President Obama has finally seen the light and agreed to nominate Janet L. Yellen as Fed Chair. Sen. Corker of TN is against her, but otherwise it looks like she has overwhelming support in the Senate and will be confirmed quite easily. Futures on stock markets are up despite falling sharply today as it increasingly looks like not only might the shutdown get fail to get solved soon, but there might actually be a default by the US government. Although Obama is reportedly saying that this decision had nothing to do with the current budget crisis, word of it has sent futures on the stock market upwards, although that will probably get quickly reversed if there continues to be no resolution. In any case, it takes one element of uncertainty off the table in a period of sharply rising uncertainty, with the VIX having risen over 50% since Sept. 20.
As it is, that old Chinese curse holds, "May you live in interesting times." It may well be that if there is a failure to raise the debt ceiling or otherwise get around it with a major financial crisis ensuing, it will hit while Bernanke is still officially in charge. But clearly Yellen will be faced with having to deal with the cleanup of the mess that will ensue. While one can poke at this or that aspect of her views, there is no doubt that she is as qualified and capable as any potential Fed Chair to handle these potential upcoming "interesting times" as anybody else out there, with her excellent track record of forecasting as documented by the Wall Street Journal encouraging in this respect. In any case, whatever anybody thinks of her, we all should wish her the very best in dealing with these "interesting times," which threaten to get just all too interesting in the near future.
BTW, I cannot resist reminding one and all for the record that I was the first person on the planet to publicly call for her to be appointed as Fed Chair, and I did it all the way back in July, 2009 right here on Econospeak. So I am pleased to pat myself on the back publicly in seeing my long ago request finally being fulfilled. Of course, I must applaud it, :-).
Barkley Rosser
Tuesday, October 8, 2013
A Small Addendum to Mike Konczal’s Take Down on Conservative “Experts” on the Debt Ceiling
Mike notes this political spin:
Right now, many House Tea Party members believe that a default is impossible because we can prioritize interest payments to go first.He provides some very good discussions on the likely impact of default but also notes that the Usual Suspects – Dan Mitchell of Cato, the Heritage Foundation, and the American Enterprise Institute – were happy to parrot this political spin. But seriously – does anyone take these guys seriously? Which I am obligated to provide this from Greg Mankiw:
My Harvard colleague Martin Feldstein writes me in an email: The WSJ and FT continue to write about the risk of default, quoting the Treasury, Boehner and others. There really is no need for a default on the debt even if the debt ceiling is not raised later this month. The US government collects enough in taxes each month to finance the interest on the debt, etc. The government may not be able to separate all accounts into "pay" and "no pay" groups but it can certainly identify the interest payments. An inability to borrow would have serious economic consequences if it lasted for any sustained period but it would not have to threaten our credit standing.Whatever! OK – on a more serious note, Menzie Chinn takes a look at what happened to the S&P 500 index “when we last came close to a breach, but the Government didn't actually default”.
Monday, October 7, 2013
CBO’s Projections of Spending Did Not Rise as Suggested by Niall Ferguson
Niall Ferguson writes in the Wall Street Journal:
An entitlement-driven disaster looms for America ... True, the federal deficit has fallen to about 4% of GDP this year from its 10% peak in 2009. The bad news is that, even as discretionary expenditure has been slashed, spending on entitlements has continued to rise—and will rise inexorably in the coming years, driving the deficit back up above 6% by 2038. A very striking feature of the latest CBO report is how much worse it is than last year's. A year ago, the CBO's extended baseline series for the federal debt in public hands projected a figure of 52% of GDP by 2038. That figure has very nearly doubled to 100%. A year ago the debt was supposed to glide down to zero by the 2070s. This year's long-run projection for 2076 is above 200%.The reader is likely left with the impression that this change in the projected debt path was driven by an increase in expected future spending. Brad DeLong:
A year ago, the CBO was required by law to calculate its extended baseline by assuming that all of the tax cuts originally put in place in 2001 and 2003 would expire at the end of 2012, and never be reinstated.In other words, much of the blame for the worsening projection had to do with the decision to make the Bush tax cuts permanent. But could it be the case that some of the blame is due to a rise in the expected path of Federal spending? If anyone actually bothered to read the CBO report that Mr. Ferguson referenced, the answer would clearly be no. Figure A.2 of The 2013 Long-term Budget Outlook is entitled “Comparison of CBO’s 2012 and 2013 Budget Projections Under the Extended Baseline”. Check the graphs out for yourself or simply read what the CBO says:
Federal revenues under the extended baseline are now expected to be substantially lower in coming decades than CBO projected in 2012 (see the top panel of Figure A-2). By 2023, revenues are projected to be 2.8 percent of GDP lower than projected in the 2012 analysis: 18.5 percent of GDP rather than 21.3 percent ... Noninterest spending under the extended baseline is now expected to be lower in coming decades than CBO projected in 2012 (see the middle panel of Figure A-2). Specifically, noninterest spending in 2038 is projected to be 1.4 percent of GDP lower than in the 2012 analysis.In other words, the document that Mr. Ferguson references says precisely the opposite about spending from what he is trying to claim in his Wall Street Journal oped. Did he really read the entire thing? If so – he could not have missed this central point.
Reification
Chris Dillow writes:
He goes on to argue that we shouldn't worry about alienation/reification because a) workers may well enjoy alienated labor and b) there's nothing the government can do about it short of replacing the market with central planning, which doesn't work.
My take on alienation is somewhat different. I think that something like reification appears in the context of coordination games. Here's a simple one. We each decide separately and independently whether or not to walk downtown at night. Suppose it's the case that when enough people walk the street, downtown is safe; otherwise it's dangerous . So we get 2 equilibria: We all walk, the streets are safe, so we all walk; or no one walks, the streets are dangerous, so no one walks. Let's say we're in the latter equilibrium: we have reification if each of us thinks that the reason he/she doesn't walk is that the streets are dangerous. In fact, the reverse is true: collectively, the streets are dangerous because we don't use them. This seems to capture the idea that without explicit coordination, we fail to see our own authorship of social reality. Notice too that the problem still exists in the better equilibrium. Here we get the efficient equilibrium, but to the extent that we see the safety of the streets as a fact to which we respond by walking out at night, we have reification.
Here's another example: Each employer decides not to hire because there is insufficient demand, while in fact there is insufficient demand because collectively employers are not hiring. Or: we run the bank because we believe it will fail when in fact the bank will fail becuse we are running it.
Is reification in this sense a problem? Well with explicit coordination, we would avoid the bad equilibrium. And the situation could be fixed without coercion and without any sort of Hayekian knowledge problem to contend with. Suppose though that we are in the better equilibrium and yet we have reification in this sense: I think Marx would say it is a problem: people are confused about their own agency and thus in some sense unfree. I
This might be one rational(or irrational) reconstruction too much, I realize!
"In the day job, I point out that the "Mr Market" metaphor can be be misleading. If markets are complex emergent processes, as Alan Kirman shows, prices and quantities cannot be seen as the result simply of an individual's behaviour writ large, and markets are unpredictable.
Such a conception is consistent with Marxian concepts of alienation and reification. In capitalism, said Marx, "the productive forces appear as a world for themselves, quite independent of and divorced from the individuals." Or as Lukacs put it:
A relation between people takes on the character of a thing and thus acquires a ‘phantom objectivity’, an autonomy that seems so strictly rational and all-embracing as to conceal every trace of its fundamental nature: the relation between people." "
He goes on to argue that we shouldn't worry about alienation/reification because a) workers may well enjoy alienated labor and b) there's nothing the government can do about it short of replacing the market with central planning, which doesn't work.
My take on alienation is somewhat different. I think that something like reification appears in the context of coordination games. Here's a simple one. We each decide separately and independently whether or not to walk downtown at night. Suppose it's the case that when enough people walk the street, downtown is safe; otherwise it's dangerous . So we get 2 equilibria: We all walk, the streets are safe, so we all walk; or no one walks, the streets are dangerous, so no one walks. Let's say we're in the latter equilibrium: we have reification if each of us thinks that the reason he/she doesn't walk is that the streets are dangerous. In fact, the reverse is true: collectively, the streets are dangerous because we don't use them. This seems to capture the idea that without explicit coordination, we fail to see our own authorship of social reality. Notice too that the problem still exists in the better equilibrium. Here we get the efficient equilibrium, but to the extent that we see the safety of the streets as a fact to which we respond by walking out at night, we have reification.
