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Anyone have the answer? This is from Brad Setser:
When The Trade Data Does Not Add Up: This is ... about a rather puzzling thing that I only noticed as a result of the Brexit debate. ...
A big part of the non-EU surplus in services comes from the United States. In 2015, the UK reported a 27 billion GBP (just over $40 billion) surplus in services trade with the U.S. and an overall surplus in goods and services with the United States.
The funny thing? The U.S. also thinks it runs a surplus in services trade with the UK. A $14 billion surplus in 2015...
It is pretty hard to square those two data points. UK data is from the Office of National Statistics’ Pink Book, U.S. data is from the Bureau of Economic Analysis (BEA), table 1.3 of the “International Transactions” data set.
It turns out that the U.S. thinks it sells more services to the UK than the UK thinks it buys...
And the UK thinks it sells more services to the U.S. than the U.S. thinks it buys. ...
My guess is that such discrepancies are actually common in the services trade numbers. Goods trade is calculated by customs bureaus. Lots of the numbers on services trade come from surveys, estimates, and the like.
Posted by Mark Thoma on Monday, October 31, 2016 at 09:53 AM in Economics, International Finance, International Trade |
"They’re trying to create bias, not end it":
Working the Refs, by Paul Krugman, NY Times: The cryptic letter James Comey, the F.B.I. director, sent to Congress on Friday looked bizarre at the time — seeming to hint at a major new Clinton scandal, but offering no substance. Given what we know now, however, it was worse than bizarre, it was outrageous. Mr. Comey apparently had no evidence suggesting any wrongdoing...; he violated longstanding rules about commenting on politically sensitive investigations close to an election; and he did so despite being warned by other officials that he was doing something terribly wrong.
So what happened? We may never know the full story, but the best guess is that Mr. Comey ... let himself be bullied by the usual suspects. Working the refs — screaming about bias and unfair treatment, no matter how favorable the treatment actually is — has been a consistent, long-term political strategy on the right. And the reason it keeps happening is because it so often works. ...
The desire to get right-wing critics off one’s back may also explain why the news media keep falling for fake scandals. ...
Sure enough, much of the initial coverage of the Comey letter was based not on what the letter said, which was very little, but on a false, malicious characterization of the letter by Jason Chaffetz, the Republican chairman of the House Committee on Oversight and Government Reform. You might think reporters would have learned by now not to take what people like Mr. Chaffetz say at face value. Apparently not. ...
Which brings us back to Mr. Comey. ... Mr. Comey was subjected to a constant barrage of demands that he prosecute her for … something. ...
And it looks as if he tried to buy them off by throwing them a bone just a few days before the election. Whether it will matter politically remains to be seen, but one thing is clear: he destroyed his own reputation.
The moral of the story is that appeasing the modern American right is a losing proposition. Nothing you do convinces them that you’re being fair, because fairness has nothing to do with it. The right long ago ran out of good ideas that can be sold on their own merits, so the goal now is to remove merit from the picture.
Or to put it another way, they’re trying to create bias, not end it, and weakness — the kind of weakness Mr. Comey has so spectacularly displayed — only encourages them to do more.
Posted by Mark Thoma on Monday, October 31, 2016 at 09:17 AM in Economics, Politics, Press |
Posted by Mark Thoma on Monday, October 31, 2016 at 12:06 AM in Economics, Links |
Posted by Mark Thoma on Saturday, October 29, 2016 at 12:06 AM in Economics, Links |
Jump in Inventories Leads to Stronger than Expected GDP Growth: The economy grew at a 2.9 percent annual rate in the third quarter, the strongest growth rate since the third quarter of 2014. Most forecasts had put growth for the quarter at just over 2.0 percent. While the growth is better than expected, a big factor was an increase in inventory accumulation, which added 0.61 percentage points to growth. Accumulation was actually negative in the second quarter, so the rate of accumulation is likely to be even higher in the fourth quarter, again adding to growth. Final demand growth in the quarter was just 2.3 percent. Most categories of final demand were relatively weak...
One striking figure in this report is the slower pace of inflation shown in the core personal consumption expenditure deflator (PCE). This rose at just a 1.7 percent annual rate in the third quarter. The rate of inflation shown in the core PCE has been trailing off throughout the year, rising at a 2.1 percent annual pace in the first quarter and a 1.8 percent rate in the second quarter. While there are enough erratic movements in the quarterly data to avoid treating this as evidence of deceleration, it is certainly hard to make a case for acceleration with these data.
In this respect it is also worth noting that the Employment Cost Index for the third quarter showed a year over year rise of just 2.3 percent, the same as for the second quarter. Wage growth continues to outpace benefit growth in the private sector, with wages rising 2.4 percent, compared to 1.8 percent for benefits.
On the whole, this report indicates that the economy continues to grow at a modest pace. With the weak first half, it will take another quarter of 2.9 percent growth to just reach 2.0 percent for the full year. That is at or below most estimates of potential GDP. The price data also show zero evidence of accelerating inflation, indicating the economy is not reaching any limits.
Posted by Mark Thoma on Friday, October 28, 2016 at 09:59 AM in Economics |
"If health costs are looking good, what’s with the spike in premiums?":
Obamacare Hits a Pothole, by Paul Krugman, NY Times: ...Obamacare ... has hit a pothole: After several years of coming in far below predictions, premiums on covered plans have shot up by more than 20 percent.
So how bad is the picture? ... Health reform had two big goals: to cover the uninsured and to rein in the overall growth of health care costs... Sure enough, the fraction of Americans without health insurance has declined to its lowest level in history, while health cost growth has plunged...
But if health costs are looking good, what’s with the spike in premiums? It only applies to one piece of the health care system — the “exchanges”... established for people who aren’t covered either by their employers or by government programs, mainly Medicare and Medicaid.
The way the exchanges were supposed to work was that both healthy and less-healthy people would sign up, providing insurers with a good mix of risks that let them offer reasonably priced policies. ...
In many states, however, not enough healthy people signed up — and now insurers are either pulling out or hiking their premiums to reflect the not-so-good risk pool. Since premiums have until now been well below projections, this only brings them back up to expected levels. But it’s clearly not good news.
How many people are hurt by these premium hikes? Not as many as you may think..., a fraction of a fraction of the population (which admittedly may still be several million people). Oh, and bear in mind that many of those affected ... have pre-existing conditions, which means that without Obamacare they wouldn’t be insured at all. ...
Can the current problems be fixed? As a technical matter, the answer is clearly yes. Strengthen the mandate; expand the subsidies; close the loopholes that have allowed some insurers to bypass the exchanges; take a more active role in setting standards and reaching out to families to make them aware of their options. Some states are doing much better than others, and it wouldn’t take a lot of money to expand best practices to the nation as a whole.
The trouble is that Congress would have to vote to spend that money. So unless Democrats manage to take the House (unlikely) or Republicans are willing to cooperate in the public interest (even more unlikely), the easy fix ... will have to wait for a while.
So, is the latest health care news disappointing? Yes. Is it catastrophic? Not at all.
Posted by Mark Thoma on Friday, October 28, 2016 at 09:52 AM in Economics, Health Care |
Posted by Mark Thoma on Friday, October 28, 2016 at 12:06 AM in Economics, Links |
Productivity measures productivity ... that's it: Justin Fox at Bloomberg put up a few articles (here, here) recently digging into trends in productivity in the US manufacturing sector. The overarching theme of the two articles is that claims regarding the success of the manufacturing sector in the US (he cites Binyamin Applebaum’s article specifically) are overstated. Fox’s first article is titled “No, U.S. Manufacturing isn’t Really Booming”.
I’m not going to tell you that manufacturing is booming. I’m also not going to tell you that Fox is right about it not booming. I am going to tell you that making claims about the business or financial success of manufacturing based on things like multi-factor productivity (MFP) or labor productivity, as Fox does, is using these measures incorrectly. The “health” or “success” or “boominess” of manufacturing are not things one can infer from productivity statistics.
I’ll pick on Fox’s articles here because they were recent, not because he’s done something especially egregious. They are two of many examples of how measures like MFP and labor productivity get misused to make points about financial or business performance.
