Josh Bivens: Why is the economy so weak? Trade gets headlines, but it’s more about past Fed rate hikes and the TCJA’s waste [feedly]

Why is the economy so weak? Trade gets headlines, but it's more about past Fed rate hikes and the TCJA's waste
https://www.epi.org/blog/why-is-the-economy-so-weak-trade-gets-headlines-but-its-more-about-past-fed-rate-hikes-and-the-tcjas-waste/

Josh Bivens, director of research at EPI

The Federal Reserve meets this week against a backdrop of mounting evidence of a slowing economy. Since the last Federal Open Market Committee (FOMC) meeting, revised data on gross domestic product (the widest measure of the nation's economic activity) and job growth have shown that 2018 saw much slower growth than previously reported.

Between April 2018 and March 2019, for example, the economy created 500,000 fewer jobs than had originally been reported. Only 105,000 jobs were created in August if temporary Census positions are excluded: this is roughly half the pace of growth that characterized pre-revision estimates of average job growth in 2018.

These clear signs of an economic slowdown raise the obvious question, "Why has growth faltered?"

While many pundits and economists have blamed the escalating trade conflict between the Trump administration and China, there are much more obvious sources of this slowdown: the Fed's own premature interest rate increases between December 2015 and 2018 and the utter waste of fiscal resources that was the Tax Cuts and Jobs Act (TCJA) passed at the end of 2017.

To be clear, the Trump administration's trade conflict is stupid and destructive, and its attempt to pin the blame for the slowdown on the Fed is self-serving. And the Trump administration's scapegoating others for the weak economy takes real hubris given that its signature economic policy initiative—the TCJA—has been such an obvious failure in terms of spurring growth.

But the evidence is growing that the Fed did indeed raise interest rates too soon in the recovery and that this premature liftoff has begun dragging on growth. Worse, because raising rates slows growth more powerfully than lowering rates spurs growth, the Fed likely lacks the ability to offset this earlier mistake by pulling down rates going forward. The FOMC should certainly reduce rates at this week's meeting, but it will need help from other policy levers—particularly effective fiscal stimulus—in the coming year.

Evidence of premature interest rate hikes

As Figure A below shows, after seven years of holding the effective federal funds rate at essentially zero, in December 2015 the Federal Reserve raised this rate by a quarter point. While many argued that a quarter-point increase in interest rates would not snuff out the ongoing recovery, I noted that raising rates while unemployment remained elevated and there was no sign of inflation made little economic sense. Worse, by increasing interest rates before any sign of inflation appeared in the data, the Fed clearly signaled that it was not eager to aggressively plumb just how low unemployment could be allowed to fall. This was a troubling signal: the Fed's failure to aggressively target as low an unemployment rate as possible in recent decades has been a major reason why wage growth over this time has been so anemic. It took a year before the Fed followed up the December 2015 rate increase with another in December 2016, but in 2017 and 2018, it undertook seven quarter-point increases in the federal funds rate.

Figure A

Given this short history of interest rates, it makes sense to look at the evidence on the effect of these rate hikes on growth. The most obvious place to look is at the performance of "interest-sensitive" components of gross domestic product since the rate hikes began in 2015. Generally, residential investment, business fixed investment, durable goods purchases, and net exports are thought to be the components of GDP that will be slowed by interest rate hikes.

Figure B charts how the average contribution of various components of GDP made to overall GDP growth changed between two time periods: the era of zero federal funds rates (from the second quarter of 2009 to the end of 2015) and the era of rising federal funds rates (from the first quarter of 2016 to the most recent quarter available, the second quarter of 2019). For three of these components (residential investment, business fixed investment, and net exports) their contributions to growth slowed notably as interest rates rose. For durable goods, the contribution to growth is roughly the same in both periods, but this is striking given that personal consumption expenditures besides durable goods saw a sharp upswing in the latter period. In short, there is ample evidence that rising interest rates have worked as expected in slowing interest-sensitive components of GDP growth.

Figure B

To its credit, the Fed seems to have recognized that past rate hikes have dragged too much on growth and reduced rates at the last FOMC meeting in July. But research has shown that rate cuts spur growth less powerfully than equivalent rate increases restrain growth. This problem of "pushing on a string" was a prime argument made by those arguing that the Fed should err on the side of letting growth continue and letting unemployment continue to fall. If the economy continues to slow, the Fed will need help from fiscal policymakers to avert a recession; rate cuts by themselves are unlikely to do that job.

Very little sign of 'trade war' fingerprints on growth slowdown

The slight deceleration of net exports' contribution to growth shown in Figure B may make some think there is a trade war–based explanation. There may be some influence of trade conflict on slowing growth, but this influence is likely pretty weak. For one, tariffs do not reliably reduce net exports—they instead reduce both exports and imports, with their effect on the trade balance (which is what matters for short-run growth) largely ambiguous. What is not ambiguous is the effect of a strengthening dollar on net exports—it reliably slows them. And since 2014, the dollar has risen sharply, driven strongly by developments in monetary policy in both the United States and its trading partners. It is important to realize that interest rate cuts made by the European Central Bank (ECB) late last week will put further upward pressure on the dollar going forward.

