Tag: Economic Growth

The Healing US Job Market and How We All Forgot About the Great Recession

 

The January jobs report suggests the nearly nine-year-old economic expansion remains plenty capable of generating solid job growth: 200,000 last month and an average of 192,000 over the past three months. More interesting, it provided fresh evidence that a tightening labor market is also capable of accelerating wage growth. The 0.3% monthly rise in average hourly earnings, following an upwardly-revised 0.4% in December, pushed the 12-month rate up to 2.9%, the highest reading in nearly eight years.

All good enough for Capitol Economics to declare, “the acceleration in average hourly earnings isn’t an outlier.” And JPMorgan thinks it “now looks like the tightness in labor markets is showing through to a gradual acceleration in wage growth.” Indeed, it seems the Wall Street consensus is that before long, we’ll start seeing month-after-month of 3-handle jobless rates. And hopefully even stronger wage growth.

Which is all very odd given all the concern in recent years about how trade, technology, Obamanomics, and even the severity of the Great Recession meant the US job market was structurally and perhaps permanently damaged. Now it seems a simpler, though less sexy, answer was more likely the correct one: The Great Recession and Financial Crisis were so severe, it was going to take a good long while for labor markets to heal. Lots of slack needed to be soaked up. Lots, even more than we thought.

The Trump Growth Machine

 

I discovered my genuine confidence in the sustainability of the current economic growth cycle when I recommended to my 27-year-old Uber driver that he invest some portion of his wages in a diversified index fund. Although the stock market will surely ease off its current pace, it nevertheless should prove far more profitable than standard money market funds with their puny returns. The good news is that the current trend likely will not fizzle out anytime soon thanks to several key factors, including lower taxes and deregulation.

Igniting economic growth, as the Trump administration’s policies are doing, is not as straightforward as it sounds because it is easy to make spectacular mistakes in judgment if caught in the grip of Keynesian economic theory. A day after Barack Obama’s 2008 election, the Dow plunged by almost 500 points. On the day of Trump’s election, the economist Paul Krugman wrote with his legendary overconfidence: “If the question is when markets will recover, a first-pass answer is never.” The Federal Reserve, he added, could not cut rates again to forestall the anticipated recession—and the Trump administration would only make matters worse because it was “ignorant of economic policy.” But the Dow soared by 250 points.

Krugman’s basic mistake is that he wants to use monetary and fiscal policy to shift income and wealth away from investment to consumption, or indeed vice versa. The theory is that only government stimulation can make up for the chronic shortage of private investment, given the general lack of confidence in market institutions. This approach falsely assumes that some omniscient policymaker knows best how to make and implement a collective decision about the appropriate balance between investment and consumption. But there are several errors with this way of thinking.

Taking a Look at the State of Trump’s Deregulation Efforts

 

When the Trump White House talks about boosting economic growth, it’s not all tax cuts, tax cuts, tax cuts. Officials also mention the administration’s ongoing deregulatory push as a big part of why Trumponomics will turn a Two Percent Economy into a Three Percent or Four Percent Economy. President Trump himself has cited deregulation as one of his biggest accomplishments so far.

But a new analysis by Bloomberg gives reason for skepticism, at least if you define “deregulation” as actually, you know, removing regulations currently in effect. Not much of that seems to be happening yet. “Only a handful of regulations have actually been taken off the books,” Bloomberg finds.

Can US Economic Growth Rise Again? A New Study Gives Reason for Optimism.

 

In the magisterial The Rise and Fall of American Growth, Northwestern University economist Robert Gordon describes a “special century” of fast productivity growth from roughly 1870 to 1970. But the apogee of that period was really the 1920–1970 “golden age” period when the economy really felt the impact of the Second Industrial Revolution of the second half of the 19th and early 20th century.

The second IR was a time that produced important and “unrepeatable” inventions flowing from the following five technology clusters: electrification, the internal combustion engine, chemicals, modern communication, and urban sanitation infrastructure. Compared to these “great inventions,” in Gordon’s view, the impact of information technology pales. And since you can only electrify once or widely install indoor plumbing once, another golden age of productivity ain’t happening.

Now plenty of technologists disagree. They think Gordon underestimates the potential impact of new technologies such as artificial intelligence and advanced robotics. Gordon, for instance, doesn’t seem to think autonomous cars will be that big a deal from a productivity standpoint. And VR is no internal combustion engine.

