'Dean Baker: Medicare for All' is Not a Fantasy [feedly]

'Medicare for All' is Not a Fantasy
http://cepr.net/publications/op-eds-columns/medicare-for-all-is-not-a-fantasy

Dean Baker
CNN, February 1, 2019

See article on original site

In recent weeks several prominent Democrats have renewed the call for "Medicare for All" that Sen. Bernie Sanders highlighted in his 2016 campaign for the Democratic presidential nomination. This has drawn pushback from billionaires and potential presidential candidates Howard Schultz and Michael Bloomberg, who insist the country can't afford it. Since it's likely to be a major issue in the presidential campaign, it is worth looking at the question more closely.

First, many countries do have national health care insurance along the lines advocated by proponents of Medicare for All. The list includes Canada, France and Denmark, among others. These countries all have healthy economies, with living standards comparable to those in the United States. In fact, in all three countries, a higher percentage of prime-age workers (ages 25 to 54) are employed than in the United States. Like all countries, these countries have some economic problems, but it is absurd to claim that the cost of providing universal health care is destroying their economies.

Their health care systems also have comparable outcomes to the United States. This means not only do people live as long (actually they live somewhat longer on average), but people with health conditions such as cancer or heart disease on average do as well in countries with universal coverage as in the United States.

Having government-guaranteed medical coverage does cost money, and in all the countries with universal coverage, people do pay a larger share of their income in taxes. However, the necessary increase in taxes to provide universal care may be less than many people would fear.

First, most working people are paying something like a tax for their health care insurance since they get it through their employer. Employers don't provide insurance as a gift, and premiums for insurance come out of workers' wages in the same way that a tax would come out of those wages.

According to the Kaiser Family Foundation, the average employer payment for a family plan was more than $14,000 last year. Last year, this employer payment came to more than $900 billion. That's more than $2,700 for every person in the country. Most workers would probably not object if their employers paid this money to the government for universal coverage as opposed to an insurance company.

The other key point is that we pay close to twice as much for our health care as the average person in other wealthy countries. According to the Organization for Economic Cooperation and Development, we paid $10,200 per person for health care in 2017. Canada paid $4,800, Denmark paid $5,200, and France paid $4,900.

The main reason for the difference is that we pay twice as much for everything. We pay twice as much for prescription drugs, for MRIs and other medical equipment and tests, and our doctors get paid twice as much. In addition, the private health insurance industry costs us more than $250 billion a year (almost $800 per person) to act as an intermediary between patients and providers. In addition, hospitals, doctors' offices and other providers spend tens of billions to deal with complex claim forms that differ by insurer.

The government already pays for more than half of the nation's health care bill through Medicare, Medicaid, veterans' benefits and other public sector programs. Getting to Medicare for All would mean covering the other half of the current expenses, along with the additional costs of paying for the uninsured and under-insured who are not getting the care they need.

This would be a difficult political process as the insurance and pharmaceutical industries and other affected groups will use all the political power they have to prevent reductions in their income. But at the end of the day, it is undeniable that the United States can afford the same guarantee of health care enjoyed by people in other wealthy countries. The question is whether we have the political commitment to bring it about.

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Bernstein: January Jobs: Another upside surprise shows the benefits of closing in on full employment. [feedly]

January Jobs: Another upside surprise shows the benefits of closing in on full employment.
http://jaredbernsteinblog.com/january-jobs-another-upside-surprise-shows-the-benefits-of-closing-in-on-full-employment/

The US labor market just keeps on rolling along, turning in one good jobs report after another. Payroll gains continue to outpace expectations, wages are handily beating inflation while not pushing it up much, participation continues to suggest more room-to-run than most economists expected, and even the slight uptick in the unemployment rate last month, to 4 percent, was likely a temporary blip caused by the government shutdown (more detail on that below). The underemployment rate, which also spiked last month, was another temporary victim of the shutdown, causing a sharp, temporary increase in involuntary part-timers (those working part-time who want to work full-time). These measures of increased slack should fully reverse in coming months, assuming the government remains open, of course.