Some have noted that aside from the direct effect of tariffs, policy-induced uncertainty stemming from the Trump administration's trade conflict might be holding back other components of growth, such as business fixed investment. Perhaps. But "uncertainty" is an awfully hard influence to define. And some of the only attempts to empirically measure this uncertainty actually show it is lower today than at many points in the last decade or more. Memories are short, but as recently as 2011 a Republican-led Congress seriously threatened to drive the federal government into totally unnecessary default on its debt if the Republican Party's policy preferences were not signed into law by the Obama administration. This episode, it hardly needs to be said, created plenty of policy uncertainty.

The squandered opportunity of 2018's TCJA

So if the recent economic slowdown is mostly not the fault of the Trump administration's trade conflict, and it is mostly the fault of a too-hawkish Federal Reserve, does the president have a leg to stand on in scapegoating of Fed chair Jerome Powell? Not really. The reason why is simple: if President Trump had wanted faster growth, he should not have championed the waste of fiscal resources that was the TCJA, and instead should have used those resources to do things that actually would have created jobs and growth.

The TCJA is a debt-financed tax cut that will cost $150 billion annually over the next 10 years (before interest costs are added). Because the lion's share of these tax cuts are accruing to rich households (mostly because the TCJA is primarily a corporate tax cut and owners of corporations are rich households), they have done very little to spur growth in aggregate demand (spending by households, businesses, and governments) in the short run. Rich households' spending is not constrained by too-low disposable income, so boosting this disposable income largely does not lead to more spending. Poorer and moderate-income households, on the other hand, are indeed income-constrained in their current spending, so tax cuts or direct transfers to them would have boosted demand growth significantly. Direct spending—say on infrastructure or providing needed public investments like high-quality early child care—would have stimulated demand even more.

For a time, many credited the slight acceleration in growth in 2018 to fiscal stimulus generally. But revisions to 2018 data show this acceleration was even more subdued than previously thought. Further, the growth in government spending brought forth by a budget deal in 2018 actually provided much more stimulus than the more-expensive TCJA (see Figure B for this increase in government spending's contribution to growth). The major component of GDP that has accelerated in recent years is consumption spending. Even if the entirety of the pickup in consumer spending shown in Figure B was attributed to the TCJA (and much of this pickup was surely driven by other factors, like tightening labor markets finally pushing up wage growth modestly), it would indicate that the TCJA was deeply inefficient as stimulus. TCJA proponents long argued that the main benefit stemming from it would not be short-run stimulus but a long-run increase in investment. This is awfully hard to see in the data—and as shown in Figure B investment (both business and residential) has been a prime source of weakness, not strength in recent years.

Essentially, President Trump and the Republican-led Congress largely squandered $150 billion in potential fiscal stimulus by prioritizing tax cuts for the rich over anything that would have plausibly created faster growth and jobs (see Table 1 in this report for a list of more and less effective fiscal policies to spur near-term growth). They are hence really the only economic observers in the world who have no standing to criticize the Fed for its clearly too-aggressive path of interest rate increases in recent years.

Despite bad-faith jawboning from President Trump, the Fed should cut rates

But just because President Trump calls for something—an interest rate cut in this case—doesn't always mean it's the wrong thing to do. The economy really is weakening, and this weakness has been led by sectors adversely affected by the Fed's interest rate increases in recent years. Unfortunately, we could well find, a year from now, that rate cuts alone were not sufficient to avoid a recession—or even just a prolonged slowdown that pushes up unemployment. In that case, the Fed will need help from fiscal policymakers. But in the meantime, the Fed should take its role as the early-warning system on economic slowdowns seriously by cutting rates this week. This rate cut would provide a clear alert to other policymakers.

 -- via my feedly newsfeed

Tim Taylor: A Road Stop on the Development Journey [feedly]

Tim Taylor reviews a new collection of essays on economic development, which is actually a different subject matter than economics per se. Thing of 3D Geometry equations (spheres, cubes, etc), where every dimension now has a time series added! Every object or item swims in the rivers of time. Where, indeed, are we going?

A Road Stop on the Development Journey
http://conversableeconomist.blogspot.com/2019/09/a-road-stop-on-development-journey.html

Economic development is a journey that has no final destination, at least not this side of utopia. But it can still be useful to take a road stop along the journey, see where we've been, and contemplate what comes next. Nancy H. Chau and Ravi Kanbur offer such an overview in their essay "The Past, Present, and Future of Economic Development," which appears in a collection of essays called
Towards a New Enlightenment? A Transcendent Decade (2018, pp. 311-325). It was published by Open Mind, which in turn is a nonprofit run by the Spanish bank BBVA (although it does have a US presence, mainly in the south and west).

(In the shade of this parenthesis, I'll add that if even or especially if your interests run beyond economics, the book may be worth checking out. It includes essays on the status of physics, anthropology, fintech, nanotechnology, robotics, artificial intelligence, gene editing, social media, cybersecurity, and more.)

It's worth remembering and even marveling at some of the extraordinary gains in the standard of living for so much of the globe in the last three or four decades. Chau and Kanbur write:

The six decades after the end of World War II, until the crisis of 2008, were a golden age in terms of the narrow measure of economic development, real per capita income (or gross domestic product, GDP). This multiplied by a factor of four for the world as a whole between 1950 and 2008. For comparison, before this period it took a thousand years for world per capita GDP to multiply by a factor of fifteen. Between the year 1000 and 1978, China's income per capita GDP increased by a factor of two; but it multiplied six-fold in the next thirty years. India's per capita income increased five-fold since independence in 1947, having increased a mere twenty percent in the previous millennium. Of course, the crisis of 2008 caused a major dent in the long-term trend, but it was just that. Even allowing for the sharp decreases in output as the result of the crisis, postwar economic growth is spectacular compared to what was achieved in the previous thousand years. ...