3% or Bust: Fanciful Forecasts and the GOP Tax Plan

 

It keeps happening. The latest member of Team Trump to offer overly optimistic takes on the GOP tax plan is Ivanka Trump. Here she is on “Fox & Friends” this morning:

Tax reform is a critical component of our plan to invigorate the economy…. This deregulation philosophy coupled with tax reform is going to have an enormous impact that we think conservatively will lead to sustained GDP growth of three percent, but more aggressively four and five percent.

Just How Risky Should US Policymaking Be Right Now?

 

“Risky scheme” used to be a popular pejorative in American politics. It’s been used by Democrats and Republicans, though my clearest recollection is Al Gore attacking Jack Kemp and the Dole-Kemp tax cut plan during the 1996 vice presidential debate. Gore used “risky” some eight times. Example:

The plan from Senator Dole and Mr. Kemp is a risky, $550-billion tax scheme that actually raises taxes on 9 million of the hardest pressed working families. It would blow a hole in the deficit, cause much deeper cuts in Medicare, Medicaid, education and the environment and knock our economy off track, raising interest rates, mortgage rates and car payments. We stopped that plan before. We will stop it again. We want a positive plan for growth and more jobs. . . . The conservative business journal, “Barron’s,” says this is the strongest economy in 30 years. We’ve got good solid growth. Let’s don’t risk it on some $550-billion risky scheme.

Member Post

 

Wayne Allyn Root put some of his high energy into describing the numerical effects of Trump’s fiscal derring-do.  After reading primarily subjective disquisitions, discussions or diatribes about the successes and policies of the Trump Administration, it’s certainly refreshing to see some objective measures hit the news. There is a degree of winning occurring in our […]

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We Need Flatter Taxes, Cleaner Rules

 

The Trump administration released a thumbnail sketch last week of its much anticipated tax plan, which has generated opposition and support from all the usual suspects. The critics of the plan take the view that the program will generate windfall subsidies for the rich and increase deficits while doing nothing for growth. Its defenders, including Treasury Secretary Steven Mnuchin, claim that the anticipated growth from lower tax rates will override any objections about increasing income inequality.

It is, of course, difficult to make predictions on matters such as economic growth. The overall effect of any tax plan depends not only on the plan itself, but on other government actions, such as spending rates, which have risen inexorably since the end of World War II, and interest rate increases by the Federal Reserve. It puts the cart before the horse to think about growth and deficits before getting the right tax structure into place. Once that is done, the needed response to changes in economic and financial conditions can be handled solely by changes in tax rates. The enhanced stability of the tax structure itself should be positive for growth. And on tax design, the Trump plan offers a mixed bag.

Politics aside, the best tax plan is also the simplest: I have long advocated that the sole source of general revenues should come from a flat tax, preferably on consumption and not income. A consumption tax eliminates the enormous difficulties of separating out capital gains, which are typically taxed at a lower rate, from ordinary income, taxed at a higher rate. If a consumption tax is unattainable politically, a relatively close substitute would be to defer capital gains taxes on any profits that are reinvested in other capital assets. No other forms of ad hoc taxation, such as the notorious medical device tax, should be used to raise general revenues.

Factory Activity Shows USA Is Shaking Off the Obama Years

 

The bad news flowed non-stop Monday, so I wanted to post something a little more positive. Restoring America to greatness has not stopped for 8+ months.

While the Left enjoys measuring the speed bumps and rejoicing at the slow-downs, most of us here on the right are looking at the eight-month journey as a whole and what we see is Great News getting better all the time.

In this AEI Events Podcast, AEI’s Desmond Lachman welcomes experts on China to discuss the US-Chinese economic relationship, particularly in light of the policies of the new Trump administration. Dr. Lachman sets the stage by emphasizing the importance of the Chinese economy to the American and global economies, pointing out that China faces a credit bubble, capital flight, and the need to transition from its investment-driven, export-led growth to a consumption-based economy.

Following Dr. Lachman’s remarks, a panel discusses China’s transition to a consumption-based economy, the interests of US multinational firms, and whether China is or will be a US economic peer. Panelists include AEI’s Derek Scissors, David Dollar (Brookings Institution), Rory Macfarquhar (Peterson Institute for International Economics), and Brad Setser (Council on Foreign Relations). The discussion is moderated by Desmond Lachman (AEI).

