I was just on MSNBC with Ali Velshi talking about today’s GDP report (here’s my take). I came on right after Ali interviewed Kevin Hassett, the chair of Trump’s Council of Economic Advisers. Since Ali and I were so engrossed in GDP talk, I didn’t get a chance to note some of the things Kevin said that were on point, and since you don’t get a lot of that from this crew, and because I’ve been highly critical of this CEA’s work in other areas, let me agree with some of Kevin’s points but also point out where I think he goes wrong on a very important matter: the lack of real wage growth in the current economy.
–Real GDP growth is likely to hit the CEA’s 3 percent forecast for the year 2018: In an administration that’s constantly throwing around random 4s, 5s, and 6s re GDP growth, Kevin’s is a defensible forecast for this year, and it’s consistent with other forecasts. Goldman Sachs is at 3, and the Fed’s nearby at 2.8. He steps onto to shakier ground when he predicts 3% as the new long-term trend, but for 2018, he’s probably on-or-near target.
–Jawboning the Fed: He can’t say his boss screwed up by complaining about the Fed’s rate hikes, and he solidly underscored the critical importance of Fed independence. But he also said, in so many words, that the DC establishment need not clutch their pearls with one hand and reach for the vapors with the other every time an elected official mentions the Fed.
–His claim that there’s no natural rate. Hassett told of being attacked for criticizing the Fed when he publicly questioned the existence of an identifiable, natural rate of unemployment that could reliably guide policy. He’s surely right about that, and there’s absolutely nothing wrong for an official in his position to say so. Obama’s CEA published the figure below, which essentially says the same thing (the confidence interval around the estimate of the natural rate goes from 0-6 percent).
Of course, he couldn’t stop there and had to say some stuff that was wrong.
In so many words, he claimed the tax cut is having its predicted supply-side effects by boosting investment. Business investment has been solid, for sure, but nothing more than what you’d expect at this point in the expansion, especially given high corporate profitability. The figure below shows that while investment has bounced around in this recovery, it is now commensurate with earlier cyclical peaks as a share of GDP. It may well climb higher before the expansion is over, but we know firms are using much of their excess pre- and especially post-tax earnings right now to buyback stock shares and pay dividends, as opposed to invest, so we’ll have to wait and see where this goes.
Sticking with the tax cuts, Kevin’s CEA bought themselves a tough problem by claiming the cuts would quickly and bigly trickle down into workers’ paychecks. That ain’t happening, and Kevin telegraphed the CEA’s forthcoming pushback to the stagnant real wage story, which sounds inconsistent with recent analysis. He said they’re working on a piece that will show that the stagnation is a compositional effect, driven by above-average shares of low-wage workers joining the labor market.
I’ll certainly check out their analysis, but EPI’s Heidi Shierholz and Elise Gould already looked at this, finding:
Composition was certainly a factor during the early part of the recovery from the Great Recession. In the first few years of the recovery, the jobs being added were very disproportionately low-wage jobs, which had the effect of pulling wage growth down over that period. But since 2013, as the recovery has strengthened, the opposite has been true—low-wage jobs are actually declining on net while middle and high wage jobs are being added, which has the effect of raising average wages. In other words, the composition effect is currently putting upward pressure on wages. [See their intuitive figures]
The CEA could also look at the Atlanta Fed’s wage tracker which controls for compositional changes by tracking the same wage earners across 12-month periods. Wage growth for these workers in each age group has slowed or stagnated for about tw0 years now, and note that these are nominal changes, so as consumer inflation has sped up considerably over this period, real wage growth in these series has significantly decelerated.
So, credit to Kevin where it’s due, but nothing’s trickling down because it pretty much never does.