Payrolls were up 304,000 in the first month of 2019, well ahead of economists' expectations for a gain of about 170,000, and the jobless rate ticked up a tenth to 4 percent. As noted, the uptick in the jobless rate is likely due to the shutdown and should fully reverse next month. The big jobs number for December was revised down significantly, from 312K to 222K, and other revisions to today's report (e.g., a small annual benchmark revision) suggest that we should smooth out the monthly data to better discern the underlying signal.

In other words, cue the JB/KB (Kathleen Bryant, who does all the work on this report) monthly smoother! It shows average monthly payroll gains over the past 3 months to be a very robust for this stage of the expansion: 241,000. The other bars, which take monthly averages over longer periods, are around the same height, implying an underlying monthly trend slightly north of 200,000. This is well above what most economists believed sustainable, given estimates of "supply-side constraints," i.e., the size of the available labor pool. Importantly, it appears this constraint is less binding than many thought, meaning there's more room-to-run in the job market, and that we're closing in on, but not yet at, full employment.

Participation measures are a bit hard to compare this month because of changes to the population weights in the survey (the weights are used to make the survey sample representative of the national population), but data provided in the report suggest participation ticked up in January to 63.2 percent, the highest rate since September 2013. The closely watched prime-age employment rate ticked up significantly for men, from 86.1 to 86.5 percent, and was up one-tenth of a point for women as well, from 73.4 to 73.5 percent (again, this monthly number should be handled with care due to the weighting change, but the underlying, positive trend is real and important).

The tight job market continues to generate near-cyclical highs in terms of year-over-year wage gains. Overall private hourly wage growth fell back slightly to 3.2 percent, from 3.3 percent in both November and December. For middle-wage workers–the 80 percent of the workforce in blue-collar or non-managerial jobs–wage growth was 3.4 percent. My estimate for January inflation (the official change does not get released until later this month) is 1.6 percent, driven down by low energy prices. That implies mid-level, real wage gains of 1.8 percent, a solid increase in buying power for these workers, many of whom have long been left behind (of course, we're talking averages here, and we know that even now, significant pockets of labor slack still persist in some places around the country).

This positive trend in wage growth is captured in the figures below, which use 6-month moving averages to smooth out the jumpy, underlying series. The acceleration is notable. The third figure, which includes my inflation forecast, zeros in on the growing gap between rising nominal wage gains for mid-wage workers and falling price movements. The gap between the two lines represents the real gains touted above.

This gap will like close somewhat as energy prices rise, but I expect some level of real wage gains to persist. Another important point about these real gains: given that productivity growth is running at around 1 percent, when real wages grow faster than output per hour, the share of national income shifts from profits to compensation. As much research has revealed, this share has long shifted in the other direction–the wage share has been historically low, meaning the profit share has been high. In other words, the current tight labor market appears to be delivering a long awaited re-balancing of these shares.

As noted, the government shutdown is likely playing a small, temporary role in today's report, though mostly in the unemployment rate. In terms of direct impact, the BLS reports that both furloughed and unpaid federal government workers should be counted in the payroll data, though furloughed workers should be counted as temporarily unemployed in the household data, the survey which yields the unemployment rate. Indirect, or spillover effects, such as a private-sector restaurant worker on temporary layoff because she works near a national park that was closed during the shutdown, could also be in play in today's data. That said, the strong topline jobs number underscores the BLS commissioner's statement today: "Our evaluation of the establishment survey data indicates that there were no discernible impacts of the partial federal government shutdown on the January estimates of employment, hours, or earnings."

I'll have more to say later about some of the guts of the report, but especially once we remove temporary shutdown effects from some of the household survey indicators, we're left with unequivocal evidence of a few very important facts. First, in an economy with too little worker bargaining power and too much inequality, the benefits of closing in on full employment are powerful and equalizing. And second, Chair Powell and the FOMC were smart to put interest-rate hikes on hold. There's non-inflationary room-to-run in this job market!