This AEI Events Podcast features Fredrik Erixon and Björn Weigel, coauthors of “The Innovation Illusion: How So Little is Created by So Many Working So Hard,” hosted by AEI’s James Pethokoukis. Erikson argues that the declining pace of innovation in Western economies during the past few decades can be attributed to the increasing dominance of financial institutions over capitalists, corporate bureaucratization, globalization that reduces competition in certain markets, and restrictive, opaque regulations.

Erikson and Weigel are joined by AEI’s James Pethokoukis and George Mason University’s Tyler Cowen in a panel discussion. Dr. Cowen argues that even though economic growth has slowed, there is more invisible innovation in society. The discussion is moderated by AEI’s Stan Veuger.

July Jobs: After Another Strong Employment Report, What Does the US Economy Really Need Right Now?

 

Good stuff! The US economy generated 209,000 jobs last month. That’s a bit stronger than analyst expectations and above the average monthly jobs gains so far this year.

Think of it this way: The current expansion is the third-longest ever with 82-straight months of job growth. And while job growth is slowly easing back — at 179,000, the average monthly gain over the past six months is slightly weaker than 2016’s 187,000 average — it’s still on a 2-million-a-year pace. Not bad at all.

In this AEI Events Podcast, Jose Carrion, chairman of the Financial Oversight and Management Board for Puerto Rico, discusses the economic and political challenges faced by Puerto Rico. Following his address, a panel, including AEI’s Andrew Biggs and Desmond Lachman, exchange views on these challenges and propose a number of solutions, ranging from labor market reforms to stimulating economic growth through existing Medicaid reforms and the earned income tax credit.

The panel features Andrew Biggs (AEI, Financial Oversight and Management Board for Puerto Rico), Desmond Lachman (AEI), Anne Krueger (Johns Hopkins School of Advanced International Studies), and Antonio Weiss (Harvard Kennedy School), and is moderated by Alex J. Pollock (R Street Institute).

May Jobs Report: Bad But Not Terrible

 

The US employment rate ticked lower last month, and at 4.3% fell to its lowest level since May 2001. But that’s pretty much where the good news ends. Job growth was just 138,000 versus Wall Street expectations of 180,000, and the prior two months were revised down a net 66,000 jobs. (Though it seems the calendar played a role here. The payroll survey week may have been a bit too early to capture students going to work at summer jobs.)

Moreover, the jobless rate fell “for all the wrong reasons,” notes Capital Economics. The decline was driven by the labor force participation rate falling 0.2 percentage point to 62.7%. The employment rate fell by the same amount.

What about paychecks? This from JPMorgan: “The dreary realities on labor supply have been reasserting themselves in recent months. On wages, the gradual 2015-2016 acceleration has stalled so far this year; average hourly earnings rose a modest 0.2% last month and the year-ago increase was unchanged at 2.5%.” So as Deutsche Bank argues, perhaps 2.5% wage growth is the news 3%, especially given weak productivity growth.

Congress Should Support the Trump Administration’s Balanced Budget … and Sustain It

 

The Trump Administration released its first full budget proposal on Tuesday. It is a good proposal. First, it balances the federal budget by the end of the 10-year budget period. Second, its gets a handle on the federal government’s accelerating debt and interest costs. Finally, it is pro-growth. This final point is critical because achieving the goal of the restoration of a responsible federal fiscal policy will be a practical impossibility in the midst of a stagnant economy.

The immediate task for Congress is to adopt a budget that matches the general parameters of the Trump Administration’s proposal. This is to say, the budget Congress adopts should include the same numbers for the total outlays, the total revenues, deficits, debt, and interest costs (both on debt held by the public and debt held by other government accounts) in each fiscal year. On the other hand, it is appropriate for Congress to modify the budget proposed by the Administration in terms of the individual accounts under these general numbers. The Trump Administration cannot expect to get everything it wants. Most important for President Trump is that he limit himself to issuing veto threats against any appropriations bill and reconciliation bill that follows from such a budget to very few matters—those that are at the very top of his policy priorities.

Sustainability Is Key

Anti-growth Housing Policy May Have Seriously Damaged the US Economy for Decades

 

In a dynamic economy, finance, ideas, people, and other resources flow to their most productive use. It’s an economy of constant disruption and change. Companies rise and fall, begin and end. Workers change jobs, moving if they must. Social mobility is high, and hopefully income growth, too. Misallocation of resources is the enemy of growth and opportunity.