The message is that you all need to just let productivity be productivity, you know? ...
It measures value-added - not profits, not sales, not cash flow - relative to inputs, and therefore tells us how effectively the economy - not businesses - turns inputs into value-added. Slower MFP growth means slower MFP growth, not anything about competitiveness or the future business success/failure of US manufacturing. Heck, it doesn’t even tell us anything about the past business success or failures of US manufacturing. ...
There's much, much more in the original post.
Posted by Mark Thoma on Thursday, October 27, 2016 at 03:06 PM in Economics, Productivity |
It Takes a Village to Maintain a Dangerous Financial System: Q&A with Anat Admati: Stanford professor Anat Admati discusses her new paper, in which she explains how a mix of distorted incentives, ignorance, confusion, and lack of accountability contributes to the persistence of a dangerous and poorly regulated financial system. ...
Posted by Mark Thoma on Thursday, October 27, 2016 at 01:05 PM in Economics, Financial System, Regulation |
Brad DeLong (reviewing Joel Mokyr's A Culture of Growth: The Origins of the Modern Economy in Nature):
Economic history: The roots of growth: What is modern economic growth? Going by the best available measure (it might be more honest to say 'guess'), today's average material living standards and economic productivity levels are some 20 times what they were in the agricultural era (about 6000 BC to AD 1500). And the efficiency with which humanity uses technology and organization to transform resources into useful commodities is currently growing at 2% per year — perhaps 100 times the rate common before the Industrial Revolution.
Some think that the current rate will slow down. But very few see it coming to a rapid end, unless there is a nuclear war or an equivalent catastrophe. The slowing will come as low-hanging fruit is picked and resource scarcities bite; but resource exhaustion followed by crash, as described in Jay Forrester's 1971 World Dynamics (Wright-Allen Press), is likely only in systems in which scarce resources are not rationed by high prices.
What set the stage for industrial expansion and unleashed the virtuous spirals that drive growth? ...
Posted by Mark Thoma on Thursday, October 27, 2016 at 10:15 AM in Books, Economics |
Posted by Mark Thoma on Thursday, October 27, 2016 at 12:06 AM in Economics, Links |
Manufacturing's Productivity Myth: The U.S. manufacturing sector is far from the basket case it is sometimes made out to be on the campaign trail. But it's important to realize that it isn't exactly going gangbusters, either.
The everything's-OK line about U.S. manufacturing goes something like this: Yes, lots of manufacturing jobs (7.3 million, to be precise-ish) have been lost since employment in the sector peaked in 1978, but real manufacturing output is at an all-time high. So the manufacturing sector is doing fine -- it's just that thanks to automation and other technological advances it has gotten much more productive and thus doesn't need as many workers. ...
It turns out there are also problems with the claim that U.S. manufacturers have gotten all that much more productive. ...
Posted by Mark Thoma on Wednesday, October 26, 2016 at 01:30 PM in Economics, Productivity, Technology |
Being honest about ideological influence in economics: Noah Smith has an article that talks about Paul Romer’s recent critique of macroeconomics. ... He says the fundamental problem with macroeconomics is lack of data, which is why disputes seem to take so long to resolve. That is not in my view the whole story.
If we look at the rise of Real Business Cycle (RBC) research a few decades ago, that was only made possible because economists chose to ignore evidence about the nature of unemployment in recessions. There is overwhelming evidence that in a recession employment declines because workers are fired rather than choosing not to work, and that the resulting increase in unemployment is involuntary (those fired would have rather retained their job at their previous wage). Both facts are incompatible with the RBC model.
In the RBC model there is no problem with recessions, and no role for policy to attempt to prevent them or bring them to an end. The business cycle fluctuations in employment they generate are entirely voluntary. RBC researchers wanted to build models of business cycles that had nothing to do with sticky prices. Yet here again the evidence was quite clear...
Why would researchers try to build models of business cycles where these cycles required no policy intervention, and ignore key evidence in doing so? The obvious explanation is ideological. I cannot prove it was ideological, but it is difficult to understand why - in an area which as Noah says suffers from a lack of data - you would choose to develop theories that ignore some of the evidence you have. The fact that, as I argue here, this bias may have expressed itself in the insistence on following a particular methodology at the expense of others does not negate the importance of that bias. ...
I suspect there is a reluctance among the majority of economists to admit that some among them may not be following the scientific method but may instead be making choices on ideological grounds. This is the essence of Romer’s critique, first in his own area of growth economics and then for business cycle analysis. Denying or marginalizing the problem simply invites critics to apply to the whole profession a criticism that only applies to a minority.
Posted by Mark Thoma on Wednesday, October 26, 2016 at 10:21 AM in Economics, Macroeconomics, Methodology |
Posted by Mark Thoma on Wednesday, October 26, 2016 at 12:06 AM in Economics, Links |
Posted by Mark Thoma on Tuesday, October 25, 2016 at 04:01 PM in Economics, Video |
Alex Walsh at Regblog:
Evaluating Germany’s Success in Regulating High-Frequency Trading: ...Although many countries have attempted to regulate the meteoric rise of high-frequency trading, no plan has been more ambitious than Germany’s High-Frequency Trading Act (HFT Act). Rather than regulate trading speed alone, the HFT Act targets the complex core of high-frequency trading: financial algorithms.
And there may be some evidence that the HFT Act is working—at least in part. In a recent paper, Nathan Coombs, a Research Fellow at the University of Edinburgh, grappled with the complexities of trying to define, identify, and monitor well-guarded financial algorithms, and concluded that the HFT Act—although far from perfect—has had a notable degree of success. ...
Posted by Mark Thoma on Tuesday, October 25, 2016 at 10:16 AM in Economics, Financial System, Regulation |
Posted by Mark Thoma on Tuesday, October 25, 2016 at 12:06 AM in Economics, Links |
A colleague, Bruce Blonigen, has a new paper (coauthored with Justin R. Pierce):
Evidence for the Effects of Mergers on Market Power and Efficiency, NBER Working Paper No. 22750 Issued in October 2016: Study of the impact of mergers and acquisitions (M&As) on productivity and market power has been complicated by the difficulty of separating these two effects. We use newly-developed techniques to separately estimate productivity and markups across a wide range of industries using detailed plant-level data. Employing a difference-in-differences framework, we find that M&As are associated with increases in average markups, but find little evidence for effects on plant-level productivity. We also examine whether M&As increase efficiency through reallocation of production to more efficient plants or through reductions in administrative operations, but again find little evidence for these channels, on average. The results are robust to a range of approaches to address the endogeneity of firms’ merger decisions. [Open link to paper]
[See also Mergers Raise Prices, Not Efficiency, by Noah Smith, though note that Bruce Blonigen is at the University of Oregon, not the Federal Reserve Board.]
Posted by Mark Thoma on Monday, October 24, 2016 at 11:47 AM
It's Trump's party, so cry if you want to:
It’s Trump’s Party, by Paul Krugman, NY Times: ...Everyone who endorsed Mr. Trump in the past owns him now... And voters should realize that voting for any Trump endorser is, in effect, a vote for Trumpism, whatever happens at the top of the ticket.
First of all, nobody who was paying attention can honestly claim to have learned anything new about Mr. Trump in the last few weeks. It was obvious from the beginning that he was a “con artist”... His racism and sexism were apparent from the beginning...; his vindictiveness and lack of self-discipline were on full display in his tirades against Judge Gonzalo Curiel and Khizr Khan.
So any politicians who try after the election to distance themselves from the Trump phenomenon — or even unendorse in these remaining few days — have already failed the character test. They knew who he was all along..., they will do whatever it takes to guarantee their own political survival.
And what this means in practice is that they will remain Trumpists after the election, even if the Orange One himself vanishes from the scene.
After all, what we learned during the Republican primary was that the party’s base doesn’t care at all about ... supposed conservative principles like small government.
What Republican voters wanted, instead, were candidates who channeled their anger and fear, who demonized nonwhites and played into dark conspiracy theories. ...
This lesson hasn’t been lost on Republican politicians. ...