Here's another example: Each employer decides not to hire because there is insufficient demand, while in fact there is insufficient demand because collectively employers are not hiring. Or: we run the bank because we believe it will fail when in fact the bank will fail becuse we are running it.
Is reification in this sense a problem? Well with explicit coordination, we would avoid the bad equilibrium. And the situation could be fixed without coercion and without any sort of Hayekian knowledge problem to contend with. Suppose though that we are in the better equilibrium and yet we have reification in this sense: I think Marx would say it is a problem: people are confused about their own agency and thus in some sense unfree. I
This might be one rational(or irrational) reconstruction too much, I realize!
Friday, October 4, 2013
NBER Recessions vs. Actual Recessions? (part 2 of 2)
(continued from part 1)
Employment Recessions. The end of the discussion of part 1 of this blog post suggests another way that the econopundits and people differ. Our commentators usually only care about the flow of money through the market economy (corrected for the impact of inflation, of course). In terms of the analogy, they care about the health of the "tiger." That’s what’s measured by GDP: nonmarket goods and service and nonmarket costs are not counted as part of GDP (with one minor exception). One reason why the econopundits have this focus is that they care a lot about stock prices (perhaps because they own stock), while the stock market’s speculative ups and downs are encouraged by GDP fluctuations. They are also more likely to be served well by the market than are people who are living from paycheck to paycheck.
But for most people, there’s a more important issue than GDP: to quote an old labor leader, for most people what’s counts is “jobs, jobs, jobs.” That is, though money flowing through the economy helps create jobs, what’s crucial is the general availability of job vacancies. We must ask: is the flow of money fast enough to lower the unemployment rate, to make the labor-market situation better for the vast majority? Or with a recession, is the flow of money so slow that the availability of jobs sags and unemployment soars? (That is, what about the health of the people who are clinging to the tiger's back?)
It’s this conflict of perspectives that’s behind the seemingly oxymoronic phrase “jobless recovery.” In this situation, the “economy” is recovering in the sense that real GDP is rising (with more money flowing) but jobs aren’t being created quickly enough to provide employment to new job-seekers and those who have lost their jobs. Thus, despite rising GDP, unemployment rates rise!
This contradiction – and the possibility of a jobless recovery – arises because of what economists call “Okun’s Law,” named after the late economist Arthur Okun. It’s really just a rule of thumb based on studying the real world, not a law. A law is a regularity which always works the same way, such the law of gravity in physics. There are no laws like that in economics. Thus, Okun's rule of thumb says that the slow growth of the U.S. economy since the 2009 should imply rising official unemployment rates (U3), but exactly the opposite has happened.
However despite this seeming contradiction, Okun's law captures the nature of a real problem. This idea goes beyond the common-sense idea that producing more real GDP means that more jobs are available, so that unemployment rates fall. It says that in order to prevent unemployment rates from rising the year-to-year growth rate of real GDP must exceed approximately 3 percent per year.
Why is it that real GDP must grow faster than 3 percent per year to get unemployment rates to fall? Partly it’s because new workers keep entering (or reentering) the labor force, seeking jobs and adding to the potential pool of unemployed workers. In addition, the normal growth of workers’ productivity – their ability to produce output during an hour of paid work – means that if the demand for products doesn’t rise fast enough, bosses may find some or even all of their existing employees to be “redundant” and so lay them off.
That is, if the economy – as measured by flows of money through markets – is growing at 4 or 5% per year (or even 3.5% per year), unemployment rates fall significantly and in a sustained way. This kind of true recovery is exactly what the doctor ordered for the current U.S. economy, since unemployment rates are so high. (It’s true that inflation may result from a true recovery, but that doesn’t make it any less of a recovery. Rather, it tells us that the tiger can eat too much.)
On the other hand (if Harry Truman hasn’t sawed off the economist’s other arm yet), if the economy is growing at only 1 or 2% per year, unemployment rates rise. That situation might be a jobless recovery. But there’s a second possibility: it might be a case of that mysterious creature called a growth recession. In this case, real GDP slows its growth without actually falling (a negative growth rate), so that unemployment rates rise.
There’s a third situation where we see rising unemployment despite growing real GDP. This occurs before an NBER recession occurs: if real GDP growth slows (causing rising unemployment as collateral damage), it can lead businesses to start retrenching and cut their new fixed investment spending. This in turn can lead to an NBER recession (an actual sustained fall of real GDP) to follow. This might be called a prelude employment recession (though it would be helpful if someone could suggest a better name).
Major causes of prelude recessions include a private-sector slowdown (as in classic stories of business cycle) and efforts by the Federal Reserve or other policymakers to attain a “soft landing.” (This refers to an effort to engineer a gradual reduction of real GDP growth and slow the fall of unemployment rates (or even raised them) in order to keep inflation from getting worse.)
A prelude recession might also happen due to the government’s budget sequester and the current partisan-driven “shutdown.” Both reduce government spending and hiring, which can reverberate through the economy causing the real GDP growth to slow. This process might snowball as both consumers and businesses cut spending, again reducing the availability of jobs and income. Thus an NBER recession can result. It's also possible that all we're going to have is a growth recession, but that's not what the doctor ordered when we still haven't recovered from the Great Recession.
The Measures. With these three kinds of non-NBER recessions in mind, I measured a “recession” as involving two or more back-to-back quarters of rising unemployment rates. These may be called “employment recessions” since employment recedes as unemployment rises. I use the unemployment rate, since talking about thousands or millions of unemployed workers misses the fact that the labor force (those both willing and able to work for pay) steadily increases over time. I use quarters (rather than months or years) in order to parallel the journalist’s version of the NBER definition of a recession. Just as with an NBER downturn or a Household Income Recession, I omit the period of stagnation that occurs in the aftermath of a recession. However, note that Household Income Recessions typically last longer than Employment Recessions.
The Bureau of Labor Statistics produces several other measures of “labor market slack,” but here I’m going to use what econopundits think of as the “official” unemployment rate (U3). This is partly due to the fact that the BLS didn’t start reporting other measures until relatively recently. It’s also the number that receives the most attention in the press even though it leaves out problems such as involuntary part-time workers, people who are driven out of job-seeking by bad prospects, and long-term unemployment. I doubt that using other measures will change my results, but we shall see. (Being fundamentally lazy, I’ll let someone else do this work.)
In any event, I doubt that there is a “correct” gauge of the starts and stops of recessions. If anything, I’d prefer the Household Income Recession measure of my previous blog. But it’s time to get to the results. But the point is not to present a total alternative to the NBER’s recession as much as to look at the economy from a different perspective.
I used quarterly data from 1948 to the present as provided by the BLS and massaged by the Federal Reserve Bank of St. Louis, to get quarterly numbers. I also got the NBER dates from the St. Louis Fed. First, we see three recessions that the NBER missed completely. They are growth recessions, since unemployment rose due to slowing real GDP growth without a full-scale GDP downturn happening. They occurred in 1951, 1959, and 1976. By sheer coincidence each of these occurred in the third and fourth quarters of the year (and yes the number were seasonally adjusted). Only the middle one (1959) really deserves serious attention, however, since the increases in the unemployment rate during the other two growth recessions were minor (i.e., one tenth of a percentage point). Of course, these growth-rate dips are “minor” only from an economist’s perspective. For those people in involved, the situation could easily been dire, since so many of us have a hard time doing well unless the economy is truly booming.