But, World Bank calculations, using their global poverty line of $1.90 (in purchasing power parity) per person per day, the fraction of world population in poverty in 2013 was almost a quarter of what it was in 1981—forty-two percent compared to eleven percent. The large countries of the world—China, India, but also Vietnam, Bangladesh, and so on—have contributed to this unprecedented global poverty decline. Indeed, China's performance in reducing poverty, with hundreds of millions being lifted above the poverty line in three decades, has been called the most spectacular poverty reduction in all of human history. ...

Global averages of social indicators have improved dramatically as well. Primary school completion rates have risen from just over seventy percent in 1970 to ninety percent. now as we approach the end of the second decade of the 2000s. Maternal mortality has halved, from 400 to 200 per 100,000 live births over the last quarter century. Infant mortality is now a quarter of what it was half a century ago (30 compared to 120, per 1,000 live births). These improvements in mortality have contributed to improving life expectancy, up from fifty years in 1960 to seventy years in 2010.

It used to be that the world's poorest people were heavily clustered in the world's poorest countries. But as the economies of countries like China and India have grown, this is no longer true: "[F]orty years ago ninety percent of the world's poor lived in low-income countries. Today, three quarters of the world's poor live in middle-income countries." In this way, the task of thinking about how to help the world's poorest has changed its nature. 

Of course, Chau and Kanbur also note remaining problems in the world's development journey. A number of countries still lag behind. There are environmental concerns over air quality, availability of clean water, and climate change. I was especially struck by their comments about the evolution of labor markets in emerging economies. 

[L]abor market institutions in emerging markets have also seen significant developments. Present-day labor contracts no longer resemble the textbook single employer single worker setting that forms the basis for many policy prescriptions. Instead, workers often confront wage bargains constrained by fixed-term, or temporary contracts. Alternatively, labor contracts are increasingly mired in the ambiguities created in multi-employer relationships, where workers must answer to their factory supervisors in addition to layers of middleman subcontractors. These developments have created wage inequities within establishments, where fixed-term and subcontracted workers face a significant wage discount relative to regular workers, with little access to non-wage benefits. Strikingly, rising employment opportunities can now generate little or even negative wage gains, as the contractual composition of workers changes with employment growth. ...
[A]nother prominent challenge that has arisen since the 1980s is the global decline in the labor share. The labor share refers to payment to workers as a share of gross national product at the national level, or as a share of total revenue at the firm level. Its downward trend globally is evident using observations from macroeconomic data (Karababounis and Neiman, 2013; Grossman et al., 2017) as well as from firm-level data (Autor et al., 2017). A decline in the labor share is symptomatic of overall economic growth outstripping total labor income. Between the late 1970s and the 2000s the labor share has declined by nearly five percentage points from 54.7% to 49.9% in advanced economies. By 2015, the figure rebounded slightly and stood at 50.9%. In emerging markets, the labor share likewise declined from 39.2% to 37.3% between 1993 and 2015 (IMF, 2017).

A running theme in work on economic development is that there is a substantial gap in low- and middle-income countries between those who have a steady formal job with a steady paycheck, and those who are scrambling between multiple informal jobs. Thinking about how to encourage an economic environment where employers provide steady and secure jobs is just one of the ways in which issues in modern development economics often have interesting overlaps with the economic policy issues of high-income countries. 

 -- via my feedly newsfeed

Bloomberg: Mass downgrades on growth estimates

Intensifying trade conflicts have sent global growth momentum tumbling toward lows last seen during the financial crisis, and governments are not doing enough to prevent long-term damage, the OECD said in its latest outlook.

The Paris-based organization cut almost all economic forecasts it made just four months ago, as protectionist policies take an increasing toll on confidence and investment, and risks continue to mount on financial markets. It sees world growth at a mere 2.9% this year.

The OECD lowered its growth forecasts for most major economies

Source: Organisation for Economic Cooperation and Development

"Our fear is that we are entering an era where growth is stuck at a very low level," OECD Chief Economist Laurence Boone said. "Governments should absolutely take advantage of low rates to invest in the future now so that this sluggish growth doesn't become the new normal."

	2019 GDP REVISION	2020 GDP REVISION
World	2.9% (3.2%)	3% (3.4%)
Euro area	1.1% (1.2%)	1% (1.4%)
Japan	1% (0.7%)	0.6% (0.6%)
U.K.	1% (1.2%)	0.9% (1%)
U.S.	2.4% (2.8%)	2% (2.3%)

The OECD is the latest institution sounding the alarm over the state of the global economy. In the past two weeks, the Federal Reserve, the European Central Bank, the People's Bank of China and numerous of their peers have eased policy to shore up demand, urging governments at the same time that fiscal stimulus will be needed to ensure their efforts won't be futile.