So you can ignore all the efforts to portray Mr. Trump as a deviation from the G.O.P.’s true path: Trumpism is what the party is all about..., the underlying nastiness is now part of Republican DNA.
And the immediate consequences will be very ugly. Assuming that Hillary Clinton wins, she will face an opposing party that demonizes her and denies her legitimacy...
In fact, it’s likely to be so bad that America’s governability may hang in the balance. A Democratic recapture of the Senate would be a very big deal, but they are unlikely to take the House, thanks to the clustering of their voters. So how will basic business like budgeting get done? Some observers are already speculating about a regime in which the House is effectively run by Democrats in cooperation with a small rump of rational Republicans. Let’s hope so — but it’s no way to manage a great nation.
Still, it’s hard to see an alternative. For the modern G.O.P. is Mr. Trump’s party, with or without the man himself.
Posted by Mark Thoma on Monday, October 24, 2016 at 09:45 AM in Economics, Politics |
My latest column:
The Election Matters for the Future of the Economy: We are entering into a time period when economic growth may be lower than we are accustomed to, the likelihood of recessions may increase, and income will continue to be very unequally distributed.
Our response to these problems, which depends upon who wins the presidential election and which party controls the House and Senate, will play a critical role in determining how well our economy performs, who benefits from economic growth, and how we respond if the economy enters into a recession.
The following graph illustrates some of the challenges we face. ...
Posted by Mark Thoma on Monday, October 24, 2016 at 03:33 AM in Economics, Politics |
Posted by Mark Thoma on Monday, October 24, 2016 at 12:06 AM in Economics, Links |
Posted by Mark Thoma on Sunday, October 23, 2016 at 12:06 AM in Economics, Links |
Debt, Diversion, Distraction: ...So, about that supposed debt crisis...
Yes, the population is getting older, which means more spending on Medicare and Social Security. But ... quite a few baby boomers are already drawing on those programs; by 2020 we’ll be about halfway through the demographic transition, and current estimates don’t suggest a big budget problem.
Why, then, do you see projections of a large debt increase? The answer lies not in a known factor — an aging population — but in assumed growth in health care costs and rising interest rates. And the truth is that we don’t know that these are going to happen. In fact, health costs have grown much more slowly since 2010 than previously projected, and interest rates have been much lower. As the chart above shows, taking these favorable surprises into account has already drastically reduced long-run debt projections. These days the long-run outlook looks vastly less scary than people used to imagine. ...
...yes, it’s possible that we may at some point in the future have to cut benefits. But deficit scolds talk as if they offer a way to avoid this fate, when in fact their solution to the prospect of future benefit cuts is … to cut future benefits. ...
By putting the debt question aside, we are NOT in any material way making the future worse. And that is a total contrast with climate change, where our failure to act means pouring vast quantities of greenhouse gases into the atmosphere, materially increasing the odds of catastrophe with every year we wait.
So my message to the deficit scolds is this: yes, we may face some hard choices a couple of decades from now. But we might not, and in any case there aren’t any choices that must be made now. Meanwhile, there are genuinely scary things happening as we speak, which we should be taking on but aren’t. And your fear-mongering is distracting us from these real problems. Therefore, I would respectfully request that you people just go away.
Posted by Mark Thoma on Saturday, October 22, 2016 at 11:32 AM in Budget Deficit, Economics, Politics |
The Walloon mouse: ...Instead of decrying people's stupidity and ignorance in rejecting trade deals, we should try to understand why such deals lost legitimacy in the first place. I'd put a large part of the blame on mainstream elites and trade technocrats who pooh-poohed ordinary people's concerns with earlier trade agreements.
The elites minimized distributional concerns, though they turned out to be significant for the most directly affected communities. They oversold aggregate gains from trade deals, though they have been smallish since at least NAFTA. They said sovereignty would not be diminished though it clearly was in some instances. They claimed democratic principles would not be undermined, though they are in places. They said there'd be no social dumping though there clearly is at times. They advertised trade deals (and continue to do so) as "free trade" agreements, even though Adam Smith and David Ricardo would turn over in their graves if they read, say, any of the TPP chapters.
And because they failed to provide those distinctions and caveats now trade gets tarred with all kinds of ills even when it's not deserved. If the demagogues and nativists making nonsensical claims about trade are getting a hearing, it is trade's cheerleaders that deserve some of the blame.
One more thing. The opposition to trade deals is no longer solely about income losses. The standard remedy of compensation won't be enough -- even if carried out. It's about fairness, loss of control, and elites' loss of credibility. It hurts the cause of trade to pretend otherwise.
Posted by Mark Thoma on Saturday, October 22, 2016 at 10:46 AM in Economics, International Trade, Politics |
Posted by Mark Thoma on Saturday, October 22, 2016 at 12:06 AM in Economics, Links |
Neoliberalism and austerity: I like to treat neoliberalism not as some kind of coherent political philosophy, but more as a set of interconnected ideas that have become commonplace in much of our discourse. That the private sector entrepreneur is the wealth creator, and the state typically just gets in their way. That what is good for business is good for the economy, even when it increases monopoly power or involves rent seeking. Interference in business or the market, by governments or unions, is always bad. And so on. ...
I do not think austerity could have happened on the scale that it did without this dominance of this neoliberal ethos. Mark Blyth has described austerity as the biggest bait and switch in history. It took two forms. In one the financial crisis, caused by an under regulated financial sector lending too much, led to bank bailouts that increased public sector debt. This leads to an outcry about public debt, rather than the financial sector. In the other the financial crisis causes a deep recession which - as it always does - creates a large budget deficit. Spending like drunken sailors goes the cry, we must have austerity now.
In both cases the nature of what was going on was pretty obvious to anyone who bothered to find out the facts. That so few did so, which meant that the media largely went with the austerity narrative, can be partly explained by a neoliberal ethos. Having spent years seeing the big banks lauded as wealth creating titans, it was difficult for many to comprehend that their basic business model was fundamentally flawed and required a huge implicit state subsidy. On the other hand they found it much easier to imagine that past minor indiscretions by governments were the cause of a full blown debt crisis. ...
While in this sense austerity might have been a useful distraction from the problems with neoliberalism made clear by the financial crisis, I think a more important political motive was that it appeared to enable the more rapid accomplishment of a key neoliberal goal: shrinking the state. It is no coincidence that austerity typically involved cuts in spending rather than higher taxes... In that sense too austerity goes naturally with neoliberalism. ...
An interesting question is whether the same applies to right wing governments in the UK and US that used immigration/race as a tactic for winning power. We now know for sure, with both Brexit and Trump, how destructive and dangerous that tactic can be. As even the neoliberal fantasists who voted Leave are finding out, Brexit is a major setback for neoliberalism. Not only is it directly bad for business, it involves (for both trade and migration) a large increase in bureaucratic interference in market processes. To the extent she wants to take us back to the 1950s, Theresa May’s brand of conservatism may be very different from Margaret Thatcher’s neoliberal philosophy.
Posted by Mark Thoma on Friday, October 21, 2016 at 09:56 AM in Economics, Fiscal Policy, Politics |
"Maybe Mrs. Clinton is winning because she possesses some fundamental political strengths":
Why Hillary Wins, by Paul Krugman, NY Times: Hillary Clinton is a terrible candidate. Hey, that’s what pundits have been saying ever since this endless campaign began. You have to go back to Al Gore in 2000 to find a politician who faced as much jeering from the news media...
Strange to say, however, Mrs. Clinton won the Democratic nomination fairly easily, and now, having pummeled her opponent in three successive debates, is an overwhelming favorite to win in November, probably by a wide margin. How is that possible?
The usual suspects are already coalescing around an answer..., she just got lucky. If only the Republicans hadn’t nominated Donald Trump, the story goes, she’d be losing badly.
But here’s a contrarian thought: Maybe Mrs. Clinton is winning because she possesses some fundamental political strengths — strengths that fall into many pundits’ blind spots. ...
When political commentators praise political talent, what they seem to have in mind is the ability of a candidate to match one of a very limited set of archetypes: the heroic leader, the back-slapping regular guy you’d like to have a beer with, the soaring orator. Mrs. Clinton is none of these things...