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Before the State of the Union, a fact check on black unemployment [feedly]

Before the State of the Union, a fact check on black unemployment
https://www.epi.org/blog/before-the-state-of-the-union-a-fact-check-on-black-unemployment/

The historically low black unemployment rate has become one of Donald Trump's favorite statistical claims, one he is likely to tout again at the upcoming State of the Union address.

The fallacy of touting this as a genuine accomplishment of the Trump administration rather than fortuitous timing has been noted by me and others on multiple occasions. Still, at the start of Black History Month, it's useful to provide some facts about the African American labor force that you will probably not hear during the presidential address to Congress.

To begin with, it is true that the 2018 black unemployment rate was the lowest it has been since the Bureau of Labor Statistics began reporting it in 1972. But little, if any, credit for that belongs to the Trump administration. As the graph below clearly shows, the black unemployment rate had been steadily falling since 2011, well before Trump was sworn into office, and the rate of decline has not gained momentum since. Arguably, the decline of the black unemployment rate to its current level has more to do with the Fed's decision to keep interest rates at or near zero for an extended period of time—decisions led by the two previous Federal Reserve chairpersons.

Figure A

However, even at an annual rate of 6.6 percent, the black unemployment rate was still more than double the white unemployment rate of 3.2 percent in 2018. In fact, the graph also shows that the last time the white unemployment rate was 6.6 percent was six years earlier in 2012, when the black unemployment rate was 14 percent. If you're starting to see a pattern emerge, then the shortsightedness of Trump's boasting about the black unemployment rate should also be apparent. The black unemployment rate has been about double the white unemployment rate for more than four decades, making this relationship more historically significant than any single unemployment rate. And, it is the durability of this gap that allows blind celebration of an unemployment rate that is higher than that of any other race or ethnicity reported by BLS, when the more appropriate response would be to focus on solutions for closing the gap.

Even so, the significance of 6.6 percent as a "historic low" deserves a closer look. Prior to the current period of economic expansion, the black unemployment rate had not been anywhere near this low in almost 20 years. The average black unemployment rate in 2000 was 7.6 percent, but a lot has changed since then, as the workforce has become older and more highly educated. In a previous post, my colleague Elise Gould and I showed that although the black unemployment rate in July 2017 was just above its monthly low from April 2000, the strength of the labor market during those two points in time was actually quite different. Given that the black unemployment rate has continued to fall since then, an update of that analysis is warranted.

Let's begin with muting any effect the aging of the workforce might have on the unemployment rate. The prime age (25–54 years old) employment-population ratios (EPOPs) can be used to roughly factor out any structural changes resulting from the growing share of retirees. Comparing 2000 to 2018, we find that 77.3 percent of black prime age adults were employed in 2000, while 75.8 percent were employed in 2018. Even at the lower unemployment rate in 2018, a smaller share of prime age adults—the group with the strongest attachment to the labor force—were working. This was true for whites as well.

Figure B

Since 2000, the share of college-educated workers has also grown. The share of African Americans with a bachelor's degree or higher grew from 14 percent in 2000 to 22.8 percent in 2018, an increase of 63 percent. Since unemployment rates tend to be lower for workers with higher levels of education, the lower 2018 unemployment rate reflects not only improvements in the economy, but also the fact that black workers today are more educated than ever before. In the graph below, you can see how higher levels of education correlate with lower unemployment rates, but significant racial disparities in unemployment are present at every level. This graph also shows how the 2018 unemployment rates within most educational categories are no better (and in some cases worse) than their respective comparison groups in 2000. This is another indication that even at a lower unemployment rate in 2018 than in 2000, the labor market is not providing significantly better employment outcomes relative to those available in 2000.

Figure C

When the American people watch the State of the Union address, with all of its grand proclamations and pageantry, we should keep this unfortunate truth in mind. The annual black unemployment rate has only been in the single digits 10 of the last 47 years that BLS has reported it. In the last 65 years that BLS has reported the white unemployment rate, it has always been below 10 percent.

