Links referenced in a recent talk

January 6th, 2019 at 12:59 pm

I recently spoke to members of Congress and referenced a number of pieces. Here are the links to those pieces.

What are some ideas for lowering the growth of health costs? See the section starting on pg. 11 of this testimony.

On our lack of investment in quality, affordable pre-K, and how we’re an international outlier in that regard. Look carefully at the 2nd figure–it tells this story well.

On some ideas for progressively raising revenues. Also, see this on a financial transaction tax.

On the need for fiscal stimulus in the next recession, even at “high” levels of the debt/GDP ratio.

On lowering the black/white unemployment gap.

Payrolls up big as a strong jobs report caps a strong year for the US labor market

January 4th, 2019 at 9:37 am

Well, it appears that the US jobs market didn’t get the memo that a recession is just around the corner.

Payrolls rose a very strong 312,000 in December, bringing the full count of jobs added for 2018 up to 2.6 million, the strongest year for job gains since 2015. Unemployment ticked up to 3.9 percent, but largely because more people were drawn into the labor market, as the participation rate ticked up two-tenths to 63.1 percent, its highest level since early 2014, and yet another reminder that the job market has more capacity to expand than many observers heretofore believed. Nominal wage growth accelerated slightly and, at 3.2 percent for all private sector workers and 3.3 percent for mid-level earners, both measures tied cyclical highs. Weekly hours edged up slightly, jobs gains for the prior two months were revised up, and a very high 70 percent of private industries added jobs on net.

In other words, not only is the US labor market holding its own, it’s actually gained momentum in recent months. Moreover–and remarkably–these uniquely strong results are occurring against a backdrop of low, stable inflation, implying that the Federal Reserve could still conceivably pause in their rate-hiking campaign, accommodating job market improvements that are so essential to middle and low-wage workers.

Key findings from today’s report

To boost the underlying signal from the jobs data, our monthly smoother takes 3, 6, and 12-month averages of the monthly job gains from the payroll data. First, note that the bars show relatively high levels of job creation at this stage in the expansion, as many economists believed monthly gains would be slowing by now as the job market neared peak capacity. But at 254,000, the average monthly gain over the past quarter has been slightly higher than the earlier trends.

Tighter labor markets continue to noticeably boost wage growth, as shown in the two figures below. Nominal hourly wages were up 3.2 percent, year-over-year, for all private-sector workers, and 3.3 percent for middle-wage workers. The smoothed, 6-months moving average shows evidence of “wage-Phillips curve” awakening in 2018: low unemployment finally started to correlate with rising pay pressures. As discussed next, thanks largely to low energy prices, I expect real wage growth of over 1 percent for middle wage workers in 2018. While not a particularly high real growth rate in historical terms, it represents an important gain for working families.

Lookback on the 2018 job market relative to earlier years

With today’s report, we can evaluate the 2018 job market in historical context, as in the two tables below. The first focuses on jobs and the second on wages. Annual changes are for December 2017 over December 2018; level variables are for December 2018 (all these values may undergo some revisions).

Payrolls grew by 1.8 percent last year, a comparable, if slightly higher, rate to earlier years in the cycle, with gains of about 220,000 per month. The unemployment rate remains below that of earlier years in the last decade, and 6 percentage points below the almost 10 percent rate at the end of 2009, near the trough of the Great Recession. Another measure of labor slack—the employment rate of prime-age workers—at 79.7 last month, is still climbing back to its pre-recession peak of 80.3 percent reached in January at that year.

The next table offers a longer historical perspective on the growth in the hourly pay of middle-wage workers at business cycle peak years and 2018 (which may or may not turn out to be a peak year). Some key determinants of mid-level wage growth include the pace of inflation, productivity, unemployment, and bargaining power (which is, in turn, related to low unemployment, as well as unions and the depth of government labor standards, like minimum wages).

Thanks to the pressure of tighter labor markets, nominal wage growth picked up over the year, as shown in the figures above. But it remains below that of prior peaks. Part of this relates to lower inflation, and, in fact, real wage growth was faster for mid-level workers last year than in 2016-17, at least based on my forecast for December inflation (which isn’t out yet; my guess is that CPI inflation is up 2 percent, Dec/Dec).