Next, we see the infamous jobless recoveries. They appear in the table below, using both my dates and those of the NBER, where “q” refers to the quarter of a year. Ignoring the growth recessions, all of the recessions I found except the second Volcker recession (1981q4-1982q4) ended after the trough quarter of the corresponding NBER recession. For Volcker #2, it’s cold comfort that unemployment stopped rising, since that one attained the highest unemployment rate the U.S. had seen since the Great Depression of the 1930s. Anyway, here’s my list, with the ways in which the two measures differ highlighted in boldface. The list includes the second Volcker recession as #8.
On the other hand, all of the employment recessions ended a quarter or more after the NBER recession ended. That is, the jobs situation (as measured by the official unemployment rate) continued to get worse even though the speed of the money flow through markets started rising. This joblessness was significantly worse during the 1990q3-1992q2 recession (#9), which ended fully five quarters after the NBER declared the recession over. It was this event which gave birth to the phrase “jobless recovery” while also helping to push President Bush #1 out of office (to be replaced by Clinton #1).
The lack of job creation after the NBER recovery began got worse, with recessions #10 and #11. The allegedly “mild” recession of 2001 (which I date as continuing all the way to 2002q2) ended two quarters after the NBER date. The same applies to the 2007q3-2009q4 “Great” one. Jobless recoveries seem to becoming the rule rather than the exception.
What about those prelude recessions? The first Volcker recession (#7) started two quarters earlier than in the NBER’s log. That is, the recession was much worse for working people than would be indicated by only looking at fluctuations of real GDP or NBER dates. The 2001 employment recession (#10) started one quarter “early” (compared to the NBER measure). I don’t know why this happened. Suffice it to say that the “Clinton boom” wasn’t as good as advertised.
Finally, the Great Recession (#11), which I date as being from 2007Q3 to the end of 2009, began one quarter earlier than the NBER measure. The fading job market was actually noted by the NBER committee that determines dates for business-cycle peaks and troughs, so that they stressed employment numbers much more than the usual real GDP measure in their dating. (They also dated the peak before the storm as during late 2007, but that’s lost when you use quarterly data.)
Conclusion. It's hard to draw a simple conclusion from these data. But two general conclusions are obvious. First, we shouldn't take NBER recessions as somehow reflecting the "gospel truth." The popular view that the "recession isn't over" actually says more than the NBER studies. Second, how we measure a peak month or quarter that begins a "recession" and the trough month or quarter that ends it depends on what our purposes are. The use of an unemployment measure, for example, illuminates the phenomenon of a "growth recession" (and similar) and the conflict between what's good for the market economy (measured by GDP) and what's good for working people (measured by employment rates).
– Jim Devine
Employment Recessions. The end of the discussion of part 1 of this blog post suggests another way that the econopundits and people differ. Our commentators usually only care about the flow of money through the market economy (corrected for the impact of inflation, of course). In terms of the analogy, they care about the health of the "tiger." That’s what’s measured by GDP: nonmarket goods and service and nonmarket costs are not counted as part of GDP (with one minor exception). One reason why the econopundits have this focus is that they care a lot about stock prices (perhaps because they own stock), while the stock market’s speculative ups and downs are encouraged by GDP fluctuations. They are also more likely to be served well by the market than are people who are living from paycheck to paycheck.
But for most people, there’s a more important issue than GDP: to quote an old labor leader, for most people what’s counts is “jobs, jobs, jobs.” That is, though money flowing through the economy helps create jobs, what’s crucial is the general availability of job vacancies. We must ask: is the flow of money fast enough to lower the unemployment rate, to make the labor-market situation better for the vast majority? Or with a recession, is the flow of money so slow that the availability of jobs sags and unemployment soars? (That is, what about the health of the people who are clinging to the tiger's back?)
It’s this conflict of perspectives that’s behind the seemingly oxymoronic phrase “jobless recovery.” In this situation, the “economy” is recovering in the sense that real GDP is rising (with more money flowing) but jobs aren’t being created quickly enough to provide employment to new job-seekers and those who have lost their jobs. Thus, despite rising GDP, unemployment rates rise!
This contradiction – and the possibility of a jobless recovery – arises because of what economists call “Okun’s Law,” named after the late economist Arthur Okun. It’s really just a rule of thumb based on studying the real world, not a law. A law is a regularity which always works the same way, such the law of gravity in physics. There are no laws like that in economics. Thus, Okun's rule of thumb says that the slow growth of the U.S. economy since the 2009 should imply rising official unemployment rates (U3), but exactly the opposite has happened.
However despite this seeming contradiction, Okun's law captures the nature of a real problem. This idea goes beyond the common-sense idea that producing more real GDP means that more jobs are available, so that unemployment rates fall. It says that in order to prevent unemployment rates from rising the year-to-year growth rate of real GDP must exceed approximately 3 percent per year.
Why is it that real GDP must grow faster than 3 percent per year to get unemployment rates to fall? Partly it’s because new workers keep entering (or reentering) the labor force, seeking jobs and adding to the potential pool of unemployed workers. In addition, the normal growth of workers’ productivity – their ability to produce output during an hour of paid work – means that if the demand for products doesn’t rise fast enough, bosses may find some or even all of their existing employees to be “redundant” and so lay them off.
That is, if the economy – as measured by flows of money through markets – is growing at 4 or 5% per year (or even 3.5% per year), unemployment rates fall significantly and in a sustained way. This kind of true recovery is exactly what the doctor ordered for the current U.S. economy, since unemployment rates are so high. (It’s true that inflation may result from a true recovery, but that doesn’t make it any less of a recovery. Rather, it tells us that the tiger can eat too much.)
On the other hand (if Harry Truman hasn’t sawed off the economist’s other arm yet), if the economy is growing at only 1 or 2% per year, unemployment rates rise. That situation might be a jobless recovery. But there’s a second possibility: it might be a case of that mysterious creature called a growth recession. In this case, real GDP slows its growth without actually falling (a negative growth rate), so that unemployment rates rise.
There’s a third situation where we see rising unemployment despite growing real GDP. This occurs before an NBER recession occurs: if real GDP growth slows (causing rising unemployment as collateral damage), it can lead businesses to start retrenching and cut their new fixed investment spending. This in turn can lead to an NBER recession (an actual sustained fall of real GDP) to follow. This might be called a prelude employment recession (though it would be helpful if someone could suggest a better name).
Major causes of prelude recessions include a private-sector slowdown (as in classic stories of business cycle) and efforts by the Federal Reserve or other policymakers to attain a “soft landing.” (This refers to an effort to engineer a gradual reduction of real GDP growth and slow the fall of unemployment rates (or even raised them) in order to keep inflation from getting worse.)
A prelude recession might also happen due to the government’s budget sequester and the current partisan-driven “shutdown.” Both reduce government spending and hiring, which can reverberate through the economy causing the real GDP growth to slow. This process might snowball as both consumers and businesses cut spending, again reducing the availability of jobs and income. Thus an NBER recession can result. It's also possible that all we're going to have is a growth recession, but that's not what the doctor ordered when we still haven't recovered from the Great Recession.
The Measures. With these three kinds of non-NBER recessions in mind, I measured a “recession” as involving two or more back-to-back quarters of rising unemployment rates. These may be called “employment recessions” since employment recedes as unemployment rises. I use the unemployment rate, since talking about thousands or millions of unemployed workers misses the fact that the labor force (those both willing and able to work for pay) steadily increases over time. I use quarters (rather than months or years) in order to parallel the journalist’s version of the NBER definition of a recession. Just as with an NBER downturn or a Household Income Recession, I omit the period of stagnation that occurs in the aftermath of a recession. However, note that Household Income Recessions typically last longer than Employment Recessions.
The Bureau of Labor Statistics produces several other measures of “labor market slack,” but here I’m going to use what econopundits think of as the “official” unemployment rate (U3). This is partly due to the fact that the BLS didn’t start reporting other measures until relatively recently. It’s also the number that receives the most attention in the press even though it leaves out problems such as involuntary part-time workers, people who are driven out of job-seeking by bad prospects, and long-term unemployment. I doubt that using other measures will change my results, but we shall see. (Being fundamentally lazy, I’ll let someone else do this work.)