A 6.6 percent black unemployment rate is definitely noteworthy, but credit belongs to those whose leadership over the past eight years steadily brought it down from 16 percent. The Trump administration should be judged by what they do to keep the rate down, and to close the persistent 2-to-1 racial disparity. That would be a truly historic accomplishment worthy of everyone attending the State of the Union rising to their feet in thunderous applause.

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Progress Radio:Case /dies the News

John Case has sent you a link to a blog:



Blog: Progress Radio
Post: Case /dies the News
Link: http://progress.enlightenradio.org/2019/01/case-dies-news.html

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Krugmaan: Elizabeth Warren Does Teddy Roosevelt [feedly]

Elizabeth Warren Does Teddy Roosevelt

Paul Krugman
https://www.nytimes.com/2019/01/28/opinion/elizabeth-warren-tax-plan.html
America invented progressive taxation. And there was a time when leading American politicians were proud to proclaim their willingness to tax the wealthy, not just to raise revenue, but to limit excessive concentration of economic power.

"It is important," said Theodore Roosevelt in 1906, "to grapple with the problems connected with the amassing of enormous fortunes" — some of them, he declared, "swollen beyond all healthy limits."

Today we are once again living in an era of extraordinary wealth concentrated in the hands of a few people, with the net worth of the wealthiest 0.1 percent of Americans almost equal to that of the bottom 90 percent combined. And this concentration of wealth is growing; as Thomas Piketty famously argued in his book "Capital in the 21st Century," we seem to be heading toward a society dominated by vast, often inherited fortunes.

So can today's politicians rise to the challenge? Well, Elizabeth Warren has released an impressive proposal for taxing extreme wealth. And whether or not she herself becomes the Democratic nominee for president, it says good things about her party that something this smart and daring is even part of the discussion.

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The Warren proposal would impose a 2 percent annual tax on an individual household's net worth in excess of $50 million, and an additional 1 percent on wealth in excess of $1 billion. The proposal was released along with an analysis by Emmanuel Saez and Gabriel Zucman of Berkeley, two of the world's leading experts on inequality.

Saez and Zucman found that this tax would affect only a small number of very wealthy people — around 75,000 households. But because these households are so wealthy, it would raise a lot of revenue, around $2.75 trillion over the next decade.

Make no mistake: This is a pretty radical plan.

I asked Saez how much it would raise the share of income (as opposed to wealth) that the economic elite pays in taxes. His estimate was that it would raise the average tax rate on the top 0.1 percent to 48 percent from 36 percent, and bring the average tax on the top 0.01 percent up to 57 percent. Those are high numbers, although they're roughly comparable to average tax rates in the 1950s.

Would such a plan be feasible? Wouldn't the rich just find ways around it? Saez and Zucman argue, based on evidence from Denmark and Sweden, both of which used to have significant wealth taxes, that it wouldn't lead to large-scale evasion if the tax applied to all assets and was adequately enforced.

Wouldn't it hurt incentives? Probably not much. Think about it: How much would entrepreneurs be deterred by the prospect that, if their big ideas pan out, they'd have to pay additional taxes on their second $50 million?


It's true that the Warren plan would limit the ability of the already incredibly wealthy to make their fortunes even bigger, and pass them on to their heirs. But slowing or reversing our drift toward a society ruled by oligarchic dynasties is a feature, not a bug.

And I've been struck by the reactions of tax experts like Lily Batchelder and David Kamin; while they don't necessarily endorse the Warren plan, they clearly see it as serious and worthy of consideration. It is, writes Kamin, "addressed at a real problem" and "goes big as it should." Warren, says The Times, has been "nerding out"; well, the nerds are impressed.