The key lesson is that very tight labor markets generate real gains for working people, even with productivity quite low. Importantly, these gains are occurring in the current economy without generating inflationary pressures, both in actual and in expected inflation. Any economic model that insists the monetary authorities hit the brakes hard to preclude further such gains is clearly out of touch with reality.

Recession ahead?

Amidst this positive labor market news, various economic headwinds have kicked up of late. Highly volatile financial markets, Trump’s trade war, slower growth abroad, and fading fiscal stimulus are leading to some grim forecasts for near-term U.S. growth. Conversely, low unemployment, job gains, and higher real wages can be counted on to boost consumer spending, which is almost 70 percent of the U.S. economy. In other words, the economy faces both headwinds and tailwinds, with the latter reflecting the job-market induced strength of the highly acquisitive American consumer.

The next figure shows this relationship by plotting yearly growth rates of real, aggregate, weekly earnings (jobs times real wages times hours per week) against real, economy-wide consumer spending (not including December’s results). They track each other well, though less so in recessions, when households dip into savings—if they can—to smooth their consumption through down labor markets. Most recently, both series have been steadily tracking 2.5 to 3 percent and my expectation is that this trend will persist, if not strengthen in coming months, as stronger real wage gains support spending.

Source: BLS. BEA, my analysis

However, the headwinds noted above are real and, especially as fiscal stimulus fades later this year, growth will likely slow, as will job gains, threatening the dynamic portrayed in the previous figure. For now–say, over the next 6-12 months–strong consumer spending should provide the US economy with good momentum. But it is important to sustain these gains for as long as possible, as it took a long while for many working households took benefit from the expansion.

Testify! Diving into the weeds on debt, the spending vs. revenue problem, and “revealed preferences.”

December 20th, 2018 at 4:18 pm

I testified today before the House Financial Services Committee at a hearing the Republicans called “The perils of ignoring the national debt.” As I tweeted earlier today, the hearing was delayed a hour because the R’s went off to vote on a tax cut adding another $100 billion to the 10-year debt. That bill is unlikely to get very far in the Senate, but it does raise a somewhat existential question about the urgency of all this hand-wringing about the debt.

Here’s my testimony; see the intro for a summary and bullet points. There are two points I’ll highlight here. First, see the discussion of “revealed preferences.” I hear a lot of chin music from all sides about how much they really want to cut spending, yet they rarely do so, and, to the contrary, are often quick to raise spending on their preferences, many of which, to be clear, I share.

But I was taught to pay a lot more attention to what people do, not what they say, which economists label “revealed preferences.” Thus, I conclude in my testimony that:

Spending and “revealed preferences:” My point in these NDD and defense discussions is that Congress’s “revealed preferences” suggest our deficits are born of an unwillingness to raise the revenue we need to meet the spending we believe is warranted. To label that a “spending problem” is fundamentally inaccurate.

While hearings like this show we can have substantive disagreements on the extent of those needs and spending levels, spending deals don’t sign themselves. This reality, in tandem with the existence of large, persistent deficits and debt, reveals that year upon year, Congressional majorities accept existing spending levels. However, the current Congressional majority has not only been unwilling to raise the revenues necessary to pay for its revealed preferences, it has significantly cut its revenue inflows.

The essence of our fiscal problem is thus neither a revenue problem nor a spending problem. Instead, it is this: Congress has long been unwilling to raise the resources necessary to pay for the institution’s revealed preferences. Given that framing of the problem, policy makers must either reduce Americans’ expectations about the role of government in our economy and their lives or, over the long-term, raise the revenues necessary to meet those expectations.

Next, a quantitative analysis of budget forecasts suggests that the logic of a framing our fiscal imbalance as a spending problem, full stop, is indefensible. I paste that section in below and urge you to take a good look at the Figure 4 (the third figure below). It’s dense, I grant you, but I think it’s persuasive.

Washington, we have a revenue problem

The above observations show the “spending-problem-only” framework to be clearly misguided. In fact, one of my biggest concerns about the impacts of the Republican tax plan is the extent to which it has broken a critical linkage in public finance: that between a full-capacity economy and lower deficits and debt through higher revenue flows. (Because it so heavily favors wealthy households, the other major concern is the extent to which the tax law exacerbates after-tax income inequality.)