Lower Track

OECD sees global economic growth slowing to post-crisis pace

Source: Organization for Economic Cooperation and Development

Manufacturing has born the brunt of the economic crisis brought about by a tit-for-tat trade war between the U.S. and China. The services sector has proved unusually resilient to the malaise so far, but the OECD warned that "persistent weakness" in industry will weigh on the labor market, household incomes and spending.

Additional risks stem from a sharper slowdown in China and a no-deal Brexit that could push the U.K. into a recession and would considerably reduce growth in Europe, according to the report.

What Bloomberg's Economists Say

"Trump's brinkmanship on trade with China has left consumers, businesses and financial markets on edge. Not knowing whether the next Presidential tweet will ease or exacerbate tensions makes for an environment of extreme uncertainty, pushing businesses to turn cautious on investment and hiring, and households to swing from spending to saving."

--Dan Hanson, Jamie Rush and Tom Orlik.

Read the GLOBAL INSIGHT

The OECD said "collective effort is urgent," and the effectiveness of monetary policy could be enhanced by "stronger fiscal and structural policy support."

It's a point central bankers have made for months, and their requests are getting more intense. Following the ECB's latest monetary stimulus push, President Mario Draghi said it's "high time" for fiscal policy to take charge, signaling there's not much more his institution can do.

"The takeaway for the euro zone today is do not rely on monetary policy to do the job alone," Boone said. "Start investing to do the structural reforms that need to be done for more sustainable growth, and do it now."

--

John Case
Harpers Ferry, WV

Enlighten Radio

Socialist Economics

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The Official U.S. Poverty Rate is Based on a Hopelessly Out-of-Date Metric [feedly]

The Official U.S. Poverty Rate is Based on a Hopelessly Out-of-Date Metric
http://cepr.net/publications/op-eds-columns/the-official-u-s-poverty-rate-is-based-on-a-hopelessly-out-of-date-metric

The poverty rate in the United States fell to 11.8 percent in 2018, according to data released last week by the Census Bureau — the lowest it's been since 2001. But this estimate significantly understates the extent of economic deprivation in the United States today. Our official poverty line hasn't kept up with economic change. Nor has it been modified to take into account widely held views among Americans about what counts as "poor."

A better, more modern measure of poverty would set the threshold at half of median disposable income — that is, median income after taxes and transfers, adjusted for household size, a standard commonly used in other wealthy nations. According to the Organization for Economic Cooperation and Development — which includes 34 wealthy democracies — 17.8 percent of Americans were poor according to this standard in 2017, the most recent year available for the United States.

To be sure, there is no such thing as a purely scientific measure of poverty. Poverty is a social and political concept, not merely a technical one. At its core, it is about not having enough income to afford what's needed to live at a minimally decent level. But there's no purely scientific way to determine what goods and services are "necessary" or what it means to live at a "minimally decent level." Both depend in part on shared social understandings and evolve over time as mainstream living standards evolve.

At a minimum, we should set the poverty line in a way that is both transparent and also roughly consistent with the public's evolving understanding of what is necessary for a minimally decent life. The official poverty line used by the Census Bureau fails that test. It was set in the early 1960s at three times the value of an "economy food plan" developed by the Agriculture Department.

The plan was meant for "temporary or emergency use when funds are low" and assumed "that the housewife will be a careful shopper, a skillful cook, and a good manager who will prepare all the family's meals at home." The decision to multiply the cost of the economy food plan by three was based on a 1955 food consumption survey showing that families spent about one-third of their income on food at that time. Since then, the measure has stayed the same, adjusted only for inflation.

No expert today would argue that multiplying by three the cost of an antiquated government food plan — one that assumes the existence of a frugal "housewife" — is a sensible way to measure poverty in 2019, even if you adjust it for inflation. However meaningful this was as a measure of poverty in the 1960s, which is debatable, it makes even less sense to apply it today to an American population in which most people were born after 1980.

In 2018, the official poverty threshold for a family of two adults and two children was $25,465 or about $2,100 a month. If it had been set at half of median disposable income, it would have been $38,098, or $3,175 monthly. Ask yourself: If you were part of a couple raising two children, could you afford the basics on $25,000 a year without going into debt or being evicted? Do you think other people would view you as no longer poor if your family's income was a bit over $25,000?

For context, if you were living on $25,000 a year in Baltimore, and paying the Housing and Urban Development Department's "fair market rent" for a two-bedroom apartment in that city, $1,411 in 2018, you'd be spending just over two-thirds of your income on rent and utilities alone. (HUD's fair market rent, used to set the value of benefits such as housing vouchers, is set at the 40th percentile of actual market rent.)

As it happens, when the official poverty line was first developed in the early 1960s, it was equal to roughly half of median disposable income. (Median disposable income back then was roughly $6,200 for a four-person family, and the official poverty threshold was $3,166.) Research using Gallup and other public opinion data, from the 1960s to the present, has found that, even as median income rose, most Americans continued to believe a family was "poor" if their income fell below roughly half of median disposable income. In other words, Americans for decades have instinctively thought of poverty partly as a matter of relative, not just absolute, deprivation.

This common-sense notion is backed up by research documenting that relative deprivation is bad for health, well-being and social participation. And the negative impact of low income on health and well-being isn't limited to those who are most absolutely deprived: It is apparent at every step of the income ladder.