Yet the person tens of millions of viewers saw in this fall’s debates was hugely impressive all the same: self-possessed, almost preternaturally calm under pressure, deeply prepared, clearly in command of policy issues. ...
Oh, and the strengths she showed in the debates are also strengths that would serve her well as president. ... And maybe ordinary citizens noticed the same thing; maybe obvious competence and poise in stressful situations can add up to a kind of star quality, even if it doesn’t fit conventional notions of charisma.
Furthermore, there’s one thing Mrs. Clinton brought to this campaign that no establishment Republican could have matched: She truly cares about her signature issues, and believes in the solutions she’s pushing.
I know, we’re supposed to see her as coldly ambitious and calculating, and on some issues — like macroeconomics — she does sound a bit bloodless, even when she clearly understands the subject and is talking good sense. But when she’s talking about women’s rights, or racial injustice, or support for families, her commitment, even passion, are obvious. She’s genuine, in a way nobody in the other party can be.
So let’s dispel with this fiction that Hillary Clinton is only where she is through a random stroke of good luck. She’s a formidable figure, and has been all along.
Posted by Mark Thoma on Friday, October 21, 2016 at 09:10 AM in Economics, Politics |
Posted by Mark Thoma on Friday, October 21, 2016 at 12:06 AM in Economics, Links |
A Tale of Two Stagnations: The term "secular stagnation," coined by economists in the 1930s and recently popularized by Larry Summers, has become a catch-all description for long-term economic pessimism. But it's gotten confused with a very different idea -- the technological stagnation hypothesis, proposed by economist Robert Gordon (and by Bloomberg View's Tyler Cowen). These are two very different ideas. Both would lead to slow growth in the long term, but they imply different causes and different remedies. ...
Posted by Mark Thoma on Thursday, October 20, 2016 at 10:26 AM in Economics |
Posted by Mark Thoma on Thursday, October 20, 2016 at 12:06 AM in Economics, Links |
No, U.S. Manufacturing Isn't Really Booming:...[Is]American manufacturing .. in decline? An answer frequently offered by wonky economics journalists is that, no, U.S. manufacturing output has actually kept growing. ...
There's a catch, though. As economist Susan N. Houseman of the W.E. Upjohn Institute for Employment Research ... points out, about half of the growth in U.S. manufacturing output since 1997 has been in just one sector: computer and electronics manufacturing.
If it weren't for computers and electronics (which includes semiconductors), manufacturing output would still be well below its 2008 peak and only 21 percent higher than in 1997...
The ... way those computers-and-electronics numbers are arrived at is worthy of a closer look. ... Without adjusting for deflation, value added in computer and electronics manufacturing is up 45 percent since 1997. With the adjustments, it's up 699 percent! What's happening here is that the Bureau of Economic Analysis has been trying to account for vast improvements in ... quality... Writes Houseman:
Such quality adjustment ... can make the numbers difficult to interpret..., figures that exclude this industry ... arguably provide a clearer picture of trends in manufacturing output.
As it stands now, those trends don't look impressive. U.S. manufacturing output has held up a lot better than manufacturing employment. But it definitely isn't booming.
Posted by Mark Thoma on Wednesday, October 19, 2016 at 12:10 PM in Economics, Technology, Unemployment |
Ben Bernanke and Peter Olson:
Are Americans better off than they were a decade or two ago?: Economically speaking, are we better off than we were ten years ago? Twenty years ago? When asked such questions, Americans seem undecided, almost schizophrenic, with large majorities saying the country is heading “in the wrong direction,” even as they tell pollsters that they are optimistic about their personal financial situations and the medium-term economic outlook.
In their thirst for evidence on this issue, commentators seized on the recent report by the Bureau of the Census, which found that real median household income rose by 5.2 percent in 2015, as showing that “the middle class has finally gotten a raise.” Unfortunately, that conclusion puts too much weight on a useful, but flawed and incomplete, statistic. Among the more significant problems with the Census’s measure are that: 1) it excludes taxes, transfers, and non-monetary compensation like employer-provided health insurance; and 2) it is based on surveys rather than more-complete tax and administrative data, with the result that it has been surprisingly inconsistent with the official national income numbers in recent years. Even if precisely measured, data on income exclude important determinants of economic well-being, such as the hours of work needed to earn that income.
While thinking about the question, we came across a recently published article by Charles Jones and Peter Klenow, which proposes an interesting new measure of economic welfare. While by no means perfect, it is considerably more comprehensive than median income, taking into account not only growth in per capita consumption but also changes in working time, life expectancy, and inequality. Moreover, as the authors demonstrate, it can be used to assess economic performance both across countries and over time. In this post we’ll report some of their results, and extend part of their analysis (which ends before the Great Recession) through 2015.
The bottom line: According to this metric, Americans enjoy a high level of economic welfare relative to most other countries, and the level of Americans’ well-being has continued to improve over the past few decades despite the severe disruptions of the last one. However, the rate of improvement has slowed noticeably in recent years, consistent with the growing sense of dissatisfaction evident in polls and politics. ...
Posted by Mark Thoma on Wednesday, October 19, 2016 at 09:44 AM in Economics, Income Distribution |
Posted by Mark Thoma on Wednesday, October 19, 2016 at 12:06 AM in Economics, Links |
Yellen poses important post-Great Recession macroeconomic questions: Last week at a Federal Reserve Bank of Boston conference, Federal Reserve Chair Janet Yellen gave a speech on macroeconomics research in the wake of the Great Recession. She ... lists four areas for research, but let’s look more closely at the first two groups of questions that she elevates.
The first is the influence of aggregate demand on aggregate supply. As Yellen notes, the traditional way of thinking about this relationship would be that demand, a short-run phenomenon, has no significant effect of aggregate supply, which determines long-run economic growth. The potential growth rate of an economy is determined by aggregate supply...
Yellen points to research that increasingly finds so called hysteresis effects in the macroeconomy. Hysteresis, a term borrowed from physics, is the idea that short-run shocks to the economy can alter its long-term trend. One example of hysteresis is workers who lose jobs in recessions and then aren’t drawn back into the labor market bur rather are permanently locked out... Interesting new research argues that hysteresis may affect not just the labor supply but also the rate of productivity growth.
If hysteresis is prevalent in the economy, then U.S. policymakers need to rethink their fiscal and monetary policy priorities. The effects of hysteresis may mean that economic recoveries need to run longer and hotter than previous thought in order to get workers back into the labor market or allow other resources to get back into full use.
The other set of open research questions that Yellen raises is the influence of “heterogeneity” on aggregate demand. In many models of the macroeconomy, households are characterized by a representative agent... In short, they are assumed to be homogeneous. As Yellen notes in her speech, overall home equity remained positive after the bursting of the housing bubble, so a representative agent would have maintained positive equity in their home.
Yet a wealth of research in the wake of the Great Recession finds that millions of households whose mortgages were “underwater” and didn’t have positive wealth—a big reason for the severity of the downturn. Ignoring this heterogeneity in the housing market and its effects on economic inequality seems like something modern macroeconomics needs to resolve. Economists are increasingly moving in this direction, but even more movement would very helpful.
Yellen raises other areas of inquiry in her speech, including better understanding how the financial system is linked to the real economy and how the dynamics of inflation are determined. ... As Paul Krugman has noted several times over the past several years, the Great Recession doesn’t seem to have provoked the same rethink of macroeconomics compared to the Great Depression, which ushered in Keynesianism, and the stagflation of the 1970s, which led to the ascendance of new classical economics. The U.S. economy is similarly dealing with a “new normal.” Macroeconomics needs to respond this reality.
Posted by Mark Thoma on Tuesday, October 18, 2016 at 09:15 AM in Economics, Macroeconomics, Methodology, Monetary Policy |
Are Yellen and Fischer Really Worlds Apart?, by Tim Duy: This from Bloomberg surprised me:
Michael Gapen, chief U.S. economist at Barclays Plc in New York, said Fischer’s comments “reflect an ongoing divergence of opinion” at the central bank. Fischer “doesn’t see much room for running the economy hot” while Yellen’s views “seem to provide a wide-open door to do that. You have a chair and a vice chair who see policy differently right now,” he said.