Figure 2 below shows that because more economic activity—lower unemployment in the figure—has historically spun off more tax revenue, as the economy has closed in on full capacity, the budget deficit has gotten smaller, and vice versa (deficits are shown as positive shares of GDP). [1] Outside of major wars, and before the 2017 tax law, when economic growth led to more employment and diminished labor market slack, deficits typically came down. In fiscal year 2000, for example, the unemployment rate was 4 percent and the budget was in surplus.

Figure 2

In fact, using data back to the mid-1940s, the average deficit as a share of GDP over every year that the unemployment rate was lower than or equal to 4.5 percent comes to -0.4 percent. If I take last year’s and this year’s deficits (-3.5 and -3.8 percent) out of that average, the result is a small surplus (0.1 percent).

The end of the figure shows just how different our fiscal stance is today and, based on CBO projections, in the future. The unemployment rate is well below 4 percent, but the deficit, also about 4 percent, is far above its average at low unemployment. In fact, a simple regression of the deficit-to-GDP ratio against unemployment predicts a deficit of about 1 percent in FY18, almost 3 percentage points below its actual value.[2]

Is this divergence driven by a negative shock to revenues or a positive shock to spending? CBO data reveal the answer to be a negative revenue shock. The figure below shows that in the summer of 2017, before the tax cuts and spending deal, the budget office predicted that we’d spend 20.5 percent of GDP in 2018, which, as the actual spending bar shows is almost exactly the right number (20.3 percent). However, CBO also thought — remember, this is pre-tax-cut — that we’d collect 17.7 percent of GDP in revenues when the actual share was, as shown, just 16.4 percent. This diminished revenue figure is the key difference between what CBO expected then and what occurred. In fact, the spending share—20.3 percent of GDP—is precisely equal to the 50-year average.

To be clear, the point of this comparison is not to argue that our current spending of about 20 percent of GDP is optimal (though it is “average” in historical terms). Instead, it shows that the jump in the 2018 deficit was a function of the tax cuts leading to diminished revenue collection, an outcome that is especially disappointing given the near-full-capacity economy.

A comparison of CBO long-term projections further underscores the revenue shortfall point. Figure 4 shows CBO’s forecasts for primary outlays (outlays other than interest payments[3]) and revenues from two different vintages of their long-term budget outlook, one from 2010 and the most recent, from 2018. The logic of the “spending problem” case implies projected outlays should be accounting for a higher share of GDP in the 2018 projection, with the projected revenue share either higher or similar to that of the earlier forecast. That is, the “spending problem” scenario should show fiscal gaps being driven by more spending, not less revenues.

In fact, the opposite is the case. Not only are primary outlays lower in the 2018 than the 2010 forecast—by 2 percentage points of GDP, on average, over the forecast period—but revenues in the 2018 budget outlook are much lower than in 2010’s outlook—by 4.5 points, on average. And they would be even lower were Congress to extend the Trump tax cuts. In other words, current law in 2010 (not all of which was followed, to be clear; i.e., the George W. Bush tax cuts did not fully sunset) called for both higher spending and higher revenues than today’s current law. And given that the revenue decline between these two forecasts has been more than twice that, on average, as the primary spending decline, the “spending problem” framework is not defensible.

These are forecasts, but  a longer-term analysis of the actual path of revenues and outlays by Robert Kogan of the Senate Budget Committee staff makes a similar point. Had we kept the Clinton-era tax code in place—meaning no George W. Bush or Trump tax cuts—but let all the spending that occurred since then proceed apace, including the military actions, the Affordable Care Act, and so on, the result would be a debt-to-GDP ratio that is 27 percentage points, or about a third, below where it stands today, about 51 percent instead of 78 percent.[4]

[1] Paul Van de Water, “2017 Tax Law Heightens Need for More Revenues,” Center on Budget and Policy Priorities, November 15, 2018, https://www.cbpp.org/research/federal-tax/2017-tax-law-heightens-need-for-more-revenues#_ftnref16.

[2] The regression runs from 1949 to 2017 with the unemployment rate at time t and with one lag, along with a lag of the dependent variable. All coefficients other than the constant are significant at the p<0.01 level; R-sq=0.81 and DW=1.77.

