Harvey, Irma and the TBTF implicit subsidy problem

September 8th, 2017 at 12:44 pm

On my way in this AM, I heard an interesting interview by the great Bloomberg Surveillance team of Tom Keene and David Gura (and I’m not just saying that because they occasionally invite me on; those guys get good guests and give them the time to answer good questions). They were talking to an insightful guy from the re-insurance industry about the costs to the industry of Harvey and Irma. To be clear, what follows abstracts from the human costs of these disasters, which I take extremely seriously. In fact, both the implicit subsidy point I stress below and the more elaborate argument I make here are intended to link the economics to the too-often tragic human outcomes.

Their discussion emphasized the large share of residential and commercial real estate vulnerable to flooding but without flood insurance (I think they put this share at 50% in South FL.). Moreover, as I stressed in the WaPo piece linked above, the federal flood insurance program has long underpriced the risks against which they insure, leading to subsidy #1.

Subsidy #2, though, is the one currently in play in DC, and discussed in the interview: those who build in harm’s way can trust that there’s an implicit subsidy as the gov’t (mostly federal) will pony up serious money for their relief and rebuild efforts. That is as it should be. When Americans are laid low by natural disasters, we pitch in, whether as taxpayers or as revealed by the behavior of many good people in TX. And when we’re talking about “black swans”–very low probability events with very high, unforeseen costs–the federal sector, which can borrow at favorable rates and run deficits long-term, is uniquely positioned to help.

And yet, there are problems with this model. Subsidy #2 is one of those implicit subsidies, not unlike the one tapped by some of the big banks or Fannie and Freddie after the financial crash. The bailouts that saved these firms were of course premised on “too big to fail” (TBTF), in that their collapse would generate nationwide damage. To the extent that this is true, there’s a huge moral hazard problem, which will, and has, led to systemically underpriced risk.

I understand that mapping these observations onto big places like Houston and South Florida is tricky. These are big chunks of America and American commerce and thus they too are legitimately classified as TBTF. But that doesn’t mean we ignore the inherent problems this creates, anymore than we ignored the financial crisis, which I assure you as a former insider was a huge motivator for the Obama administration, leading ultimately to the Dodd-Frank reforms.

Instead, we must work to both mitigate and adapt to the impacts of climate change, particularly the intensity of storms and flood surges. We must update our priors around alleged 500-year floods that appear to be showing up a lot more frequently than that. And we must generate more accurate price signals, particularly in the face of implicit TBTF subsidies.

Trump tries to sell his tax plan as an antidote to middle-class wage pressures. Woe betide those who believe him.

September 6th, 2017 at 2:47 pm

The President is jetting off to North Dakota today to sell his farblunget tax plan. This WaPo piece reveals that D Senator Heidi Heitkamp is going with him. As the article puts it:

The Democratic senator is expected to face a difficult challenge for reelection next year in a state Trump carried in 2016 by 36 percentage points, one of his biggest margins of victory. So Heitkamp may see a political advantage in being friendly with Trump and open to his ideas, even if she does not ultimately vote to pass his agenda.

I was impressed by the extent to which D’s held together to block the R’s attack on health care, but Trump’s guest passenger is a reminder that tax legislation has the potential to scramble that alliance.

The administration’s clear play here is to try to convince people that what appears to be the latest version of the standard, highly regressive Republican tax plan is actually the answer to wage and income challenges that have faced working-class people for many decades now.

For example, the Post tells us this sentence will be in the speech: “The pipe fitters and plumbers, the nurses and police officers — all the people like you who pour their hearts into every penny earned in both the offices and oil fields of America — you are the ones who carry this nation on your backs, and it is time you got the relief you deserve.”

OK, let’s see what Tax Policy Center numbers have to say about that. The TPC has patched together enough info about tax ideas floated by team Trump to run distributional tables. But they’ve also taken a useful step beyond that by looking at the impact of offsetting the costs of the tax cuts with spending cuts (I explain these tabulations here).

According to BLS data, the median plumber or pipefitter in North Dakota earns about $54,000 a year; ND registered nurses, about $60,000; police, $53,000. Assuming that’s their family income, it puts them all in the middle-fifth of the national income distribution, according to the TPC tables (average inc: $67,000).

At first blush, the Trump plan would boost their income all of 1.3%, as per the chart below, compared to over 11% for high-income households (average inc: $2.3 million). But once you factor in the payfors, assuming spending cuts hit uniformly across the income scale, the middle class, including cops, plumbers, and pipefitters, lose income, and poor families get whacked especially hard. The income of the top 1%, however, is essentially unchanged.

My CBPP colleague and tax expert Chuck Marr often focuses on the impact of tax plans on working-class people. He told me, “During the campaign, the President focused on the stagnant wages of the working class. The problem is that his and other GOP tax plans ignore working-class people.”

In that spirit, I’ve helpfully edited Trump’s ND speech:

When it comes to Trump and co. selling this tax plan as we currently understand it to the working-class voters who supported him, the old adage comes to mind: “Fool me once, shame on you. Fool me twice, shame on me.”

The workload they’re facing would be tough for a functional Congress

September 5th, 2017 at 9:01 am

Just a quick note of the mass of portentous stuff on Congress’s plate as they return to DC this week.

–The debt ceiling.

To do: They’ve got to raise it by late-Sept., maybe mid-Oct. at the latest.