I don't think there exists a yawning gap between Federal Reserve Vice-Chair Fischer and Federal Reserve Vice Chair Yellen. The perception of this gap stems in part from what I think was an aggressive reading of Yellen's speech last week. The line in question:
If we assume that hysteresis is in fact present to some degree after deep recessions, the natural next question is to ask whether it might be possible to reverse these adverse supply-side effects by temporarily running a "high-pressure economy," with robust aggregate demand and a tight labor market.
Is this a call for a "high-pressure economy"? My interpretation is somewhat more muted. Note that this was posed as a potential research question, along with three others, that macroeconomists should pursue in the wake of the Great Recession:
The Influence of Demand on Aggregate Supply
The first question I would like to pose concerns the distinction between aggregate supply and aggregate demand: Are there circumstances in which changes in aggregate demand can have an appreciable, persistent effect on aggregate supply?
My second question asks whether individual differences within broad groups of actors in the economy can influence aggregate economic outcomes--in particular, what effect does such heterogeneity have on aggregate demand?
Financial Linkages to the Real Economy
My third question concerns a key issue for monetary policy and macroeconomics that is less directly addressed by this conference: How does the financial sector interact with the broader economy?
My fourth question goes to the heart of monetary policy: What determines inflation?
She does not actually say that the Fed should run a high pressure economy. Nor should this be seen as a defense of current policy because this is decidedly not a high pressure economy. Instead, Yellen argues we need more research on the topic to understand the costs and benefits of such a policy approach:
More research is needed, however, to better understand the influence of movements in aggregate demand on aggregate supply. From a policy perspective, we of course need to bear in mind that an accommodative monetary stance, if maintained too long, could have costs that exceed the benefits by increasing the risk of financial instability or undermining price stability. More generally, the benefits and potential costs of pursuing such a strategy remain hard to quantify, and other policies might be better suited to address damage to the supply side of the economy.
Now, to be sure, she is willing to delay rate hikes to explore the possibility of drawing more supply from the labor market. From the press conference:
But with labor market slack being taken up at a somewhat slower pace than in previous years, scope for some further improvement in the labor market remaining, and inflation continuing to run below our 2 percent target, we chose to wait for further evidence of continued progress toward our objectives.
Does this mean the economy is a running at a high pressure? Later in the conference:
And that is some news that we’ve received in recent months, that the labor market does have that potential to have people come back in without the unemployment rate coming down. So we’re not seeing strong pressures on utilization suggesting overheating, and my assessment would be, based on this evidence, that the economy has a little more room to run than might have been previously thought.
One reason Yellen is willing to delay rate hikes is because the economy is not overheating. Again, this is not a high pressure economy - and if it was, she would not be so willing to delay rate hikes. Indeed, willingness to accept a high pressure economy suggests that Yellen has abandoned preemptive policy. But:
So I think the notion that monetary policy operates with long and variable lags—that statement is due to Milton Friedman, and it is one of the essential things to understand about monetary policy, and it has not fundamentally changed at all. And that is why I believe we have to be forward looking, and I’m not in favor of a “whites of their eyes” sort of approach. We need to operate based on forecasts.
Compare this with Fischer, via the same Bloomberg story:
“If you go below the full employment rate, or peoples’ estimates of full employment, by a couple of tenths of percentage points, I don’t think there’s any danger in that,” Fischer said Monday in response to questions at an Economic Club of New York lunch. “But saying we should keep going until the inflation rate shows us we’re wrong, then you’re going to change too late.”
Then, back to Yellen:
One is the risk that the economy runs too hot, that unemploy—the labor market tightens too much, that unemployment falls to a very low level, that we need to tighten policy in a less gradual way than would be ideal, and in the course of doing that, because that is a very difficult thing to accomplish, to gently create a bit more slack in the labor market, we could cause a recession in the process.
So you get the idea. There is nothing here to suggest that Yellen looks to generate a high pressure economy. She holds the commonly held view within the Fed that policy makers need to prevent the unemployment rate from sinking too low because they cannot just nudge the rate higher. If anything, with the unemployment rate dancing on the edge of Fed estimates of the natural rate, she would almost certainly react to an acceleration in activity with an acceleration in the pace of rate hikes. So too would Fischer. But with growth around 2 percent per tracking estimates, labor force participation rising to meet job growth, and inflation below target, we do not have a high pressure economy and hence the need for immediate rate hikes dissipates. Yellen will let it play out a bit longer. But if the labor force participation rate stalls out and unemployment starts heading back down, Yellen would become nervous that the Fed is poised to fall behind the curve.
Bottom Line: The key debate within the Fed at the moment centers around the need for preemptive rate hikes. The hawks prefer more preemption, the doves favor less. Federal Reserve Lael Brainard pulled the FOMC to the dovish camp, primarily through her influence at Constitution Ave. Yellen is probably somewhat more sympathetic to Brainard than Fischer, but as I said last week, Fischer has moved substantially in Brainard's direction. It is really the presidents that are on the hawkish side of the aisle. There just isn't that much space between Yellen and Fischer at the moment.
Posted by Mark Thoma on Tuesday, October 18, 2016 at 12:15 AM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Tuesday, October 18, 2016 at 12:06 AM in Economics, Links |
How Clones Can Experience Unequal Economic Outcomes: A certain amount of economic inequality is just luck. At the extreme, some people win the lottery, and others don't. But there is also the potential for more subtle kinds of luck, like two equally talented entrepreneurs, where one business happens to take off while the other doesn't. Or two equally talented workers who go to work for similar-looking companies, but one company takes off while the other craters. Richard Freeman discusses the research literature on why this final example might be significant enough to play a role in overall economic inequality in the US in his essay, "A Tale of Two Clones: A New Perspective on Inequality," just published by the Third Way think tank. Freeman sets the stage like this (footnotes omitted):
"[C]onsider two indistinguishable workers, you and your clone. By definition, you/clone have the same gender, ethnicity, years of schooling, family background, skills, etc. In 2006 you/clone graduated with identical academic records from the same university and obtained identical job offers from Facebook and MySpace. Not knowing any more about the future than the analysts who valued Facebook and MySpace roughly equally in the mid-2000s, you/clone flipped coins to decide which offer to accept: heads – Facebook; tails – MySpace. Clone’s coin came up heads. Yours came up tails. Ten years later, Clone is in the catbird’s seat in the job market — high pay, stock options, a secure future. You struggle. Back to university? Send job search letters to close friends? Ask distant acquaintances to help? The you/clone thought experiment may seem extreme, but recent research that I have conducted with colleagues finds that the earnings of workers with near-clone similarity in attributes diverged so much by the place they worked that rising inequality in pay among employers has become the major factor in the trend rise in inequality. ... The labor market has been dominated by economic forces that pull the wages of firms further apart from each other, motivating our analysis of the role of employers in increasing inequality."
In other words, a lot of inequality is about where you work. The rise in equality is linked to differences across what firms are paying employees who appear to be similarly qualified. As Freeman acknowledges, this argument that this is a quantitatively important cause of rising inequality isn't ironclad at this point, but it's highly suggested in several ways of looking at the data: Freeman writes:
"This implies that 86% ... of the trend increase in inequality [from 1977-2009] occurs among people with measurably the same skills, whereas just 14% of the trend increase comes from changes in earnings among workers with different skills. The big surprise in the exhibit is that the inequality of average earnings among establishments increased by the same 0.147 points [measuring variance of natural log of earnings, a standard measure of inequality of earnings] as did inequality among workers with the same characteristics. This suggests that all of the increase in inequality among similar workers comes from the increase in earnings at their workplaces."
Or here is a figure suggesting a linkage from firm earnings to individual inequality of earnings. The blue line shows the change in individual earnings along the income distribution from 1992-2007. As one would expect, given the rise in inequality, those in the bottom percentiles of the income distribution do worse, while those in the top percentiles of the income distribution do better. But now, notice that the blue line for individual earnings almost matches the orange line for firm earnings. That is, there has also been widening inequality in firm earnings, with those at the bottom of the earnings distribution also seeing a decline from 1992-2007 and those at the top seeing an increase. Freeman also offers evidence that those who stayed at firms have seen their earnings change with the fortunes of the firm--thus contributing to overall inequality. As he writes; "In sum, changes in the distribution of earnings among establishments affect the change in earnings along the entire earnings distribution and the increased advantage of top earners compared to other workers."