Many of our international peers' measure poverty in relative terms, as well. In addition to the OECD, which uses half of median disposable income for its comparisons of poverty in member countries, Canada, Ireland and the United Kingdom use similar measures in their domestic statistical reports on poverty. But the United States continues to use an idiosyncratic measure developed during the Kennedy and Johnson administrations. One side effect is that, because median income has outpaced inflation over time, the official poverty line has fallen further and further behind mainstream living standards.

To be sure, some critics, including in the Trump administration, seem to think the real problem with the official poverty line is that it's too generous. They argue, among other things, that the consumer price index often overstates inflation, as it affects the things that workers and their families must purchase to get by; therefore, they say, the official threshold for poverty has risen to a higher level than it ought to have.

But when the public thinks about what it means to be poor in 2019, they don't start by trying to imagine what it meant to be poor in the early 1960s (or the early 1900s for matter), and then update that for inflation. Instead, they start by thinking about today's economy and today's society, and, when they do that, most of them conclude that families need much more income to avoid poverty than the Census Bureau says they do.

There is one other important criticism of the current poverty line, namely that it doesn't take taxes and certain in-kind transfers into account, including the Earned Income Tax Credit and food stamps. But adopting a relative poverty measure set to a percentage of disposable income addresses this issue, too.

Finally, if we set a new poverty threshold using a relative approach, how should it be updated each year? In the United Kingdom, which uses 60 percent of median income, the threshold is adjusted each year to remain equal to that amount. But the U.K. also tracks poverty using a threshold set to 60 percent of median income in a previous base year (15 years ago in their most recent report) — adjusting that poverty line for inflation. Tracking poverty over time in these two distinct ways may ease concerns that some have about measuring poverty in a relative fashion.

The dominant framework for measuring poverty in the United States is too technocratic and too ideologically conservative. There's never going to be unanimity on what counts as "poor," but we ought to give more weight to the views of ordinary Americans on that subject — which would also mean shifting toward the kind of metric used by our economic peer countries.

---

Shawn Fremstad is a Senior Policy Fellow at the Center for Economic Policy and Research.

 -- via my feedly newsfeed

Lane Kenworthy: Prospects for economic democracy [feedly]

A very provocative post from Lane Kenworthy, an expert economist and commentator on economics and democracy subjects. His observation, backed by new data studies, that institutionalization of union membership WITH unemployment and retraining benefits is s KEY differentiator in maintaining worker influence in democracy.  The implication is suggestive that labor law reform needs to shoot a bit higher than card-check and arbitration to find sustainable footings in the advanced tech economies.

Prospects for economic democracy
https://lanekenworthy.net/2019/09/14/prospects-for-economic-democracy/

The most prominent forms of employee voice are worker participation, labor unions, works councils, board-level employee representation, and worker control. What do we know about them? My take is here.

One bit:

What are the prospects for a revitalization of unions in the United States? When asked, many workers say they would like to have a union or union-like organization represent them. We can point to various aspects of US labor policy that, if changed, seemingly would facilitate an increase in union membership — the 1949 Taft-Hartley Act's permission for states to implement anti-union "right to work" laws, the lack of a Canadian-style card check procedure for forming a union, weak enforcement of labor laws under Republican administrations, and more. And there is no shortage of proposals for how the American labor movement could organize more effectively.

Yet optimism about unions' future in America must reckon with the story told by the chart below. In a handful of countries, procedures established nearly a century ago require that workers be a member of a labor union in order to have access to unemployment insurance, and unionization rates there have remained fairly high. In virtually every other rich democratic nation, despite policies and governments far less hostile to unions than in the US, union membership has fallen just as sharply as it has here.

Unionization 
Share of employees who are union members. 5-country average: Bel, Den, Fin, Nor, Swe. 15-country average: Asl, Aus, Can, Fr, Ger, Ire, It, Ja, Kor, Nth, NZ, Por, Sp, Swi, UK. The thin lines are for individual countries. Data source: Jelle Visser, "ICTWSS: Database on Institutional Characteristics of Trade Unions, Wage Setting, State Intervention, and Social Pacts," version 6.0, 2019, Amsterdam Institute for Advanced Labour Studies, series ud, ud_s.

 -- via my feedly newsfeed

Tim Taylor: Is the US Economy Having an Engels' Pause? [feedly]

A fascinating historical correlation from Tim Taylor (reviewing Robert Allen's revival of Engels 1844 Condition of the English Working Class). The analogies between labor productivity's lag and lead cycle relative to rising technological investment, or following a tech shock (like steam power), and the noted LAG in pay relative to productivity these days, is very suggestive. But there are competing factors, especially the shortage of actual investment (the rich and their corps holding on to their money) that do not map quite so neatly. Much of the new tech is in intangibles, and they are not stores of value like the steam engine plants, or the engines themselves.Why is there a virtually negative interest rate, meaning government is "supplying the banks (the supply side)" with money to give away? Otherwise it is implied the banks would not be able to loan anything.  

Is the US Economy Having an Engels' Pause?
https://conversableeconomist.blogspot.com/2019/09/is-us-economy-having-engels-pause.html

 -- via my feedly new

  Consider a time period of several decades when there is a high level of technological progress, but typical wage levels remain stagnant while profits soar, driving a sharp rise in inequality. In broad-brush terms, this description fits the US economy for the last few decades. But it also fits the economy of the United Kingdom during the first wave of the Industrial Revolution in the first half of the 19th century.