Frictions: Hard-right typically wants to extract promises of less future spending, but grownup R’s are calling for a clean bill.

Probabilistic Outcome: Look for some House R’s to team up with D’s to pass clean bill on time. I’m 85% confident they’ll do the right thing here.

–Funding the gov’t and paying for Harvey recovery.

To do: Congress must appropriate funds to run the gov’t be the end of Sept.

Frictions: Trump’s wall was a big stumbling block here, but with Harvey recovery in the mix, he appears to have backed down.

Probabilistic Outcome: There’s no chance they’ll pass a budget through “regular order,” so we’re looking at another budget patch/”continuing resolution.” Prior to Harvey, I had the shutdown as a coin toss at best. Updating priors, I’d put it at 25% tops. In fact, I now expect emergency funding for Harvey (which doesn’t count against the official budget caps) to be in the CR.

–Tax reform

To do: R’s want to pass a big, regressive tax cut.

Frictions: Remarkably, they still don’t have a plan. But they’re working on it. They’ll unlikely to get help from D’s on tax cuts, so this is about getting their majorities on board. I’d guess their biggest task is coming up with payfors and figuring out how to sell the big increase in the deficit that these cuts will engender, at least as scored by CBO/JCT. (“Bespoke” scores, with dynamic scoring tricks, will be more favorable, of course.)

Probabilistic Outcome: I think the likelihood they get this over the legislative bar this year is low, around 20%. Next year…well, let’s cross the bridge when we get to it.


To do: A new entry, thanks to the Pres. And just a completely, freakin’ horrible idea. Trump wants to phase out the program that blocks deportation for undocumented immigrants who’ve been here since childhood. He’s supposed to announce today that he’s giving Congress 6 months to either legislate the program or end it.

Frictions: Xenophobia intersecting with our dysfunctional immigration laws. It’s possible that there’s bipartisan support for DACA, but I don’t see how they get to ‘yes’ in six months.

Probabilistic outcome: I don’t have a good feel for this yet, but I’ll say 50% with downside risk. And I really hope I’m being pessimistic. Also, I could see the volatile Trump say “never mind” at some point.

Healthcare and North Korea are also in the mix, with the thermonuclear sabre rattling among the latter really existentially scary. As my title suggests, for a functional Congress is mid-season form, this agenda would pose a challenge. For these guys and gals…Oy.


Reposting the OTE “mensch rule” re comments

September 2nd, 2017 at 1:12 pm

Originally posted here.

I don’t have time to read every comment in detail but if I may say so myself, the level of commenting here at OTE is generally quite high, so thanks all for your substantive responses.

However, while I welcome debate, I decidedly do not welcome personal swipes (targeted at me or anyone else), or anything that veers, in my less-than-humble opinion, into non-menschiness.  When I see that, I’ll typically kill the comment or in rare cases, edit that part out.

Do other wage series contradict the where’s-the-wage-response story? Nope.

September 1st, 2017 at 12:19 pm

In a few pieces out this morning, I make some noise about how unresponsive wage growth has been to the tightening job market, using the wage data from the Establishment Survey, which covers the private sector workforce. This is the key figure, showing that while wage growth clearly accelerated from 2 to 2.5% as the job market tightened over the past few years, it has since stalled out.

But do other wage and compensation series agree?

A lot of people like to cite the Atlanta Fed Wage Tracker. This series has some clear advantages, but I’m not quite sure what it’s telling me, as I’ll explain in a moment. At any rate, it too kind of shows some recent flattening, having sped up from about 2 to 3%, where it’s been wiggling around since about 2015.

Most wage series compare snapshots across different time periods, but the Atlanta one measures the wage growth of the same workers over 12 months (really, workers employed in both time periods, e.g., this August and last August). Because of this, it will typically show more growth than other series, since it’s including an “experience premium,” the bump to wages some workers enjoy as they age (or, similarly, as they add another year of tenure at their job). Also, relative to the snapshots, it’s less moved-around by compositional or demographic changes.

The unusual aspect of this wage series is that the median plotted above is not the median wage. It’s the median growth rate. They calculate the wage growth of people in the survey over the course of a year, and construct a distribution of growth rates from which they plot (a 3-mo. moving average of) the median. That means the median growth rate in any given month could be for low-, high-, or mid-wage workers. I find that a little confusing, as it doesn’t link to the earnings of what we typically think of as the median worker.

The next figure shows the yr/yr growth of the Employment Cost Index for compensation and wages. The ECI holds the industry and occupation mix constant and thus increases should not reflect changes in the shifting mix of jobs. It’s jumpy towards the end of the series, and there’s maybe a lift from around 2 to 2.5% growth. But, again, not much by way of acceleration.

Finally, there’s our own mash-up series, the result of principal component analysis of five different series: compensation from the productivity and ECI data, ECI wages, median weekly earnings, and the production-worker wage from the Establishment Survey. It’s shown here with a 3-quarter rolling average to smooth out its bips and bops. It shows a slow acceleration from 1.5 to 2.5% (yr/yr), but like the others, probably not as much as you’d expect from an unemployment rate that’s come down from 10% at its peak to 4.4% last month.

All the series show some responsiveness to the tighter job market, which is, of course, a positive development. That said, I don’t think the lack-of-wage-responsiveness story can be dismissed by referencing other wage and comp series.