[3] Primary outlays are an appropriate choice here because the “spending problem” refers to programmatic spending. Consider a revenue increase with unchanged program spending. Thanks to the higher revenues, deficits and debt service would fall, even with no spending cuts. However, for completeness, I show the same figure with total outlays in an appendix.

[4] https://www.washingtonpost.com/news/posteverything/wp/2018/05/29/my-attempt-to-cut-through-the-fog-of-our-fiscal-debate/?utm_term=.52481a56ae76

Blog repair…and a request for questions.

December 16th, 2018 at 1:47 pm

I’ve been remiss in keeping up with this blog. While I still post here–especially stuff that’s too technical to go elsewhere and my write-up of the monthly jobs numbers–I’ve taken to posting most weekly takes on this or that to my PostEverything WaPo column.

In the old days, however, I used to post a link here to those posts, often with an extra comment or two. Here’s a brief attempt to update:

This one’s more political than usual: I pushback on Frank Bruni’s NYT oped arguing that my former boss VP Biden shouldn’t run in 2020. To be clear, I don’t know who should run, but neither does anybody else.

Here’s some noodling about what I judge to be a highly interesting moment in macro-dynamics: the job market is fueling strong consumer spending, which is almost 70 percent of US GDP. But the other components of GDP are all shakier. It’s C vs. I+G+NX!

In a related recent post, I get into what some other sources recent econo-angst: the flattening yield curve and the late 2019 fiscal fade.

Another entry into current economic events: The cause for a pause in the Fed’s rate hike campaign.

–I recently interviewed the great Belle Sawhill on her new book, The Forgotten American.

–I’ve been putting together what I call a “reconnection agenda” set of pieces intended to help members of the new House majority and their staffs think through some of the key policy issues that have been ignored or abused for too long. Here’s one on fiscal policy and one on jobs. Tomorrow, I’ll post #3 in this series–on climate change.

I’ve also featured the occasional musical link to share with those who, like me, recognize the essential importance of great music to get us through these challenging times. We if you need to ingest the chill pill, I’ll happily write you a prescription for the first cut here from the Gator: Willis Gator Tail Jackson.

Finally, I was asked to do a video answering questions folks have on anything I write about–economy, political economy, markets, fiscal policy…you know my methods. So, if you’ve got a question that might be usefully addressed in such a venue, please post it to comments.

Thanks, and seasonally-adjusted greetings (which I guess means no greetings at all!).

Nick Hanauer’s Progressive Labor Standards: A bold idea to do more than just repair the damage.

December 11th, 2018 at 1:31 pm

According to Wikipedia, Nick Hanauer is “an American entrepreneur and venture capitalist.” True, but very incomplete. Hanauer is also a prominent progressive thinker, advocate, funder, and writer. I’ll get to the purpose of this post in a moment (to amplify a new piece out today in the journal Democracy) but I’ve long appreciated Hanauer’s ability to frame economic problems and solutions in ways that both make common sense and point the way forward toward bolder policies than many of us tend to come up with.

Probably the most prominent example of his work—no less than President Obama used to reference it all the time—is Hanauer and Eric Liu’s “middle-out economics,” a concept that puts the middle class, not the wealthy, at the center of the economy:

“It is time to kill the myth of trickle-down economics — and to replace it with the true story of middle-out economics…Middle-out economics argues that national prosperity does not trickle down from wealthy businesspeople or corporations; rather, it flows in a virtuous cycle that starts with a thriving middle class.” 

Amen! But beyond not doing the obviously wrong thing—cutting taxes for the wealthy—what are some specific examples of policies that would promote middle-out economics?

How about “progressive labor standards?”

In this new piece, Hanauer looks closely at an area of public policy that is essential for pushing back on the increasingly disproportionate power of capital: labor standards or regulations that protect vulnerable workers from employer exploitation. Their long erosion is one reason why worker bargaining clout is so low, and it is neither an accident nor a benign act of nature. It’s an explicit part of the anti-worker, anti-union conservative project.

Based on this recognition, Hanauer lays out a counter-agenda that goes much further than many of us in the labor standards debate who seek mostly to repair the erosion and prevent egregious maltreatment of vulnerable workers—to adjust the federal minimum wage for inflation, to prevent wage theft and misclassification of regular employees as self-employed. Basically, we’re playing defense.