But do ideas this bold stand a chance in 21st-century American politics? The usual suspects are, of course, already comparing Warren to Nicolás Maduro or even Joseph Stalin, despite her actually being more like Teddy Roosevelt or, for that matter, Dwight Eisenhower. More important, my sense is that a lot of conventional political wisdom still assumes that proposals to sharply raise taxes on the wealthy are too left-wing for American voters.

But public opinion surveys show overwhelming support for raising taxes on the rich. One recent poll even found that 45 percent of self-identified Republicans support Alexandria Ocasio-Cortez's suggestion of a top rate of 70 percent.

By the way, polls also show overwhelming public support for increasing, not cutting, spending on Medicare and Social Security. Strange to say, however, we rarely hear politicians who demand "entitlement reform" dismissed as too right-wing to be taken seriously.

And it's not just polls suggesting that a bold assault on economic inequality might be politically viable. Political scientists studying the behavior of billionaires find that while many of them push for lower taxes, they do so more or less in secret, presumably because they realize just how unpopular their position really is. This "stealth politics" is, by the way, one reason billionaires can seem much more liberal than they actually are — only the handful of liberals among them speak out in public.

The bottom line is that there may be far more scope for a bold progressive agenda than is dreamed of in most political punditry. And Elizabeth Warren has just taken an important step on that agenda, pushing her party to go big. Let's hope her rivals — some of whom are also quite impressive — follow her lead.


Paul Krugman has been an Opinion columnist since 2000 and is also a Distinguished Professor at the City University of New York Graduate Center. He won the 2008 Nobel Memorial Prize in Economic Sciences for his work on international trade and economic geography. @PaulKrugman

A version of this article appears in print on Jan. 29, 2019, on Page A22 of the New York edition with the headline: Elizabeth Warren Does Teddy Roosevelt. Order Reprints | Today's Paper | Subscribe

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EPI: The Fed shouldn’t give up on restoring labor’s share of income—and measure it correctly [feedly]

This a wonky article, but it touches on fundamentals questions and factors in considering what constitutes an economically "just" wage, including the impact, and policy adjustments, required by "structural" change WHILE striving toward full employment. Structural is an important, but somewhat squishy term, in economic literature: Here it refers to significant changes (e.g. the IT revolution, or monopolization) in the division of labor and capital -- primarily generated BY the real economy (either consequences or side-effects) --  but that appear to current markets as "externalities" -- i.e. not market forces.

The Fed shouldn't give up on restoring labor's share of income—and measure it correctly
https://www.epi.org/blog/the-fed-shouldnt-give-up-on-restoring-labors-share-of-income-and-measure-it-correctly/

U.S. workers' wages have climbed modestly but noticeably over the past year. EPI's nominal wage tracker shows that in 2015 and 2016, this growth averaged 2.4 percent, in 2017 it averaged 2.5 percent, but in 2018 it accelerated to 2.85 percent—and it surpassed 3 percent growth in the last quarter of the year. This uptick has been long-coming and it took a longer spell of low unemployment to spur it than most would have thought.

3 percent growth for a quarter, however, should not constitute "mission accomplished" in the minds of macroeconomic policymakers like the Federal Reserve. In the long run, nominal wage growth should run at a rate equal to the Fed's inflation target (2 percent) plus the long-trend growth in potential productivity (let's call this 1.5 percent).1 This indicates that even the recent accelerations in wage growth leave us failing to meet these long-run goals.

Even more importantly, wage growth should run substantially above these long-run targets for a spell of time after long periods of labor market slack. The arithmetic reasoning for this is straightforward: any time wage growth runs slower than current rates of inflation plus productivity, the result will be labor compensation shrinking as a share of the economy. The economic intuition is simply that extended periods of labor market slack sap workers' ability to secure wage increases from employers.

This undermining of labor's leverage shows up clearly in the data. EPI's nominal wage tracker, besides charting wage growth over time, also tracks a measure of labor's share of income, precisely to highlight the accumulated shortfall of labor income that policymakers should aim to restore.