Economic historian Robert C. Allen calls this the "Engels' pause," because Friedrich Engels, writing in books like The Condition of the Working Class in England in 1844, described this confluence of economic patterns. Allen laid out the argument about 10 years ago in "Engels' pause: Technical change, capital accumulation, and inequality in the British industrial revolution," published in Explorations in Economic History (2009, 46: pp. 418–435).

Allen summarizes his argument about the arrival and then the departure of the Engels' pause in this way: 

According to the Crafts-Harley estimates of British GDP, output per worker rose by 46% between 1780 and 1840. Over the same period, Feinstein's real wage index rose by only 12%. It was only a slight exaggeration to say that the average real wage was constant, and it certainly rose much less than output per worker. This was the period, and the circumstances, described by Engels in The Condition of the Working Class. In the next 60 years, however, the situation changed. Between 1840 and 1900, output per worker increased by 90% and the real wage by 123%. This was the 'modern' pattern in which labour productivity and wages advance at roughly the same rate, and it emerged in
Britain around the time Engels wrote his famous book.

The key question is: why did the British economy go through this two phase trajectory of development? ... Between 1760 and 1800, the real wage grew slowly (0.39% per annum) but so did output per worker (0.26%), capital per worker, and total factor productivity (0.19%). Between 1800 and 1830, the famous inventions of the industrial revolution came on stream and raised aggregate TFP growth to 0.69% per year. This technology shock pushed up growth in output per worker to 0.63% pa but had little impact on capital accumulation or the real wage, which remained constant. This was the heart of Engels' Pause ... In the next 30 years 1830–1860, TFP growth increased to almost one percent per annum, capital per worker began to grow, and the growth in output per worker
rose to 1.12% pa. The real wage finally began to grow (0.86% pa) but still lagged behind output per worker with most of the shortfall in the beginning of the period. From 1860 to 1900, productivity, capital per worker, and output per worker continued  to grow as they had in 1830–1860. In this period, the  real wage grew slightly faster than output per worker (1.61% pa versus 1.03%). The 'modern' pattern was established.

In short, technological growth first led to a period where wages did not keep up with economic growth, and then to a period where wages rose faster than economic growth. 

Of course, historical parallels are never perfect. The prominent inventions of the first half of the late 18th and early 19th century--mechanical spinning, coke smelting, iron puddling, the power loom, the railroad, and the application of steam power--did not have an identical interaction with labor markets and workers as the rise of modern technologies like information technology, materials science, genetics research, and others. 

In addition, historical parallels do not dictate what the appropriate policy response should be. 

As one example, the kinds of active labor market policies available to governments in the 21st century (for discussion, see here, here, and here) are quite different from the United Kingdom in the 19th century. The problems of modern middle-income workers in high-income countries are obviously not the same as the problems of UK workers in 1840. 

Also, modern economic historians argue over whether UK wages were really not rising much in the early 1900s, and current economist argue over the extent to which increases technology and variety suggest that the standard of living of typical modern workers is growing by more than their paychecks might suggest. 

But historical parallels are nonetheless interesting. But it's interesting that the original Engels' pause led to calls for socialism, and that socialism as a broad idea, if not necessarily a well-defined policy program, has re-entered the public discussion today. Historical parallels offer a reminder that when sustained shifts in an economy occur over several decades--a rise in inequality, wages rising more slowly than output, sustained high profit levels--the causes are more likely to involve shifts in economic output and organization driven by underlying factors like technology or demographics, not by factors like selfishness, conspiracies, or malevolence (whose prevalence does not shift as much, and are always with us). Finally, the theory of the Engels' pause suggests that underlying economic forces can drive patterns rising inequality, high profits, and stagnant wages can persist for decades, but nonetheless can have a momentum that leads to their eventual reversal, although my crystal ball is not telling me when or  how that will happen. 

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Universal Basic Income--Combined With What Else? [feedly]

Resources and Research on UBI from Tim Taylor

Universal Basic Income--Combined With What Else?
http://conversableeconomist.blogspot.com/2019/09/universal-basic-income-combined-with.html

The idea of  a "universal basic income" has some immediate attraction. If we can land an astronaut on the moon, etc., etc. But along with other slogans like a guaranteed government job or single payer health insurance, the devil is in the details.

Three recent essays offer a useful overview of the choices and tradeoffs. Melissa S. Kearney and Magne Mogstad have written "Universal Basic Income (UBI) as a Policy Response to Current Challenges" for the Aspen Institute Economic Strategy Group (August 23, 2019). Also, the most recent issue of the Annual Review of Economics, published in August 2019, has a three-paper symposium on the universal basic income.

• "Universal Basic Income: Some Theoretical Aspects," by Maitreesh Ghatak and François Maniquet
• "Universal Basic Income in the United States and Advanced Countries," by Hilary Hoynes and Jesse Rothstein
• "Universal Basic Income in the Developing World," by Abhijit Banerjee, Paul Niehaus, and Tavneet Suri

For those who don't have access to the Annual Review of Economics, the first paper is freely available here, the second paper is available as an NBER working paper here, and the third paper is freely available here.

An underlying theme of these discussions is that it is essentially meaningless to discuss the idea of a universal basic income in isolation. Whether you are talking about cost, or effects on distribution of income, or effects on work incentives, it matters considerably whether the universal basic income is views as an addition to any existing income transfer programs, or as a replacement for at least some of those programs.

