up (i.e., the cost of an hour of chilling = your hourly wage). The other, the income effect, says work less because you can now afford to chill more without lowering your income.

In fact, the article does suggest that this latter effect is in play as drivers appear to be roughly hitting their income targets sooner when fares are up (though there’s also something in there about how more experienced Uber drivers don’t drive less at peak fares).

At any rate [sic], I may be missing something and it’s a small point, but I wonder if what’s going on here is emblematic of a more serious problem I’ve noticed in the tax debate: income effects are heavily discounted, if not ignored. And this makes supply-side tax cuts look more pro-work than they probably are.

To be fair, the empirical literature supports the view that the substitution effect dominates—when they simulate labor supply responses to tax changes, the CBO uses a substitution elasticity that is multiples of that for the income effect: 0.24 versus -0.05 (see Table 4 here). Moreover, the assumption that most workers can freely set their hours as they see fit belies most workers’ reality, which is one reason why the Uber drivers and other gig economy workers are a cool group to study in this space, as they’ve inherently got more flexibility.

But we shouldn’t be at all surprised if those who can do so work less when their pay goes up. For many, it’s an unquestionably rational choice!

*****

On other matters, a few links to pieces you may have missed and might enjoy.

My (pretty long) Labor Day piece over at WaPo. Yes, we need more unionization, a critical yet diminished balancing force. But is such a revival plausible? That’s where centralized bargaining comes in.

Also at WaPo, a plea to the Fed to do what jazz musicians do when they get lost in the tune: when in doubt, lay out!

Finally, Arthur Levitt asks me many topical questions and gives me some time to answer them!