What makes it possible for successful firms to pay workers more? The answer must be rooted in higher productivity for those firms. Indeed, productivity seems to be diverging across firms, too.
Indeed, as Freeman emphasizes, this figure shows that the equality of revenue per worker--a rough measure of productivity at the firm level--is diverging faster than inequality of wages across firms. Moreover, Freeman argues that a similar pattern of productivity divergence across firms is happening within each sector of the economy.
Freeman's evidence is consistent with some other studies. For example, last year I pointed to an OECD report on The Future of Productivity, which argued that while cutting-edge frontier firms continue to see strong increases in productivity, the reason for slower overall rates of productivity is that other firms aren't keeping up.
Thinking about inequality between similar workers may alter how one thinks about public policies related to underlying determinants of inequality. For example, it may be important to think about how productivity gains diffuse across industries and how that process may have changed. I suspect there is also some element of geographical separation here, where firms in certain areas are seeing faster productivity and wage increases, and so thinking about mobility of people and firms across geographic areas may be important, too.
Posted by Mark Thoma on Monday, October 17, 2016 at 10:01 AM in Economics, Income Distribution |
"Why does the modern right hate America?":
Their Dark Fantasies, by Paul Krugman, NY Times: I’m a baby boomer, which means that I’m old enough to remember conservatives yelling “America — love it or leave it!” at people on the left who criticized racism and inequality. But that was a long time ago. These days, disdain for America — the America that actually exists, not an imaginary “real America” in which minorities and women know their place — is concentrated on the right..., you increasingly find prominent figures describing our society as a nightmarish dystopia.
This is obviously true for Donald Trump... In his vision of America — clearly derived largely from white supremacist and neo-Nazi sources — crime is running wild, inner cities are war zones, and hordes of violent immigrants are pouring across our open border. In reality, murder is at a historic low, we’re seeing a major urban revival and net immigration from Mexico is negative. But I’m only saying that because I’m part of the conspiracy.
Meanwhile, you find almost equally dark visions, just as much at odds with reality, among establishment Republicans, people like Paul Ryan...
...consider the portrait of America Mr. Ryan painted last week, in a speech to the College Republicans. For it was, in its own way, as out of touch with reality as the ranting of Donald Trump (whom Mr. Ryan never mentioned).
...Mr. Ryan claimed to be describing the future — what will happen if Hillary Clinton wins... According to him, it’s very grim. There will, he said, be “a gloom and grayness to things,” ruled by a “cold and unfeeling bureaucracy.” We will become a place “where passion — the very stuff of life itself — is extinguished.” And this is the kind of America Mrs. Clinton “will stop at nothing to have.”
...We have many problems, but we’re hardly living in a miasma of despair. ...Mr. Ryan’s vision of America looks nothing like reality. It is, however, completely familiar to anyone who read Ayn Rand’s “Atlas Shrugged” as a teenager. ...
So why does the modern right hate America? There’s not much overlap in substance between Mr. Trump’s fear-mongering and Mr. Ryan’s, but there’s a clear alignment of interests. The people Mr. Trump represents want to suppress and disenfranchise you-know-who; the big-money interests that support Ryan-style conservatism want to privatize and generally dismantle the social safety net, and they’re willing to do whatever it takes to get there.
The big question is whether trash-talking America can actually be a winning political strategy. We’ll soon find out.
Posted by Mark Thoma on Monday, October 17, 2016 at 09:48 AM in Economics, Politics |
Posted by Mark Thoma on Monday, October 17, 2016 at 12:06 AM in Economics, Links |
Posted by Mark Thoma on Saturday, October 15, 2016 at 12:06 AM in Economics, Links |
What’s Behind a Rise in Ethnic Nationalism? Maybe the Economy: Global economic weakness and a rise in inequality appear to be causing a disturbing growth in ethnic nationalism. ...
In the United States, despite his attempts to woo minority voters, Donald J. Trump appears to derive support from such sentiment. In Moscow, Vladimir V. Putin has used Russian nationalist sentiment to inspire many of his countrymen. And we see growing ethnic political parties inspired by national identity in countless other countries.
It is natural to ask whether something so broad might have a common cause, other than the obvious circumstantial causes like the gradual fading of memories about the horrors of ethnic conflict in World War II or the rise in this century of forms of violent ethnic terrorism.
Economics is my specialty, and I think economic factors may explain at least part of the trend. ...
Posted by Mark Thoma on Friday, October 14, 2016 at 10:36 AM in Economics, Politics |
The presidential race may be all but over, but many others are not -- your vote still matters:
The Clinton Agenda, by Paul Krugman, NY Times: It ain’t over until the portly gentleman screams, but it is ... highly likely that Hillary Clinton will win this election...
But what will our first female president actually be able to accomplish? That depends...
Consider, first, the effects of a minimal victory: Mrs. Clinton becomes president, but Republicans hold on to both houses of Congress.
Such a victory wouldn’t be meaningless. It would avert the nightmare of a Trump presidency, and it would also block the radical tax-cutting, privatizing agenda that Paul Ryan ... has made clear he will steamroll through if Mr. Trump somehow wins. But it would leave little room for positive action.
Things will be quite different if Democrats retake the Senate. ...
Now, even a Democratic Senate wouldn’t enable Mrs. Clinton to pass legislation in the face of an implacably obstructionist Republican majority in the House. It would, however, allow her to fill the Supreme Court seat left vacant by the death of Antonin Scalia.
Doing that would have huge consequences..., the most important ... the Clean Power Plan ... is currently on hold, thanks to a stay imposed by the Supreme Court. Democratic capture of the Senate would remove this roadblock. ... Quite simply, if Democrats take the Senate, we might take the minimum action needed to avoid catastrophe; if they don’t, we won’t.
What about the House? ... Until the last few days, the chances of flipping the House seemed low...
But a sufficiently big Clinton victory could change that, especially if suburban women desert a G.O.P. that has turned into the gropers-owned party. And that would let her pursue a much more expansive agenda.
There’s not much mystery about what that agenda would be. ... Broadly speaking, she would significantly strengthen the social safety net, especially for the very poor and children, with an emphasis on family-related issues like parental leave. Such programs would cost money...; she proposes, credibly, to raise that money with higher taxes on top incomes, so that the overall effect would be to reduce inequality.
Democratic control of the House would also open the door for large-scale infrastructure investment. ...
In any case, the bottom line is that if you’re thinking of staying home on Election Day because the outcome is assured, don’t. Barring the political equivalent of a meteor strike, Hillary Clinton will be our next president, but the size of her victory will determine what kind of president she can be.
Posted by Mark Thoma on Friday, October 14, 2016 at 09:20 AM in Economics, Politics |
Posted by Mark Thoma on Friday, October 14, 2016 at 12:06 AM in Economics, Links |
How much bigger can the U.S. labor force get?: The U.S. labor market continues to recover from the still lingering effects of the Great Recession, but the question on the minds of many economists and analysts is how long can the healing continue? Or, in other words, has the U.S. economy hit “full employment”...? Understanding trends in the labor force participation rate is key for answering this question. ...
Views on labor force participation today vary on the extent to which structural forces or cyclical effects from the Great Recession of 2007-2009 are still affecting the participation rate. Many economists and analysts point to the role of structural forces or trends that long predate the Great Recession. But the long-term trend that gets cited the most is the aging of the working population as the Baby Boomer generation reaches retirement. The estimates on the effects of aging can vary quite a bit, but an estimate by the White House’s Council of Economic Advisers puts about half of the decline in participation from 2007 to 2014 into the “aging” category. When it comes to a policy response, it’s hard to change the age distribution of the population...
The importance of structural forces and demographics might give an impression that labor force participation or other trends are immutable and have to simply be endured. Regardless of how much slack remains in the labor market..., several structural factors can be addressed through policy actions.