For example, consider the question of cost.  Hoynes and Rothstein explain this way:

A universal payment of $12,000 per year to each adult U.S. resident over age 18 would cost roughly $3 trillion per year. This is about 75 percent of current total federal expenditures, including all on- and off-budget items, in 2017. (If those over 65 were excluded, the cost would fall by about one-fifth.) Thus, implementing this UBI without cuts to other programs would require nearly doubling federal tax revenue; even eliminating all existing transfer programs – about half of federal expenditures – would make only a dent in the cost. ...

A truly universal UBI would be enormously expensive. The kinds of UBIs often discussed would cost nearly double current total spending on the "big three" programs (Social Security, Medicare, and Medicaid). Moreover, each of these programs would likely be necessary even if a UBI were in place, as each addresses needs that would not be well served by a uniform cash transfer. Expenditures on other existing programs sum up to only a small fraction of the cost of a meaningful UBI. This suggests that a full-scale UBI would require substantial increases in government revenue. The impacts of whatever taxes are imposed to generate this revenue are likely of first-order importance in evaluating the impact of a UBI.

This insight helps to explain why no high-income country has actually adopted a "universal" basic income, and why most proposals for a "universal" basic income aren't really a simple universal payment. Instead, such proposals often include various phaseouts of the payments as other income rises, or rules that some of the money must be spent on purchasing health insurance, and so on and so forth.

On the issue of how a universal basic income would affect the distribution of income, the answer again depends on the extent to which is might replace other programs. The United States, like many other countries, uses "tagging" in its transfer programs, which means that transfer payments are often linked to some characteristic other than income. For example, payments may be linked to age (like Social Security), or to disability, or to whether or how many children are in a household (like Medicaid, the earned income tax credit, food stamps, and others).

Consider the proposal that is sometimes made for taking all the funds now spent on income transfers, and instead using that money for cash payments in the form of a universal basic income. (In "Universal Basic Income: A Thought Experiment" (July 29, 2014), I discuss one proposal along these lines for the US.)  As Hoynes and Rothstein explain, even if you cannibalized all spending on Social Security, Medicare, Medicaid, and every other program that involves government transfers, it wouldn't be enough to support a universal basic income of $12,000 per person. But set aside the cost arguments and instead focus on how the redistribution of income would be affected by moving away from a "tagging" system.

Hoynes and Rothstein do various calculations of how a universal basic income that replaces other government programs would affect who receives the funds. It shouldn't be any surprise that if you stop targeting the elderly, the disabled, and families with children, then households with those characteristics will get less. In contrast, households that are nonelderly, nondisabled, and with no children get tent to get more. They write:

This implies that were we to eliminate current income support programs and apply the funds towards a pure UBI, there would be a relative redistribution from low-earners to zero earners, but the first-order effects would be a massive distribution up the earnings distribution, along with a redistribution from the elderly and disabled towards those who are neither, primarily but not exclusively those without children.

As Kearney and Mogstad write: "The complexity of existing redistribution problems is a real issue, but the complexity is in large part based on seeking to address specific needs for specific groups: health care, housing, food, energy costs, and so on." For those attracted by the simplicity of just paying a flat cash amount to everyone, not linking benefits to family status or type of service, it's important to think seriously about what this shift away from tagging would be giving up.

Another main set of arguments about a universal basic income involves its interaction with labor markets. There are several arguments here that do not necessarily dovetail very well with each other. For example, some supporters of a universal basic income suggest that it will be needed in the future after the robot apocalypse makes most of human labor obsolete. When this actually happens, I'm ready to revisit this argument. But at present, the unemployment rate has been 4% or less for more tha a year and there are plenty of previous warnings about technological change would lead to permanent mass unemployment (here are examples from 1927, 1964, and 1982) that did not come to pass.

A gentler version of this argument is that a universal basic income would be a way of helping low-wage or low-income workers. But if helping a specific group of low-wage, low-income workers is the goal, then a "universal" payment is a peculiar way of accomplishing it. Instead, it would seem like an expansion of support for low-wage workers, perhaps designed in a way that is linked to work and provides an additional incentive to work, would make more sense.

Would a universal basic income discourage work? The direct evidence on this point remains thin. There have been studies of a few programs that make universal payments to certain groups, like the Alaska Permanent Fund (based on oil revenues from Alaska) or the Eastern Cherokee Native American tribe payments from gaming revenues, but the size of these payments is too small to be a stand-alone income. There have been experiments with something close to a universal basic income in Finland and Ontario, but these experiments were cancelled after a couple of years. There is some evidence from lottery winners, or from increases in disability insurance payments.

 Kearney and Mogstad provide an overview of the available evidence and argue that both economic theory and the existing evidence suggest that a true universal basic income--that is, an income received without any linkage to other income received, will tend to reduce work. In contrast, programs like wage subsidies, job training, or job subsidies seem likely to increase work. They write (citations omitted):

Studies of transfers that are more comparable in size to the types of UBI payments being proposed imply more negative labor supply effects. For example, a study of lottery winners find that, with an average annual prize of $26,000, each $100 in additional earnings reduced labor market earning by $11. A more recent study of lottery winners in Sweden also provides evidence of reduced earnings in response to winning a lottery prize. This study finds that winning a lottery prize leads to an immediate and persistent reduction in earnings. In addition, the effects of any guaranteed income program are likely to most strongly affect those marginally attached to the labor force. On this point, the lessons from expanded access to disability insurance payments is potentially instructive. Economists have found that the marginal beneficiary of a disability insurance award would have been almost 30 percentage points more likely to work had they not received benefits.