Figure A

Measuring the labor share correctly

We think tracking labor's share of income is crucial for policymakers, and that this figure contains lots of interesting insights about macroeconomic dynamics. Before we delve into these insights, however, we should first note that our measure above is not the only way to measure labor's share of income. In particular, a measure obtained directly from the Bureau of Labor Statistics (BLS) productivity series is often referenced. This measure—reproduced below and shown side-by-side with our preferred measure—shows some non-trivial differences in the labor share over time. Most strikingly, the BLS measure has a much stronger long-run downward trend than the measure we use.

Figure B

What explains these differences? Three things: First, our measure examines labor's share in the corporate sector only, while the labor share from the BLS productivity series looks at the broader non-farm business (NFB) sector. Second, our measure uses net, not gross, measures of income. So, our measure strips out depreciation from the income in the denominator of the labor share. Third, our measure strips out the profits of Federal Reserve banks. We think each of these decisions yields a better measure if you want a labor share indicator that sheds light on the relative bargaining strength of workers vis-a-vis employers—below we explain why.

First, we focus on the corporate sector rather than the total economy or even the NFB sector. We make this choice because in the corporate sector all income is either labor income or capital income. Since we are interested in using changes in the labor share as measures of relative bargaining strength between workers and employers, this clean distinction between incomes is useful. In the total economy, there are many income flows that do not necessarily tell us much about this relative bargaining strength. Rental incomes accruing to property-owners, for example, can come at the expense of both workers and their employers, and can in theory reflect land scarcity rather than anything profound about the current state of macroeconomic slack. Proprietor's incomes are a mix of labor and capital incomes, and correctly apportioning which share of these should be chalked up to returns to labor versus capital is near-impossible. The corporate sector divides income cleanly into labor versus capital, and yet remains large enough (accounting for over 70 percent of the U.S. private sector) to provide generalizable findings.

Second, we focus on net measures of income that account for depreciation. Depreciation is the reduction in the value of assets that occurs through wear and tear or technological obsolescence. If income from current production is not used to reinvest and keep the value of the capital stock whole in the face of constant depreciation, this would lead to a smaller capital stock and reduced productivity over time. Hence, depreciation represents a claim on income that cannot boost the living standards of either workers or capital owners. Further, the share of depreciation in corporate sector value-added (as well as its share in total economy gross domestic product) has been rising steadily over time. The reason for this rise is well understood: information and communications technology equipment has been steadily rising as a share of the overall capital stock, and this type of capital depreciates far more rapidly than other types (think of how often you need to replace your laptop or cellphone these days). This steady rise in depreciation is a significant reason why the decline in the labor share shown in the BLS NFB measures is larger than in our measure. Yet the decline in the labor share that's due to the rise of depreciation really doesn't tell us much about labor market dynamics or macroeconomic slack.

Finally, we choose to strip out the profits of Federal Reserve banks for our measure.2In the course of their open market operations (buying and selling bonds to move interest rates), the Fed makes profits. These profits are used to finance the Fed's operations and they remit anything left over to the U.S. Treasury. These profits have very little to do with underlying labor market dynamics or macroeconomic slack. Before 2008, because these profits were generally quite small and relatively stable as a share of corporate sector value-added, they could largely be ignored in examinations of the labor or profit share. Post-2008, however, the Federal Reserve vastly expanded the scale of assets it purchased as part of its effort to hold down long-term interest rates (an effort commonly referred to as "quantitative easing"). This larger balance sheet led to significantly larger Federal Reserve profits during the recovery from the Great Recession. All else equal, this would have led to a further decline in the measured labor share of income. But since these Federal Reserve profits were not the result of increased leverage vis-a-vis workers over implicit wage bargaining, it doesn't make much sense to allow them to depress the labor share measures we're examining for evidence about this relative bargaining strength. In recent years, the Federal Reserve profits have been declining as their balance sheet has shrunk modestly. This would, all else equal, boost the labor share of income, but this boost would not represent increased leverage by workers. Given these considerations, our measure of corporate sector income and profits removes the profits earned by Federal Reserve banks. This again leads to a smaller decline in the labor share when compared to the BLS measures over the whole post-Great Recession period.