Consider a new paper by Princeton University economist and former Council of Economic Advisers chairman Alan Krueger. The paper takes a direct look at the labor force participation rate and tries to understand what is depressing participation for men and women who are in prime working ages of 25 to 54. When it comes to prime-age men, health problems seem to be a huge barrier to labor market participation. According to the paper, almost 50 percent of men in this age group are taking medicine to control pain, and about 40 percent of this group say health issues are preventing them from taking a job. This is structural force that is not directly related to the Great Recession, but it certainly is amenable to a policy response.
As Krueger notes, such a trend means increased health insurance may help this trend or policymakers may want to look at pain-management interventions. When it comes to trends for prime-age women, there’s research pointing to the importance of family-friendly policies, or rather the lack thereof. ... Policies that help provide childcare and paid family and medical leave seem likely to help push back against these trends... And paid leave may also help male employment by allowing workers to take time off for their own health problems.
Of course, there is still the possibility that cyclical forces are pushing down the labor force participation rate. ... The only way we’ll really know is if policymakers, especially at the Federal Reserve, continue to be patient and help the current recovery continue.
Posted by Mark Thoma on Thursday, October 13, 2016 at 10:47 AM in Economics, Policy, Unemployment |
Posted by Mark Thoma on Thursday, October 13, 2016 at 12:06 AM in Economics, Links |
Me, at MoneyWatch:
Why this Nobel prize for economics is so well deserved: Most people have probably never even heard of “contract theory,” but that’s the specialty that has won Finland’s Oliver Hart and Bengt Holmström this year’s Nobel prize in economics. And as the theory’s name implies, their work helps us understand the contractual relationships between, for example, workers and firms, shareholders and management, businesses and suppliers, and health insurance companies and their customers.
When should workers be paid a bonus based on performance? What’s the best way to structure the contract specifying the terms for paying a bonus? Should managers have stock options as part of their contracts, or is some other arrangement preferable? When should insurance companies require co-payments, and what’s the best co-pay schedule?
Here’s a way to think about contract theory. ...
Posted by Mark Thoma on Wednesday, October 12, 2016 at 09:08 AM in Economics |
What Is the New Normal for U.S. Growth?: Economic growth during the recovery has been slower on average than its trend from before the Great Recession, prompting policymakers to ask if there is a “new normal” for U.S. GDP growth.
This Economic Letter argues that the new normal pace for GDP growth, in real (inflation-adjusted) terms, might plausibly fall in the range of 1½ to 1¾%. This estimate is based on trends in demographics, education, and productivity. The aging and retirement of the baby boom generation is expected to hold down employment growth relative to population growth. Further, educational attainment has plateaued, reducing the contribution of labor quality to productivity growth. The slower forecast for overall GDP growth assumes that, apart from these effects, productivity growth is relatively normal, if modest—in line with its pace for most of the period since 1973.
Subdued growth in the labor force
In thinking about prospects for economic growth, it is necessary to distinguish between the labor force and the larger population. Both are expected to grow at a relatively subdued pace; however, because of the aging of the population, the labor force is likely to grow even more slowly than the overall population.
Figure 1 shows that growth in the labor force has varied substantially over time and has often diverged from overall population growth. In the 1950s and 1960s, population (yellow line) grew more rapidly than the working-age population ages 15 to 64 (blue line) or the labor force (red line). In contrast, in the 1970s and 1980s, the labor force grew much more rapidly than the population as the baby boom generation reached working age and as female labor force participation rose. Those drivers of labor force growth largely subsided by the early 1990s. Since then, the labor force, working-age population, and overall population have all seen slower growth rates. Labor force participation fell sharply during the Great Recession, which held down labor force growth. But labor force growth has since rebounded to roughly the pace of the working-age population.
Slowing growth in working-age population and labor force
Source: Bureau of Labor Statistics, Bureau of Economic Analysis, Census Bureau, Congressional Budget Office (labor force projections).
Future labor force growth is likely to remain low for a couple of reasons. First, as shown in Figure 1, the population is now growing relatively slowly, and census projections expect that slow pace to continue. Second, these projections also suggest the working-age population will grow more slowly than the overall population, reflecting the aging of baby boomers. Of course, some of those older individuals will continue to work. Hence, the Congressional Budget Office (CBO) projects the labor force will grow about ½% per year (red dashed line) over the next decade—a little faster than the working-age population, but substantially slower than in the second half of the 20th century. I use their estimate as a basis for my assumption that hours worked will also grow at about ½% per year so that hours per worker do not change much.
Recent slow growth for productivity
Figure 2 shows growth in GDP per hour since 1947 broken into periods to reflect variation in productivity growth. This measure of productivity growth was very fast from 1947 to 1973 but much slower from 1973 to 1995. It returned to a fast pace from 1995 to 2004, but has slowed again since 2004. During the fast-growth periods, productivity growth averaged 2½ to 2¾%. During the slower periods, growth was only 1 to 1¼% and dropped dramatically lower in 2010–2015 (Fernald 2016 discusses this period).
Variation in productivity growth by trend period
Source: Bureau of Labor Statistics, Bureau of Economic Analysis.
Figure 2 is consistent with the view that the history of productivity growth has shifted between normal periods and exceptional ones (Gordon 2016, Fernald 2015, and David and Wright 2003). Unusually influential innovations—such as the steam engine, electric dynamo, internal combustion engine, and microprocessor—typically lead to a host of complementary innovations that boost productivity growth broadly for a time.
For example, productivity growth was exceptional before 1973, reflecting gains associated with such developments as electricity, the telephone, the internal combustion engine, and the Interstate Highway System (Fernald 1999). Those exceptional gains ran their course by the early 1970s, and productivity growth receded to a normal, modest pace.
Starting around 1995, productivity growth was again exceptional for eight or nine years. Considerable research highlighted how businesses throughout the economy used information technology (IT) to transform what and how they produced. After 2004, the low-hanging fruit of IT had been plucked. Productivity growth returned to a more normal, modest, and incremental pace—similar to that in 1973–95.
The past and future of GDP growth
GDP growth is the sum of growth in worker hours and GDP per hour. The blue line in Figure 3 shows how GDP growth fluctuated on average for each period mentioned in Figure 2. Before 2005, GDP growth since World War II was typically 3 to 4%. The dashed lines in the figure show two projections for future GDP. The higher estimate assumes productivity growth will return to its 1973–95 pace in the long run, while hours grow at the ½% per year pace projected by the CBO. In this scenario, GDP growth would average about 1¾%.
GDP scenarios with low labor force growth
Note: Annual percent change averaged over periods from Figure 2.
Source: Bureau of Labor Statistics, Bureau of Economic Analysis, and author’s calculations.
But productivity growth could easily be lower than in the 1973–95 period for two main reasons. First, productivity has grown a little more slowly from 2004–15 than in the 1973–95 period—and much more slowly since 2010 (Figure 2). Second, and perhaps more importantly, future educational attainment will add less to productivity growth. In recent decades, educational attainment of younger individuals has plateaued. This reduces productivity growth via increases in labor quality, which measures the combined contribution of education and experience. Labor quality has added about 0.4 percentage points to annual productivity growth since 1973. However, by early next decade, labor quality will contribute only about 0.10 to 0.20 percentage points to annual productivity growth (Bosler et al. 2016).
On its own, then, reduced labor quality growth suggests marking down productivity and GDP projections by at least two-tenths of a percentage point and possibly more. The lower dashed line in Figure 3 shows future GDP growth assuming that productivity growth net of labor quality grows at its 1973–95 pace, while labor quality grows at the slower pace of 0.2%. By this projection, GDP growth per hour would be only a little above 1½%.
At first glance, a pace of 1½ to 1¾% seems very low relative to history. But the main reason for the slow pace is demographics: Growth in the 1973–95 period would have been equally slow had hours grown only ½% per year. The red line shows how fast GDP would have grown in that scenario, holding productivity growth at its actual historical pace by period but using the slower pace of growth for hours that the CBO expects in the future. For example, in the 1973–95 period, GDP grew at nearly a 3% pace. But if hours had grown only ½% per year, then GDP growth would have been about 1¾%.