In any event, I doubt that there is a “correct” gauge of the starts and stops of recessions. If anything, I’d prefer the Household Income Recession measure of my previous blog. But it’s time to get to the results. But the point is not to present a total alternative to the NBER’s recession as much as to look at the economy from a different perspective.
I used quarterly data from 1948 to the present as provided by the BLS and massaged by the Federal Reserve Bank of St. Louis, to get quarterly numbers. I also got the NBER dates from the St. Louis Fed. First, we see three recessions that the NBER missed completely. They are growth recessions, since unemployment rose due to slowing real GDP growth without a full-scale GDP downturn happening. They occurred in 1951, 1959, and 1976. By sheer coincidence each of these occurred in the third and fourth quarters of the year (and yes the number were seasonally adjusted). Only the middle one (1959) really deserves serious attention, however, since the increases in the unemployment rate during the other two growth recessions were minor (i.e., one tenth of a percentage point). Of course, these growth-rate dips are “minor” only from an economist’s perspective. For those people in involved, the situation could easily been dire, since so many of us have a hard time doing well unless the economy is truly booming.
Next, we see the infamous jobless recoveries. They appear in the table below, using both my dates and those of the NBER, where “q” refers to the quarter of a year. Ignoring the growth recessions, all of the recessions I found except the second Volcker recession (1981q4-1982q4) ended after the trough quarter of the corresponding NBER recession. For Volcker #2, it’s cold comfort that unemployment stopped rising, since that one attained the highest unemployment rate the U.S. had seen since the Great Depression of the 1930s. Anyway, here’s my list, with the ways in which the two measures differ highlighted in boldface. The list includes the second Volcker recession as #8.
dates of cyclical peaks and following troughs
NBER Recession || Employment Recession
- 1949q1–1949q3 || 1949q1–1949q4
- 1953q3–1954q2 || 1953q3–1954q3
- 1957q4–1958q1 || 1957q2–1958q2
- 1960q2–1961q1 || 1960q2–1961q2
- 1970q1–1970q4 || 1970q1–1971q1
- 1974q1–1975q1 || 1974q1–1975q2
- 1980q1–1980q2 || 1979q3–1980q3
- 1981q4–1982q4 || 1981q4–1982q4
- 1990q3–1991q1 || 1990q3–1992q2
- 2001q2–2001q4 || 2001q1–2002q2
- 2008q1–2009q2 || 2007q3–2009q4
On the other hand, all of the employment recessions ended a quarter or more after the NBER recession ended. That is, the jobs situation (as measured by the official unemployment rate) continued to get worse even though the speed of the money flow through markets started rising. This joblessness was significantly worse during the 1990q3-1992q2 recession (#9), which ended fully five quarters after the NBER declared the recession over. It was this event which gave birth to the phrase “jobless recovery” while also helping to push President Bush #1 out of office (to be replaced by Clinton #1).
The lack of job creation after the NBER recovery began got worse, with recessions #10 and #11. The allegedly “mild” recession of 2001 (which I date as continuing all the way to 2002q2) ended two quarters after the NBER date. The same applies to the 2007q3-2009q4 “Great” one. Jobless recoveries seem to becoming the rule rather than the exception.
What about those prelude recessions? The first Volcker recession (#7) started two quarters earlier than in the NBER’s log. That is, the recession was much worse for working people than would be indicated by only looking at fluctuations of real GDP or NBER dates. The 2001 employment recession (#10) started one quarter “early” (compared to the NBER measure). I don’t know why this happened. Suffice it to say that the “Clinton boom” wasn’t as good as advertised.
Finally, the Great Recession (#11), which I date as being from 2007Q3 to the end of 2009, began one quarter earlier than the NBER measure. The fading job market was actually noted by the NBER committee that determines dates for business-cycle peaks and troughs, so that they stressed employment numbers much more than the usual real GDP measure in their dating. (They also dated the peak before the storm as during late 2007, but that’s lost when you use quarterly data.)
Conclusion. It's hard to draw a simple conclusion from these data. But two general conclusions are obvious. First, we shouldn't take NBER recessions as somehow reflecting the "gospel truth." The popular view that the "recession isn't over" actually says more than the NBER studies. Second, how we measure a peak month or quarter that begins a "recession" and the trough month or quarter that ends it depends on what our purposes are. The use of an unemployment measure, for example, illuminates the phenomenon of a "growth recession" (and similar) and the conflict between what's good for the market economy (measured by GDP) and what's good for working people (measured by employment rates).
– Jim Devine
NBER Recessions vs. Actual Recessions? (part 1 of 2)
It is not surprising that controversies surround the issue of whether an economic “recession” is over or not. This is especially true for a world-shattering episode like the Great Recession that started in late 2007 and ended in the middle of 2009. The dates I just quoted were determined by a committee of economists at the National Bureau of Economic Research. Contrary to what most textbooks say, however, such dates are subject to debate. So below I present another new gauge to indicate when economic recessions occur, on top of the one I discussed in an earlier blog post. The new one is based on the officially-measured unemployment rate (U3). But to set the stage for this, alas, I must first repeat some of what I already said in an earlier post. I promise to throw in a tiger analogy to make things more interesting.
There, I discussed a major contrast in perceptions: while the NBER, many economists, and most pundits declared the Great Recession “ended” as of July 2009, many or even most folks outside of this charmed circle say “the recession isn’t over!” Using a year-to-year fall in the inflation-corrected median household income as indicating the existence of a “recession,” it turns out that popular perception was almost completely correct. However, further examination of how the dates of recessions’ peaks and troughs are set suggests that more is going on. Even though many dislike the phrase, the idea of a "jobless recovery" actually makes some sense in terms of the normal workings of capitalism.
Definitional Differences. An important reason for the difference between the non-governmental NBER and those of us who have to live in the real-world economy is a lack of communication. First, econopundits define a “recession” as the situation where the economy is actually receding (or retreating) until it reaches the business-cycle "trough." Making things clearer, this kind of event is often called an economic downturn. Journalists often measure this as the situation when we see two or more back-to-back quarters when the inflation-corrected GDP fell. (This is also called the “real” GDP; I’m going to ignore the controversy about his practice and just go with the flow.) This is a simplistic, but easy-to-measure, version of the generally-accepted definition used by the NBER. In practice, it gives quarterly dates for peak and troughs that corresponds well to the NBER dates. Thus, I’m treating the journalistic definition as equivalent to an “NBER recession” – or a recession as defined in this “standard” way. (People should remember, however, that the NBER uses a more complex way to determine the dates of cyclical peaks and troughs. Otherwise they wouldn’t need a committee!)
In contrast, so-called “ordinary” folks, for whom the economy’s situation is up close and personal, often see a “recession” as including not only the period when the economy is falling but also the quarters or even years when it’s stagnating in the aftermath of an “official” NBER recession. We should be heartened by the fact that the economist Lawrence Ball’s Money and Banking textbook takes a similar tack: his recession adds what economists call a “recessionary gap” (i.e., real GDP hovering below its estimated potential) onto the back end of the falling real GDP conception.This fits with much of popular experience.
However, this debate is really nothing but a difference about definitions. To my mind, there’s no point in arguing about which definitions are “correct.” A fight over whether that big creature that’s about to stomp on us is a Brontosaurus or an Apatosaurus is totally sterile. And does it really matter whether we call a thumb a “finger” or not? But we should remember that this disagreement arises because people are speaking slightly different languages, based in their different life experiences and intellectual approaches.
Median Income Recessions. But there are more serious differences. As noted in the previous blog post on this subject, the economists and pundits are likely gauging a “recession” using the wrong numbers. For the vast majority of people, using inflation-corrected median household income is better than using real GDP (which is so central to the standard definition). Suppose that the Jones family represent the median household, i.e., one which is smack dab in the middle of the income distribution. If they find that their money income isn’t keeping up with inflation (so that their real income falls), that disrupts their efforts to make ends meet and may drive them to borrow to maintain their standard of living. That is, the Joneses must cut back, canceling visits to movie theaters, sit-down restaurants, and even doctor’s offices. This is exactly the kind of situation that the word “recession” evokes for most people.