What does a correctly-measured labor share tell us about policy?

Assume for the moment that our way of tracking the labor share is better for assessing underlying labor market dynamics and the state of macroeconomic slack. This measure contains a number of interesting findings. One finding, which most might find counterintuitive, is that during recessions (the shaded areas on the chart) the labor share actually tends to rise. This mostly tells us that corporate profits are very cyclical, and fall even faster during recessions than labor income.3 But once the official recession is over, these profits tend to recover much faster than labor income and this leads to a rapid decline in labor's share in the early phases of business cycle recoveries. As recoveries mature and turn into expansions, the reduction in labor market slack eventually allows the labor share to begin making up some of its early-recovery losses.

Another striking feature of our measure of the labor share is how depressed it remains even as we approach 10 years from the end of the Great Recession. This highlights that even wage growth significantly faster than we've seen in recent months can persist for a long time before it necessarily translates into inflation breaching the Fed's 2 percent target. If inflation-adjusted wages start rising faster than economy-wide productivity, this does not necessarily lead to an inflationary wage-price spiral; instead some of this faster wage growth can be absorbed by firms in coming years through a slight reduction in their still quite-fat profit margins. In an earlier paper, we calculated for how long nominal wage growth could outpace the sum of inflation and productivity growth before previous labor share peaks were broached.4 The figure below reproduces these calculations, using the Fed's 2 percent inflation target and productivity growth averages since the beginning of 2017 (1.1 percent), and various scenarios for nominal wage growth.

Figure C

The results are striking. The 3.2 percent wage growth that characterized the last quarter of 2018 would take literally decades and decades to yield a return to the labor share that characterized the last quarter before the Great Recession hit (the last quarter of 2007, or 2007Q4). 3.5 percent growth—the long-run target we referenced before—would only return the economy to the 2007Q4 labor share level by 2031. Even 4 percent nominal wage growth would only see the labor share return to 2007Q4 levels by the end of 2024. We should note here how fundamentally conservative these projections are, in that they assume productivity growth only runs at 1.1 percent in coming years, even as labor markets tighten and wages rise. If productivity growth—spurred by firms looking to make labor-saving investments as wages rise—instead moves closer to its long-run average of 1.5 percent, then it would take even longer at any given pace of wage growth to return to historical labor share levels.

Is it possible that structural changes, not just prolonged labor market slack, have contributed to the fall in the labor share and macroeconomic reflation alone won't be able to claw back this post Great Recession decline? It's possible—and the most-sensible theory for what precise structural change might have led to this is a rise in monopoly power. Empirical research clearly shows upticks in industry concentration ratios, and a number of large and crucial economic sectors (health care and finance, in particular) are characterized by immense pricing power. Other sectors (mostly technology) have also seen waves of consolidation that have not led (yet?) to rapid price growth, but have raised a whole host of concerns about the intersection of economic and political power.

And yet the first priority in setting the conditions for better wage growth remains pushing down the unemployment rate and wringing out any last sign of slack from the labor market. In fact, our examination of labor share indicates that we can't even diagnose the extent of the monopoly problem's effect on wages and incomes until we wring out this labor market slack and spark some wage-driven price inflation.

Consider the recovery following the recession in the early 1990s. Between the third quarters of 1990 and 1997, labor's share of income in the corporate sector fell by almost 5 percentage points. This a big change—a change like that today would translate into about $600 billion being claimed by capital-owners rather than workers. So, this fall in labor's share was large, but it was also quite persistent; seven years is a long time to see the labor share not recover from a recession-induced fall. Because most economists in 1997 thought the economy was clearly at full employment even as sluggish wage growth kept labor share flat, new theories were pushed forward (just like today) about how sluggish wage growth must be being driven by something else besides labor market slack. Skill-biased technological change was the fashionable explanation at the time.