But in his new book, “The Complacent Class,” Tyler Cowen describes modern America as a society that is “more risk averse and more set in our ways, more segregated … sapped … of the pioneer spirit that made America the most productive and innovative economy in the world.”

One cause of this dynamism decline, Cowen argues, is that it’s so darn expensive for workers to move to dynamic, high-productivity cities. In making this case, he cites the research of UC Berkeley economist Enrico Moretti who, as it happens, just released a new paper on the subject with Chang-Tai Hsieh of the University of Chicago. The researchers look at the “spatial misallocation of labor.” The problem here is that strict restrictions to new housing supply — local residents have a huge incentive here — have effectively limited the number of workers who can access high productivity cities and regions such as New York and the San Francisco Bay area.

Corporate Tax Reform Is a Good Idea. Let’s Do It in the Growthiest Way Possible.

 

I hope the current Washington political turmoil doesn’t torpedo tax reform. It would be an important element — though not the only one — in boosting the US economy’s growth potential by raising productivity. As a new Capital Economics report notes, US business investment as a share of GDP has been trending lower since the late 1990s. And that may be feeding into chronically weak productivity gains since the Great Recession.

From the report: “According to the BLS, the contribution from capital intensity (aka capital deepening) fell from an average of 1.0% between 2000 and 2007 to 0.5% between 2007 and 2016.” (The above chart from the firm provides a breakdown.)

Who Needs Progress Anyway? Not the “Degrowth” Movement

 

Andy Kessler dislikes Bill Gates’s “robot tax” idea about as much as I do and explainS his reasons in the Wall Street Journal. Among them, Kessler doesn’t like how such ideas — particular Gates’s notion that we may want to slow progress so workers can better adjust — feeds into the “degrowth” movement. Yes, “degrowth” is kind of a thing. Kessler:

There is a murmuring movement out of Europe known as “degrowth.” If this sounds to you like a cabal of cave dwellers, you’re not that far off. Degrowth Week in Budapest last summer featured enchanting sessions like this one: “Popular competence building against the Technocracy.” Channeling Ludd, industrial insurgents and sustainability samurais want to keep things the way they are, like the eco-protesters at Standing Rock. The site degrowth.org is clear about the movement’s unproductive goals: Consume less and share more.

Well, advanced economies just ran a fascinating, real-world degrowth experiment. It was called the Global Financial Crisis. An economic shock followed a decade of sub-par economic growth. It wasn’t broadly popular. Really not all.

America’s Worst Economic Problem Might Be Getting Better

 

The American Growth Machine is badly malfunctioning, at least as diagnosed by official government statistics. US productivity growth — the engine of long-term economic growth — has averaged just 0.5% since 2010 vs. 2.3% over the previous six decades. Productivity growth in 2016 fell to 0.2%, notes IHS Markit, the ninth weakest reading in the postwar era. (And that’s post World War II, not post-Iraq War.) Moreover, when stalled productivity growth meets slowing labor force growth, you get an economy capable only of uninspiring 1-2% growth at best. And growth that slow, especially when combined with greater income inequality, may feel like no growth at all to most Americans. The Great Stagnation.

All terrible news, unless of course the official numbers are wrong. Some economists think current statistical methods badly understate the value of new products, especially in the tech economy, and miss welfare gains from free goods like Facebook and Wikipedia. If they are right, overall economic growth and living standards are growing faster than we think. Then again, some economists think the official numbers are capturing a real downshift. The technopessimists argue today’s innovations aren’t as transformative as past ones. Combustion engine beats smartphone.

5 Reasons the Fed Should Not Raise Interest Rates

 

I will admit a current bias against monetary tightening and the idea that the US economy is at full employment (though maybe such a state is only a long nine iron away). And although I am not a “high pressure economy” person,  I would take any rate hikes very, very gradually. And if a voting member of the FOMC, I probably would have stayed the course at this week’s Fed meeting. Much like Minneapolis Fed President Neel Kashkari, who explains his dissent — with plenty of chart goodness — in a Medium blog post.

Among his key points: First, prices still seem pretty stable. (“Twelve-month core inflation is at 1.7 percent, and while it seems to be moving up somewhat, it is doing so slowly, if at all.”)