In the previous blog post, I determined the dating of Household Income Recessions using yearly data, since that is what’s available. It’s possible that quarterly data would be better, but the analysis suggests that recessions are a much more serious problem than the econopundits have seen. A year-to-year recession of household incomes captures the severity that most associate with this word.
Using the median household income has the advantage of correcting the usual real GDP measures for the effects of population growth. In my post, I didn’t even mention this issue because it’s not very important in a rich country such as the United States.
A different way to deal with the population issue is to use per capita or mean income (that is, the total GDP divided by the total population). But using real median household income to gauge recessions is highly superior. Per capita incomes can soar even though the 99 percent find our lives continuing to be nasty and brutish (and short, if we can’t afford medical care). This happens if the rich are garnering income hand over fist and grabbing the lion’s share of any increase in total income. In fact, that’s exactly the situation we’ve seen in recent years: in the aftermath of the Great Recession, the rich have been getting richer while most of the rest of us have continued to suffer.
Thus, the Household Income Recession I found that corresponded to the NBER’s “Great Recession” ended in 2012 rather than in the July 2009. In fact, it may be continuing into 2013 or even later. Whether or not the Recession will continue can only be seen when the government cranks out the data (if they can find the money to do it).
Ride the Tiger! An important criticism of the use of market incomes to gauge the onset and end of a recession is that both GDP and household incomes, whether they are measured in “real” terms or not, totally ignore non-market costs and benefits. They thus mis-measure the net benefits produced by the economy. In GDP calculations, the cost of pollution – think of the megatons of oil the BP’s oil disaster dumped on the Gulf of Mexico a few years ago – is not deducted, unlike the market cost of (say) the gasoline that goes into making the GDP. In fact, the clean-up costs from a massive oil spill can add to the value of GDP since it involves hiring and paying droves of workers! Further, the benefits of non-market activities – such as parents taking care of their own children – are also forgotten in GDP calculations. Thus, some have developed alternatives, such as the Genuine Progress Indicator to get an idea of the net sustainable benefits actually created by our economy for people.
This criticism is totally on-target when we think about the quality of long-term economic growth (i.e., rises in the ability of the economy to produce). Are we building higher and higher GDP numbers by dumping costs on Nature? That may not be sustainable because they’ll come back to bite us in a few years. For example, GDP growth is promoted by dumping carbon dioxide into the atmosphere (rather than paying for it as a cost up-front). But the resulting rise in the sea level with likely create large economic costs very soon, if global warming isn't doing that already (as with all of the "weird weather" we've been having).
The problem is that this criticism isn’t relevant to the issue of business cycles (a shorter-term matter). Remember that we live in a capitalist economy. That means that the vast majority of people are dependent on getting jobs and being paid wages or salaries. This makes us dependent on the health of the capitalist market economy – by its own standards. Even rich folks are dependent on the health of capitalism since they reap dividends, interest, capital gains, and/or princely executive salaries and bonuses that the system pumps out. GDP, despite its limits, measures capitalist health. This means that it real GDP stagnates, not many jobs will be created and not much property income will be garnered. So many or most people will suffer.
Think of us as riding the back of the tiger called capitalism. Measures like GDP miss such events as when the tiger kills an antelope for no reason and lets the carcass rot. However, if we have no way to get off its back, we want the tiger to be well-nourished. After all, it might decide to eat its passengers. GDP is like a measure of the amount of food the tiger gets, as is the study of business cycles. If GDP is soaring, the passengers can enjoy the ride ... (I apologize if this analogy is unfair to tigers.)
(to be continued)
– Jim Devine
There, I discussed a major contrast in perceptions: while the NBER, many economists, and most pundits declared the Great Recession “ended” as of July 2009, many or even most folks outside of this charmed circle say “the recession isn’t over!” Using a year-to-year fall in the inflation-corrected median household income as indicating the existence of a “recession,” it turns out that popular perception was almost completely correct. However, further examination of how the dates of recessions’ peaks and troughs are set suggests that more is going on. Even though many dislike the phrase, the idea of a "jobless recovery" actually makes some sense in terms of the normal workings of capitalism.
Definitional Differences. An important reason for the difference between the non-governmental NBER and those of us who have to live in the real-world economy is a lack of communication. First, econopundits define a “recession” as the situation where the economy is actually receding (or retreating) until it reaches the business-cycle "trough." Making things clearer, this kind of event is often called an economic downturn. Journalists often measure this as the situation when we see two or more back-to-back quarters when the inflation-corrected GDP fell. (This is also called the “real” GDP; I’m going to ignore the controversy about his practice and just go with the flow.) This is a simplistic, but easy-to-measure, version of the generally-accepted definition used by the NBER. In practice, it gives quarterly dates for peak and troughs that corresponds well to the NBER dates. Thus, I’m treating the journalistic definition as equivalent to an “NBER recession” – or a recession as defined in this “standard” way. (People should remember, however, that the NBER uses a more complex way to determine the dates of cyclical peaks and troughs. Otherwise they wouldn’t need a committee!)
In contrast, so-called “ordinary” folks, for whom the economy’s situation is up close and personal, often see a “recession” as including not only the period when the economy is falling but also the quarters or even years when it’s stagnating in the aftermath of an “official” NBER recession. We should be heartened by the fact that the economist Lawrence Ball’s Money and Banking textbook takes a similar tack: his recession adds what economists call a “recessionary gap” (i.e., real GDP hovering below its estimated potential) onto the back end of the falling real GDP conception.This fits with much of popular experience.
However, this debate is really nothing but a difference about definitions. To my mind, there’s no point in arguing about which definitions are “correct.” A fight over whether that big creature that’s about to stomp on us is a Brontosaurus or an Apatosaurus is totally sterile. And does it really matter whether we call a thumb a “finger” or not? But we should remember that this disagreement arises because people are speaking slightly different languages, based in their different life experiences and intellectual approaches.
Median Income Recessions. But there are more serious differences. As noted in the previous blog post on this subject, the economists and pundits are likely gauging a “recession” using the wrong numbers. For the vast majority of people, using inflation-corrected median household income is better than using real GDP (which is so central to the standard definition). Suppose that the Jones family represent the median household, i.e., one which is smack dab in the middle of the income distribution. If they find that their money income isn’t keeping up with inflation (so that their real income falls), that disrupts their efforts to make ends meet and may drive them to borrow to maintain their standard of living. That is, the Joneses must cut back, canceling visits to movie theaters, sit-down restaurants, and even doctor’s offices. This is exactly the kind of situation that the word “recession” evokes for most people.
In the previous blog post, I determined the dating of Household Income Recessions using yearly data, since that is what’s available. It’s possible that quarterly data would be better, but the analysis suggests that recessions are a much more serious problem than the econopundits have seen. A year-to-year recession of household incomes captures the severity that most associate with this word.
Using the median household income has the advantage of correcting the usual real GDP measures for the effects of population growth. In my post, I didn’t even mention this issue because it’s not very important in a rich country such as the United States.
A different way to deal with the population issue is to use per capita or mean income (that is, the total GDP divided by the total population). But using real median household income to gauge recessions is highly superior. Per capita incomes can soar even though the 99 percent find our lives continuing to be nasty and brutish (and short, if we can’t afford medical care). This happens if the rich are garnering income hand over fist and grabbing the lion’s share of any increase in total income. In fact, that’s exactly the situation we’ve seen in recent years: in the aftermath of the Great Recession, the rich have been getting richer while most of the rest of us have continued to suffer.
Thus, the Household Income Recession I found that corresponded to the NBER’s “Great Recession” ended in 2012 rather than in the July 2009. In fact, it may be continuing into 2013 or even later. Whether or not the Recession will continue can only be seen when the government cranks out the data (if they can find the money to do it).