The major source of uncertainty about the future concerns productivity growth rather than demographics. Historically, changes in trend productivity growth have been unpredictable and large. Looking ahead, another wave of the IT revolution from machine learning and robots could boost productivity growth. Or, as Fernald and Jones (2014) suggest, the rise of China, India, and other countries as centers of frontier research might lead to more innovation. In such a case, as Fernald (2016) discusses, the forecast here could reflect an extended pause before the next wave of transformative productivity growth. But, until such a development occurs, the most likely outcome is a continuation of slow productivity growth.
Once the economy recovers fully from the Great Recession, GDP growth is likely to be well below historical norms, plausibly in the range of 1½ to 1¾% per year. The preferred point estimate in Fernald (2016), who examines these issues in even more detail, is for 1.6% GDP growth. This forecast is consistent with productivity growth net of labor quality returning over the coming decade to its average pace from 1973–95, which is a bit faster than its pace since 2004. In the past we have seen long periods with comparably modest productivity growth. But we have not experienced such modest productivity growth combined with the types of changes in demographics and labor quality that researchers are expecting.
This slower pace of growth has numerous implications. For workers, it means slow growth in average wages and living standards. For businesses, it implies relatively modest growth in sales. For policymakers, it suggests a low “speed limit” for the economy and relatively modest growth in tax revenue. It also suggests a lower equilibrium or neutral rate of interest (Williams 2016).
Boosting productivity growth above this modest pace will depend primarily on whether the private sector can find new and improved ways of doing business. Still, policy changes may help. For example, policies to improve education and lifelong learning can help raise labor quality and, thereby, labor productivity. Improving infrastructure can complement private activities. Finally, providing more public funding for research and development can make new innovations more likely in the future (Jones and Williams, 1998).
John Fernald is a senior research advisor in the Economic Research Department of the Federal Reserve Bank of San Francisco.
Bosler, Canyon, Mary C. Daly, John G. Fernald, and Bart Hobijn. 2016. “The Outlook for U.S. Labor-Quality Growth.” FRB San Francisco Working Paper 2016-14.
David, Paul, and Gavin Wright. 2003. “General Purpose Technologies and Productivity Surges: Historical Reflections on the Future of the ICT Revolution.” In The Economic Future in Historical Perspective, eds. Paul A. David and Mark Thomas. Oxford: Oxford University Press.
Fernald, John G. 1999. “Roads to Prosperity? Assessing the Link between Public Capital and Productivity.” American Economic Review 89(3), pp. 619–638.
Fernald, John G. 2016. “Reassessing Longer-Run U.S. Growth: How Low?” FRB San Francisco Working Paper 2016-18.
Fernald, John G., and Charles I. Jones. 2014. “The Future of U.S. Economic Growth.” American Economic Review Papers and Proceedings 104(5, May), pp. 44–49.
Gordon, Robert. 2016. The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War. Princeton, NJ: Princeton University Press.
Jones, Charles I., and John C. Williams. 1998. “Measuring the Social Return to R&D.” Quarterly Journal of Economics 113(4), pp. 1119–1135.
Williams, John C. 2016. “Monetary Policy in a Low R-star World.” FRBSF Economic Letter 2016-23 (August 15).
Opinions expressed in FRBSF Economic Letter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.
Posted by Mark Thoma on Wednesday, October 12, 2016 at 12:24 AM in Economics |
Posted by Mark Thoma on Wednesday, October 12, 2016 at 12:06 AM in Economics, Links |
Ricardian Equivalence, benchmark models, and academics response to the financial crisis: In his further thoughts on DSGE models (or perhaps his response to those who took up his first thoughts), Olivier Blanchard says the following:
“For conditional forecasting, i.e. to look for example at the effects of changes in policy, more structural models are needed, but they must fit the data closely and do not need to be religious about micro foundations.”
He suggests that there is wide agreement about the above. I certainly agree, but I’m not sure most academic macroeconomists do. I think they might say that policy analysis done by academics should involve microfounded models. Microfounded models are, by definition, religious about microfoundations and do not fit the data closely. Academics are taught in grad school that all other models are flawed because of the Lucas critique, an argument which assumes that your microfounded model is correctly specified. ...
Let me be more specific. The core macromodel that many academics would write down involves two key behavioural relationships: a Phillips curve and an IS curve. The IS curve is purely forward looking: consumption depends on expected future consumption. It is derived from an infinitely lived representative consumer, which means Ricardian Equivalence holds in this model. As a result, in this benchmark model Ricardian Equivalence also holds. 
Ricardian Equivalence means that a bond financed tax cut (which will be followed by tax increases) has no impact on consumption or output. One stylised empirical fact that has been confirmed by study after study is that consumers do spend quite a large proportion of any tax cut. That they should do so is not some deep mystery, but may be traced back to the assumption that the intertemporal consumer is never credit constrained. In that particular sense academics’ core model does not fit Blanchard’s prescription that it should ‘“fit the data closely”.
Does this core model influence the way some academics think about policy? I have written how mainstream macroeconomics neglected before the financial crisis the importance that shifting credit conditions had on consumption, and speculated that this neglect owed something to the insistence on microfoundations. That links the methodology macroeconomists use, or more accurately their belief that other methodologies are unworthy, to policy failures (or at least inadequacy) associated with that crisis and its aftermath.
I wonder if the benchmark model also contributed to a resistance among many (not a majority, but a significant minority) to using fiscal stimulus when interest rates hit their lower bound. In the benchmark model increases in public spending still raise output, but some economists do worry about wasteful expenditures. For these economists tax cuts, particularly if aimed at those who are non-Ricardian, should be an attractive alternative means of stimulus, but if your benchmark model says they will have no effect, I wonder whether this (consciously or unconsciously) biases you against such measures.
In my view, the benchmark models that academic macroeconomists carry round in their head should be exactly the kind Blanchard describes: aggregate equations which are consistent with the data, and which may or may not be consistent with current microfoundations. They are the ‘useful models’ that Blanchard talked about... These core models should be under constant challenge from both partial equilibrium analysis, estimation in all its forms and analysis using microfoundations. But when push comes to shove, policy analysis should be done with models that are the best we have at meeting all those challenges, and not models with consistent microfoundations.
Posted by Mark Thoma on Tuesday, October 11, 2016 at 09:08 AM in Economics, Macroeconomics, Methodology |
Notes on Brexit and the Pound: The much-hyped severe Brexit recession does not, so far, seem to be materializing – which really shouldn’t be that much of a surprise, because as I warned, the actual economic case for such a recession was surprisingly weak. (Ouch! I just pulled a muscle while patting myself on the back!) But we are seeing a large drop in the pound, which has steepened as it becomes likely that this will indeed be a very hard Brexit. How should we think about this?
Originally, stories about a pound plunge were tied to that recession prediction... But the demand collapse doesn’t seem to be happening. So what is the story?
For now, at least, I’m coming at it from the trade side – especially trade in financial services. It seems to me that one way to think about this is in terms of the “home market effect,” an old story in trade but one that only got formalized in 1980. ...
In Britain’s case,... financial services ... are subject to both internal and external economies of scale, which tends to concentrate them in a handful of huge financial centers around the world... But now we face the prospect of seriously increased transaction costs between Britain and the rest of Europe, which creates an incentive to move those services away from the smaller economy (Britain) and into the larger (Europe). Britain therefore needs a weaker currency to offset this adverse impact.
Does this make Britain poorer? Yes. It’s not just the efficiency effect of barriers to trade, there’s also a terms-of-trade effect as the real exchange rate depreciates.
But it’s important to be aware that not everyone in Britain is equally affected..., weakening helps British manufacturing – and, maybe, the incomes of people who live far from the City and still depend directly or indirectly on manufacturing for their incomes. It’s not completely incidental that these were the parts of England (not Scotland!) that voted for Brexit.
Is there a policy moral here? Basically it is that a weaker pound shouldn’t be viewed as an additional cost from Brexit, it’s just part of the adjustment. And it would be a big mistake to prop up the pound: old notions of an equilibrium exchange rate no longer apply.
Posted by Mark Thoma on Tuesday, October 11, 2016 at 08:52 AM in Economics, International Trade |