An intriguing thought that emerges from several of these papers is that the arguments for a universal basic income may be stronger for low-income countries. As Ghatak and Maniquet emphasize, most low income countries share several characteristics. A larger share of the population is close to subsistence, compared to high-income countries. As a result, a universal payment can help to raise a larger share of population out of poverty, and at a relatively low cost. In addition, the governments of low-income countries often have a hard time implementing detailed tax and welfare policies; for example, such governments may not be able to observe income levels or hours worked very accurately. Thus, linking government payments to income, as well as to disability, number of children, and even age may be more difficult. As they write, "UBI might be more appropriate in developing countries, especially those in which UBI could help circumvent the imperfections of government institutions in charge of helping the poor."

Of the papers I've mentioned here, Ghatak and Maniquet is the only one with a hefty share of math, and thus is likely to be a hard read for the unintiated. However, Banerjee, Niehaus, and Suri dig into the issues of a universal basic income for lower-income countries in more detail. They point out that while we don't have good evidence on pure universal basic income programs in low-income countries (although experiments are underway in some countries), we do  have a lot of evidence on programs in low-income countries that pay cash to recipients under various conditions. They write (citations omitted):

With the most current available data as of 2018, the World Bank identified 552M people living in the developing world who receive some form of cash transfer from their government. While none of these schemes were (to our knowledge) labelled as UBI, they all shared the common and crucial feature that recipients were given the freedom to do what they want with their money. Many transfers (particularly in South and Central America) were paid out conditional on certain conditions being met, but many others (particularly in Africa) were not. And in some cases - pensions, for example - these transfers have a structure (size, frequency, and duration) quite similar to UBI payments, though they are not universal.

What have we learned from the evaluation of these schemes? ...

First, evaluations generally have not found the negative impacts that many feared. Reviewing evidence on "temptation goods," Evans and Popova (2017) find that transfers had on average reduced expenditure on temptation goods by 0.18 standard deviations. In other words, far from blowing their transfers on alcohol and tobacco, recipients appear to drink and smoke less. This finding in no way diminishes the seriousness of substance abuse as an issue for the poor, but it does suggest that lack of money may be a cause of substance abuse rather than a constraint on it. Turning to "dependency" ...  Banerjee et al. (2017b) find no systematic evidence that transfers discourage work.

Second, evaluations have found a great diversity of positive impacts. To give some sense, a partial list of outcomes affected in a positive way in one study or another ... includes income, assets, savings, borrowing, total expenditure, food expenditure, dietary diversity, school attendance, test scores, cognitive development, use of health facilities, labor force participation, child labor migration, domestic violence, women's empowerment, marriage, fertility, and use of contraception, among others. ...

This variety implies that recipients value the flexibility that cash transfers provide: they reveal a preference for many different things. It also implies that a UBI is unlikely to appeal to a technocrat seeking cost-effective ways to increase any particular, narrow outcome.

In addition, they point out that a universal basic income may help economic growth in low-income countries by making it possible for low-income people to deal with the day-to-day risks they face and to make modest investments in small-scale entrepreneurship. And a universal benefit might build political support for a rudimentary social safety net in countries that do not yet have one.

On the other side, even if it is harder for a low-income country to run a precisely targeted income transfer program, imperfect targeting can still be useful. Rema Hanna and Benjamin A. Olken make this case in "Universal Basic Incomes versus Targeted Transfers: Anti-Poverty Programs in Developing Countries," in the Fall 2018 issue of the Journal of Economic Perspectives. They point out that a number of emerging-market countries make transfer payments conditional on behaviors, like whether children attend school or doctor visits, or else on observable characteristics like whether a home has a dirt floor, or a certain kind of roof or appliances. In some places, a "universal" payment requires taking enough time to register for the program or to undertake some work effort that those with higher income see no benefit from applying. In a few places, transfer payments are given to a community, which then must have a formal and open process for distributing those payments among the members of the community. They argue that a truly universal program, with payments going to people of all income levels, is less effective at addressing inequality than a program with imperfect targeting of benefit payments.

Here's a final comparison between universal basic income in high-income and low-income countries that struck as interesting, from the Banerjee, Niehaus, and Suri paper. They point out that one of the arguments for a universal basic income in low-income countries is that employment in such countries is often sporadic, with many people working a variety of part-time gigs rather than a single steady job, which is part of what makes it hard for the government in a low-income country to adjust benefits in response to income and work status. But of course, there is also concern that a greater share of workers in high-income countries are ending up in the "gig economy"  with a series of part-time jobs, which in turn makes it more challenging for high-income countries to set up programs where transfer programs will make sporadic payments in the gaps between sporadic jobs. Banerjee, Niehaus, and Suri write:  

"[D]eveloping countries already look like one possible future for the developed ones: few people hold stable full-time jobs, many work a variety of part-time gigs instead, and as a result, public policy has never been based on an assumption of universal full-time employment. Perhaps in this there is something the rich countries can learn from the poor."

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