Ride the Tiger! An important criticism of the use of market incomes to gauge the onset and end of a recession is that both GDP and household incomes, whether they are measured in “real” terms or not, totally ignore non-market costs and benefits. They thus mis-measure the net benefits produced by the economy. In GDP calculations, the cost of pollution – think of the megatons of oil the BP’s oil disaster dumped on the Gulf of Mexico a few years ago – is not deducted, unlike the market cost of (say) the gasoline that goes into making the GDP. In fact, the clean-up costs from a massive oil spill can add to the value of GDP since it involves hiring and paying droves of workers! Further, the benefits of non-market activities – such as parents taking care of their own children – are also forgotten in GDP calculations. Thus, some have developed alternatives, such as the Genuine Progress Indicator to get an idea of the net sustainable benefits actually created by our economy for people.
This criticism is totally on-target when we think about the quality of long-term economic growth (i.e., rises in the ability of the economy to produce). Are we building higher and higher GDP numbers by dumping costs on Nature? That may not be sustainable because they’ll come back to bite us in a few years. For example, GDP growth is promoted by dumping carbon dioxide into the atmosphere (rather than paying for it as a cost up-front). But the resulting rise in the sea level with likely create large economic costs very soon, if global warming isn't doing that already (as with all of the "weird weather" we've been having).
The problem is that this criticism isn’t relevant to the issue of business cycles (a shorter-term matter). Remember that we live in a capitalist economy. That means that the vast majority of people are dependent on getting jobs and being paid wages or salaries. This makes us dependent on the health of the capitalist market economy – by its own standards. Even rich folks are dependent on the health of capitalism since they reap dividends, interest, capital gains, and/or princely executive salaries and bonuses that the system pumps out. GDP, despite its limits, measures capitalist health. This means that it real GDP stagnates, not many jobs will be created and not much property income will be garnered. So many or most people will suffer.
Think of us as riding the back of the tiger called capitalism. Measures like GDP miss such events as when the tiger kills an antelope for no reason and lets the carcass rot. However, if we have no way to get off its back, we want the tiger to be well-nourished. After all, it might decide to eat its passengers. GDP is like a measure of the amount of food the tiger gets, as is the study of business cycles. If GDP is soaring, the passengers can enjoy the ride ... (I apologize if this analogy is unfair to tigers.)
(to be continued)
– Jim Devine
Congressional Staff Compensation Packages Explained in a Way that Even Sean Hannity Might Get
I stopped listening to Sean Hannity years ago as watching his show is bad for both the brain cells and blood pressure so I have to thank Catherine Thompson for letting us know about this silly exchange:
A discussion between Fox News host Sean Hannity and Reps. Bill Pascrell (D-NJ) and Matt Salmon (R-AZ) on employer contributions to congressional staff's health care plans quickly devolved into a shouting match Thursday ... "You have a 72 percent subsidy that everybody watching this show does not have. That's what the law says congressman," Hannity said. "You’re getting special perks and special breaks for yourself, absolutely. So cut the crap and stop lying to the audience!”I work for the private sector and my employer pays for part of my health insurance, but then again I just admitted that I was not watching this show. But let’s consider two possible ways of compensating the staff members of Congressman. Suppose Pascrell’s staff was paid $40,000 a year and got a health insurance package where the employee paid $50 a month and the government kicked in $150 a month. Sean Hannity would call that a 75% subsidy I guess. Suppose Congressman Salmon’s staff was not offered this subsidy but received $42,000 a year in terms of their Congressional subsidy. They then went onto a health exchange and got essentially the same insurance for $200 a month. Congressman Salmon’s staff would be getting an extra $200 a year precisely because the Federal government would be paying out an extra $200 a year per person. Which is just to say this has become one of the many stupid discussions in D.C. these days – for which we have Senator Grassley to blame.
Thursday, October 3, 2013
The Mulligan Marginal Tax Rate
Casey Mulligan has published a truly amazing chart in his latest Wall Street Journal op-ed asserting the following:
The chart nearby shows an index of marginal tax rates for non-elderly household heads and spouses with median earnings potential. The index, a population-weighted average over various ages, occupations, employment decisions (full-time, part-time, multiple jobs, etc.) and family sizes, reflects the extra taxes paid and government benefits forgone as a consequence of working. The 2009-10 peak for marginal tax rates comes from various provisions of the "stimulus" programs in the American Recovery and Reinvestment Act of 2009 and the extension of unemployment benefits to 99 weeks in some states. At the end of 2012, the marginal tax rate index reached its lowest value since 2008: 43.9%. A little over a year later (January 2014), the index will be close to 50%, driven up by the expiration of the payroll tax cut and multiple provisions of the Affordable Care Act.I have to admit that I have yet to read his NBER paper from which his graph is supposedly taken, but something in all of this looks mighty odd to me. The graph starts in the good old Bush43 days before the Great Recession. I realize that the “1 percent” paid marginal tax rates close to 36% on their Federal income taxes and perhaps a bit extra depending on what state they lived in. But these same folks had a zero marginal tax rate from payroll taxes. Yet, the payroll tax holiday and its expiration change the Mulligan marginal tax rate calculation dramatically. OK, there are a lot of households that were affected by the payroll tax holiday and its expiration even at the margin, but their marginal income tax rate was never anywhere close to 36%. So one has to wonder how few households face anything remotely close to the marginal rates presented in this graph. Given its pro-Republican spin value, Greg Mankiw dutifully linked to it under The Coming Tax Hike supposedly from “The-Not-So-Affordable Care Act” but provided absolutely no commentary or insights. I guess you’ve guessed by now that I’m not buying this Mulligan but it also seems I should go read his NBER paper. Any insights from other economists on whether this chart makes any sense or not would be greatly appreciated.
Wednesday, October 2, 2013
Public Health Externalities Argument For Universal Health Insurance Coverage
As coauthor of a widely used comparative systems textbook (third edition now in preparation for MIT Press) who travels around a lot and talks to economists and policymakers in many nations, I have been struck by a nearly universal argument that has been made to me repeatedly, often with dripping contempt for the discourse in the US, an argument that they consider to be obvious and a matter of common sense as well as good economics, but that one almost never hears within the US. This is that the presence of negative externalities from having sick people walking around justifies making sure that everybody has health insurance, however one mananages to pay for it or organize it, so that people will get preventive care from physicians and not be wandering around infecting those around them. With the US being the only high income nation that does not have universal coverage, I do not know to what extent our poor showing on life expectancy (37th to 50th depending on source and how many micro states one includes on the list) is due to our failing to cover everybody and avoid this obvious negative externatlity, but I have no doubt it aggravates this poor performance.
Of course, the joke is that the new ACA (aka "Obamacare," even though it was initially a GOP-supported plan out of the Heritage Foundation implemented in MA by Romney) does not provide universal coverage, although it increases coverage. The SCOTUS in an unprecedented and supremely stupid move dramatically reduced this expansion of coverage by allowing states to opt out of the Medicaid expansion in the law, with that the leading source of the hoped-for expansion of coverage, now limited, and with the states with the highest percentages of uninsured (25% in TX) being the ones with governors or legistlatures or both blocking adoption of the Medicaid expansion. I guess we should understand that at least one reason we do not hear this argument universally used in other nations is that ACA does not mandate universal coverage, although clearly the argument can be used to support the expanded coverage under ACA. Unfortunately, I think the subtext of opposition to universal coverage is just plain raw racism, people not wanting "them," the moochers of racial minority status, to get coverage, especially those illegal immigrants who should be encouraged to leave the country and certainly should not be given any coverage, even if them getting sick puts all of the rest of us at greater risk of doing so as well.
Barkley Rosser
Of course, the joke is that the new ACA (aka "Obamacare," even though it was initially a GOP-supported plan out of the Heritage Foundation implemented in MA by Romney) does not provide universal coverage, although it increases coverage. The SCOTUS in an unprecedented and supremely stupid move dramatically reduced this expansion of coverage by allowing states to opt out of the Medicaid expansion in the law, with that the leading source of the hoped-for expansion of coverage, now limited, and with the states with the highest percentages of uninsured (25% in TX) being the ones with governors or legistlatures or both blocking adoption of the Medicaid expansion. I guess we should understand that at least one reason we do not hear this argument universally used in other nations is that ACA does not mandate universal coverage, although clearly the argument can be used to support the expanded coverage under ACA. Unfortunately, I think the subtext of opposition to universal coverage is just plain raw racism, people not wanting "them," the moochers of racial minority status, to get coverage, especially those illegal immigrants who should be encouraged to leave the country and certainly should not be given any coverage, even if them getting sick puts all of the rest of us at greater risk of doing so as well.