Hanauer plays offense. He calls on progressives to go outside the box and ramp up labor standards to curb corporate power, especially that of large companies whose increased concentration within their industries is raising employer- over worker-power even further. Though I offer caveats below, it’s refreshingly bold stuff!

Hanauer adds an important dimension to the inequality diagnosis that sets up the piece. It’s no longer adequate to consider only the widening distributions of wages, income, and wealth between households. Certain firms now dominate their industries, where they can set prices and wages (importantly, these so-called “monopsonist” firms have tended to hold down wages more than raise prices). Geographical inequality is another key dimension, as the individuals and companies benefiting the most from the consolidation of income and wealth are highly geographically concentrated, leading to rising spatial inequality between prosperous tech hubs and the rest of the country.

Market concentration is a key target of progressive labor standards: “74 percent of e-books are sold by Amazon, 75 percent of candy is sold by Mars and Hershey, and 86 percent of basketball shoes are sold by Nike. Retail is particularly concentrated, with 69 percent of the office supply market controlled by Office Depot and Staples, 90 percent of the home improvement store business by Lowes and Home Depot, and an astounding 99 percent of the drug store market dominated by just CVS, Walgreens, and Rite Aid.”

The key to progressive labor standards is to not merely establish a set of workers’ benefits, but to scale the benefits to employer size. The minimum wage might start at a “regionally adjusted” $15 and hour but go as high as $22 an hour, based on an employer’s size and market power:

Just like a progressive income tax employs multiple tax brackets to levy higher tax rates based on the size of one’s income, a progres­sive minimum wage might apply multiple “wage brackets” based on the size of a company’s workforce.

Hanauer proposes a graduated scale to cover the full spate of labor standards, including retirement and health benefits, paid leave, and overtime policies. Presumably, fines for violations would be scalable as well, so wage theft and misclassification would be much costlier to Apple than to the guy with an apple cart.

Ok, how could this go wrong? One issue is measuring and thus penalizing labor exploitation. A metric that has surfaced in this evaluative space is: “do employees receive public benefits?” Trust me, I understand the problem of large, profitable firms whose workers don’t earn enough to avoid collecting public benefits. But to ding companies who hire such workers threatens to both vilify benefit receipt and engender an unintended version of “statistical discrimination,” where employers are careful not to hire workers who look to them like someone who might draw public assistance. Let’s work to raise wages, not to expose benefit recipients to potential discrimination.

Second, it is harder than it sounds to surgically target one type of firm over another, in no small part because to do so creates an incentive for a targeted firm to make themselves look like a non-targeted firm. Hanauer’s aware of such gaming potential and offers a good idea to prevent it, a “whichever is larger” rule, meaning the progressive standards get applied to workers based on the largest entity in the employment relationship. Thus, an employee outsourced from a small firm who works at a large firm is under the standards of the latter. Still, my experience is that carefully defining and enforcing such rules can be hard, which is one reason why raising taxes on those at the top of the income and wealth scale is a straightforward, progressive complement to these ideas, one Hanauer is fully signed on to.

Finally, while Hanauer wants to rebalance power between small and large businesses, I also worry about progressive standards leading to a real division between good jobs at large employers and much less good ones at small employers. Clearly, he’s justly proposing to raise labor costs at firms whose industry power allows them to set wages too low. But I can imagine a local labor market where this creates some weird competitive pressures. This is why economists tend to prefer uniform regulations that don’t create competitive disadvantages for one firm over another. That said, Hanauer’s goal here is to offset some of the evolving advantages of larger, powerful firms.

But all big ideas come with big challenges and none of these are insurmountable. Moreover, many of us on the progressive left tend to fall into a trap Hanauer avoids: negotiating with ourselves. Given the deep-pocketed, relentless opposition from the forces of inequality, to start out where we want to end up is formula for consistently under-delivering. To do so invokes significant negative consequences for both the effectiveness of our policies, while reducing the political support from the many voters who long for a true progressive agenda, one that doesn’t nibble at the edges of power, but takes big bites out of it.

In other words, let us continue to look for the boldest ideas we can come up with in the pursuit of middle-out economics!