Barkley Rosser
Tuesday, October 1, 2013
George Will’s Reasoning to Repeal the Medical Device Tax
I guess I’m a bit late to the party as George Will penned this back in May of 2012:
In 2010, however, Congress, ravenous for revenue to fund Obamacare, included in the legislation a 2.3 percent tax on gross revenue — which generally amounts to about a 15 percent tax on most manufacturers’ profits — from U.S. sales of medical devices beginning in 2013. This will be piled on top of the 35 percent federal corporate tax, and state and local taxes ... Covidien, now based in Ireland, has cited the tax in explaining 200 layoffs and a decision to move some production to Costa Rica and Mexico.Where to begin with this op-ed? First of all - Covidien denied that is decision to source some of its products from overseas were due to this tax. Of course, this did not stop the rightwing spin machine from repeating Will’s claim. Maybe other medical device manufacturers made this claim but Paul N. Van de Water has often noted:
the excise tax creates no incentive whatever for medical device manufacturers to move production overseas. The tax applies to imported as well as domestically produced devices. Thus, sales of medical devices in the United States will be equally subject to the tax whether they are produced here or abroad, and the tax will not make imported devices any more attractive to domestic purchasers. In addition, devices produced in the United States for export are exempt from the tax, so it will not reduce the competitiveness of U.S.-made devices in international markets.Yes – I am repeating myself but as I also noted on Sunday, the tax is on the wholesale price and not gross revenues as Will claimed. Here are a few other things Will seems to not understand. Covidien’s effective tax rate is 15% - not the 35% Federal plus state & local taxes Mr. Will talks about. Maybe he is thinking more along the lines of Medtronic. So I checked its 10-K filing for fiscal year ended April 26, 2013. Its pretax income was 25.6% of its sales, which means this tax would be far less than the alleged “15 percent tax” Mr. Will suggests. And its effective tax rate was only 18.4%, which is about half of what Mr. Will claims.
Monday, September 30, 2013
Henry Aaron Calls For Obama To Ignore Debt Ceiling
This Henry Aaron is not the home run hitting former baseball player, but the longtime top tax expert at the Brookings Institution. In today's New York Times he has an op-ed entitled "Obama Should Ignore Debt Ceiling: (I have actually linked to Mark Thoma's economist view links for today, but it is the top one there). He makes numerous valid points. One is to point out that if the debt ceiling is not raised then the president will be in a situation of inevitably violating the law one way or another. On the one hand, he must have the Treasury pay bills as they come in that have been lawfully approved by Congress with him signing on. OTOH, of course, he is not supposed to borrow money if the debt ceiling has been hit in order to pay for those bills (and he cannot unilaterally raise taxes to do so, either, a point not usually noted, and clearly way off the charts constitutionally).
Aaron notes that there was a discussion of this conundrum in 2012 in the Columbia Law Review by Neil H. Buchanan and Michael C. Dorf who concluded that indeed there are only three options in this case: 1) do not pay lawful bills, 2) arbitrarily raise taxes, and 3) simply ignore the debt ceiling and proceed as usual. After noting that these are all bad option and technically illegal, with Aaron adding "unconstitutional because violating the law," they conclude that #3 is the least bad of the bad options. Aaron notes that Obama doing this may well lead to him being impeached by the House, but he would not be convicted by the Senate, and it would avoid multiple disasters to the world economy. Aaron also notes that getting rid of the debt ceiling will end the periodic attempts at blackmail by opposition parties trying to achieve ends they could not get through normal legislative processes. All of this is correct, needless to say.
The one thing that I find curious about this is that neither Buchanan and Dorf nor Aaron raise the possibility of not merely ignoring the debt ceiling, but going further to put the nail in its coffin (or drive the stake through its heart, if you prefer) by declaring it unconstitutional, with Part D of the 14th Amendment that declares that the national debt must be paid the obvious base for doing so. I note that not only Bill Clinton and Bruce Bartlett have urged this, but also Moody's prior to the last raising of the debt ceiling, which was followed by them downgrading US debt precisely because of the political silliness and uncertainty involved in this process of raising the debt ceiling.
Indeed, Aaron emphasizes how ridiculous the debt ceiling is by calling it a law "like a human appendix," with no discernible function, given that the budget already sets a course for a particular deficit level that will change the debt level. As has been said a million times, raising the debt ceiling only ratifies what has already been committed, the source of all the contradictions. I also remind one and all that the US is the only nation in world history to have ever had such a nominal debt ceiling. It is time to have a fiscal appendectomy and remove this absurdity most thoroughly and completely, once and for all.
Barkley Rosser
Aaron notes that there was a discussion of this conundrum in 2012 in the Columbia Law Review by Neil H. Buchanan and Michael C. Dorf who concluded that indeed there are only three options in this case: 1) do not pay lawful bills, 2) arbitrarily raise taxes, and 3) simply ignore the debt ceiling and proceed as usual. After noting that these are all bad option and technically illegal, with Aaron adding "unconstitutional because violating the law," they conclude that #3 is the least bad of the bad options. Aaron notes that Obama doing this may well lead to him being impeached by the House, but he would not be convicted by the Senate, and it would avoid multiple disasters to the world economy. Aaron also notes that getting rid of the debt ceiling will end the periodic attempts at blackmail by opposition parties trying to achieve ends they could not get through normal legislative processes. All of this is correct, needless to say.
The one thing that I find curious about this is that neither Buchanan and Dorf nor Aaron raise the possibility of not merely ignoring the debt ceiling, but going further to put the nail in its coffin (or drive the stake through its heart, if you prefer) by declaring it unconstitutional, with Part D of the 14th Amendment that declares that the national debt must be paid the obvious base for doing so. I note that not only Bill Clinton and Bruce Bartlett have urged this, but also Moody's prior to the last raising of the debt ceiling, which was followed by them downgrading US debt precisely because of the political silliness and uncertainty involved in this process of raising the debt ceiling.
Indeed, Aaron emphasizes how ridiculous the debt ceiling is by calling it a law "like a human appendix," with no discernible function, given that the budget already sets a course for a particular deficit level that will change the debt level. As has been said a million times, raising the debt ceiling only ratifies what has already been committed, the source of all the contradictions. I also remind one and all that the US is the only nation in world history to have ever had such a nominal debt ceiling. It is time to have a fiscal appendectomy and remove this absurdity most thoroughly and completely, once and for all.
Barkley Rosser
Sunday, September 29, 2013
The Medical Device Excise Tax
Last night the Tea Party crowd in the House passed a couple of resolutions. Most of today’s endless political mania is over the Faustian choice between either eliminating a centrist health care reform on the eve of when it will actually start helping people or watching the government shut down. The other resolution would repeal the Medical Device Excise Tax and it actually has the support of a few Democrats who just happened to be bought and paid for by the medical device sector. I just listened to one of them say that the tax will cause these firms shift production offshore. Paul N. van de Water rebutted this ridiculous claim yesterday:
the excise tax creates no incentive whatever for medical device manufacturers to move production overseas. The tax applies to imported as well as domestically produced devices. Thus, sales of medical devices in the United States will be equally subject to the tax whether they are produced here or abroad, and the tax will not make imported devices any more attractive to domestic purchasers. In addition, devices produced in the United States for export are exempt from the tax, so it will not reduce the competitiveness of U.S.-made devices in international markets.Paul did an admirable job of addressing some of the other claims from the medical device sector so let me turn to a more subtle point about this alleged 2.3% tax rate. Section 4191 notes the tax is applied to the wholesale price as opposed to the retail price even though companies like Medtronic and Johnson & Johnson sell into the retail market. So the law allows for a constructive price, which is effectively the arm’s length price between the manufacturing division and the distribution division. The government seems to think that this price should be around 75% of the retail price, which is likely about right. If these companies accept this government position, their effective tax rate would be only 1.73% not 2.3%. But suppose the Big Four accounting representatives of these companies draft transfer pricing reports that base the price on production costs plus a modest markup over costs, which would like argue that the constructive price should be closer to 30% of retail sales. In this case, the effective rate would likely be less than 0.7% of sales. While any reasonable person would recognize that no medical device manufacturer would ever forego their substantial intangible profits by selling their goods so cheaply to a distributor, we will have to see whether the IRS has the intelligence and fortitude to challenge such incredibly aggressive tax evasion through transfer pricing manipulation.
Wednesday, September 25, 2013
Who Ends Up Losing Their Job Under a Higher Minimum Wage?
The effects of a higher minimum wage on employment is likely one of the most studied issues in economics with a surprising result being that employment losses are not that high. Well that is surprising to conservatives who think markets are very competitive. To those of us who recognize the potential existence of market power on the hiring side, standard economic theory says that wage floors may actually increase employment in some markets. But let’s turn the microphone over to a couple of conservatives starting with a Grumpy Economist who must do empirical research as he feeds his children fast food:
A sturdy hike in the minimum wage, in today's economy, is basically an industrial policy subsidizing the transition to low-skill service industry automation.And Greg Mankiw says this is a nice post? OK – I’m citing Greg as he cites a paper by David Lee and Emmanuel Saez:
This paper provides a theoretical analysis of optimal minimum wage policy in a perfectly competitive labor market and obtains two key results. First, we show that a binding minimum wage – while leading to unemployment – is nevertheless desirable if the government values redistribution toward low wage workers and if unemployment induced by the minimum wage hits the lowest surplus workers first. Importantly, this result remains true in the presence of optimal nonlinear taxes and transfers. In that context, a binding minimum wage enhances the effectiveness of transfers to low-skilled workers as it prevents low-skilled wages from falling through incidence effects. Second, when labor supply responses are along the extensive margin only, which is the empirically relevant case, the co-existence of a minimum wage with a positive tax rate on low-skilled work is always (second-best) Pareto inefficient. A Pareto improving policy consists of reducing the pre-tax minimum wage while keeping constant the post-tax minimum wage by increasing transfers to low-skilled workers, and financing this reform by increasing taxes on higher paid workers. Those results imply that the minimum wage and subsidies for low-skilled workers are complementary policies.Greg’s reason for not buying this argument is:
Rather than providing a justification for minimum wages, the paper seems to do just the opposite. It shows that you need implausibly strong assumptions, such as efficient rationing, to make the case. I cannot see any compelling reason to believe that in the presence of excess supply of workers, the market will somehow manage to efficiently ration the scarce jobs.Hang on a second – a conservative economist arguing that markets are not efficient? Puzzling!
Monday, September 23, 2013
Stalin and Charles Murray on American Exceptionalism as Botched by Robert Samuelson
In today's Washington Post, non-economist Robert Samuelson yet again reminds us of his lack of credentials by a botched discussion of the American Exceptionalism issue. He gains some brownie points by claiming that the term was first used by Joseph Stalin in 1927 when he apparently denied the argument by US Communist, Jay Lovestone, that the advanced state of the US economy precluded the need for a communist revolution with Stalin denouncing this "heresy of American exceptionalism." Stalin's skepticism is reiterated by conservative Charles Murray later in the column, who sees American exceptionalism dribbling away as American values are eroding, with Murray particularly emphasizing, with RJS supporting him, that while for our first 140 years the federal government never exceeded 4% of GDP in peacetime, "Now it regularly tops 20 percent. The U.S. welfare state resembles the Europeans."
In the first part of the column makes the case for American exceptionalism, at least based on attitudes. So, he recounts that solid majorities of Americans believe in "freedom over security" and also in free will, in contrast with various European nations where only minorities accept these. OTOH, at the end of the column Samuelson admits that there is a sharp split within age groups in the US over whether or not "Our people are not perfect but our culture is superior," with 60% of those over 50 agreeing while only 37% agree among those aged 18 to 29. Somehow Samuelson only mentions some alleged convergence of values and trends across nations without any mention of any economic factors in this outcome, curious for someone who supposedly writes on economics. Needless to say, he has missed the boat here.
So, let us start with the argument by Murray, accepted so unquestioningly by Samuelson, about the size of government in the US. It is claimed that somehow there has been some big increase in federal government size relative to GDP. However, except for the during the depth of the Great Recession, the claim here does not hold up very well, see "U.S. Federal Government Budget as a Percent of GDP Over Time ". So, since 1960, federal government spending reached a low of 17% in 1965, just prior to the Great Society expansion. However, for every year from 1975 through 1996 the share of fed spending of GDP exceeded the supposedly fatal 20%, reaching a peak of 23% in the "Morning in America" Reagan year of 1983. So, indeed, the share jumped to nearly 25% in 2009, rising slightly above in 2010, down a bit in 2011, but down to 23% in 2012, with this projected to hold about there for the next few years. Yes, this is a couple of percent above the norm for 75 through 96, but hardly some fall-off-the-cliff into European socialism, with most of those nations over 30 if not 40% on this measure. This seems pretty overblown and silly.
However, the real failure to face reality here is that Samuelson somehow misses all the recent reports and studies showing a massive decline in social and income mobility in the US, clearly associated with our ongoing and massive increase in income and wealthy inequality, see "4 Charts On Income Inequality And Economic Mobility That Will Destroy Your Faith In The American Dream".
Indeed, there is now less mobility intergenerationally and by other measures in the US than in tired old Europe, a result that has received a lot of publicity. How has Samuelson missed this important fact that obviously has more to do with the decline youth belief in the superiority of US culture than some supposed erosion of American values? The wannabe economist needs to get back to looking at economics and not bad sociology.
Barkley Rosser
In the first part of the column makes the case for American exceptionalism, at least based on attitudes. So, he recounts that solid majorities of Americans believe in "freedom over security" and also in free will, in contrast with various European nations where only minorities accept these. OTOH, at the end of the column Samuelson admits that there is a sharp split within age groups in the US over whether or not "Our people are not perfect but our culture is superior," with 60% of those over 50 agreeing while only 37% agree among those aged 18 to 29. Somehow Samuelson only mentions some alleged convergence of values and trends across nations without any mention of any economic factors in this outcome, curious for someone who supposedly writes on economics. Needless to say, he has missed the boat here.
So, let us start with the argument by Murray, accepted so unquestioningly by Samuelson, about the size of government in the US. It is claimed that somehow there has been some big increase in federal government size relative to GDP. However, except for the during the depth of the Great Recession, the claim here does not hold up very well, see "U.S. Federal Government Budget as a Percent of GDP Over Time ". So, since 1960, federal government spending reached a low of 17% in 1965, just prior to the Great Society expansion. However, for every year from 1975 through 1996 the share of fed spending of GDP exceeded the supposedly fatal 20%, reaching a peak of 23% in the "Morning in America" Reagan year of 1983. So, indeed, the share jumped to nearly 25% in 2009, rising slightly above in 2010, down a bit in 2011, but down to 23% in 2012, with this projected to hold about there for the next few years. Yes, this is a couple of percent above the norm for 75 through 96, but hardly some fall-off-the-cliff into European socialism, with most of those nations over 30 if not 40% on this measure. This seems pretty overblown and silly.
However, the real failure to face reality here is that Samuelson somehow misses all the recent reports and studies showing a massive decline in social and income mobility in the US, clearly associated with our ongoing and massive increase in income and wealthy inequality, see "4 Charts On Income Inequality And Economic Mobility That Will Destroy Your Faith In The American Dream".
Indeed, there is now less mobility intergenerationally and by other measures in the US than in tired old Europe, a result that has received a lot of publicity. How has Samuelson missed this important fact that obviously has more to do with the decline youth belief in the superiority of US culture than some supposed erosion of American values? The wannabe economist needs to get back to looking at economics and not bad sociology.
Barkley Rosser
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