But, three years later, in the third quarter of 2000, labor share was just 0.3 percentage points below its 1990 peak and wages had risen sharply across-the-board. What changed in those three years between 1997 and 2000? Unemployment continued to fall and the share of employed adults (and prime-age adults) continued to rise, tightening up labor markets. The real innovation of this period was a Fed that did not preemptively raise interest rates to choke off falling unemployment; instead they waited for actual wage-driven price inflation to appear in the data. When it didn't, they let the recovery continue.

Today's Fed should follow this advice and assume that the U.S. economy can restore the labor share of income lost during the recovery from the Great Recession; at least until the data tells us that it cannot by showing a large jump in inflation before this share is restored.

This is a preview edition of a new macroeconomic policy briefing that will be published by the Economic Policy Institute before each FOMC meeting. These analyses will take a deep dive into one aspect of monetary or other macroeconomic policies and data. To receive the briefing in your inbox, sign up below.

 

1. See Bivens (2015) and Bivens (2017) on the rationale for this nominal wage target and for evidence that recent years' productivity malaise should not lead to large downward revisions in estimates of the economy's potential productivity growth rate.

2. We call these "profits" of Federal Reserve banks because that's what the Bureau of Economic Analysis (BEA) labels them in the data. Given that the Federal Reserve system is not a private business, it's a bit of a strange label for lots of reasons, but we'll follow the convention here.

3. This recession-induced rise in the labor share is most striking in the last half of 2008, as the write-off of the value of bad loans in the financial sector was reflected in large, one-time declines in corporate profits, sending labor's share soaring for these quarters.

4. See Figure 7 in Bivens (2015).

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In Davos vs. the new progressives, round one goes to the left [feedly]

In Davos vs. the new progressives, round one goes to the left
https://www.washingtonpost.com/outlook/2019/01/28/davos-vs-new-progressives-round-one-goes-left/

There was a revealing moment at this year's World Economic Forum in Davos, Switzerland.

In recent years, as global elites from the business, financial and political spheres — along with the political donor class — have converged at their annual meeting, they have been increasingly hard pressed to celebrate the triumph of neoliberal politics and expanded global connectedness. At the same time, they've been perplexed and discomforted by policy solutions put forth by those outside their Davos bubble to push back on rising inequality.

The moment to which I refer happened when computer executive Michael Dell — who has a net worth of $28 billion — reportedly laughed off calls by Rep. Alexandria Ocasio-Cortez (D-N.Y.) for a 70 percent marginal tax rate for income above $10 million, and challenged the audience to "name a country where that's worked. Ever."

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Economist Erik Brynjolfsson was also on the panel and, to his credit, quickly met Dell's challenge with one prominent place: the United States.

From 1913, our average top tax rate was about 60 percent, then from the 1930s to the 1980s, the top tax rate ranged from about 60 to 90 percent (today's top tax rate is 37 percent). Such high top rates "worked" in the sense that they did not obviously dampen growth, which was on average stronger in those years than since, when rates have been lower — a pattern that holds for various other countries as well. To be clear, this is correlation, not causation, but Dell's point was nonsense.

Unless he meant such tax rates "don't work" for him and other denizens of the wealth stratosphere. If so, his point is revealing. Dell's wealth places him near the top of the top 0.001 percent. In recent years, angst in Davos has noticeably increased over the rise of populism, Trumpism, Brexit and the impact of the concentrated wealth the World Economic Forum has come to represent. What there hasn't been, however, is much in the way of policy solutions to correct any of the above.

This is no great revelation: The beneficiaries of the status quo — at least, the one that prevailed before President Trump, Brexit, November's midterms and so on — are rarely the ones to challenge it. That falls to outsiders like Ocasio-Cortez (or AOC as she is popularly known) and those who have long touted the notion of a "rigged economy," like Sen. Elizabeth Warren (D-Mass.), who just introduced a wealth tax on net worth above $50 million. Others, including Sens. Kamala D. Harris (D-Calif.) and Sherrod Brown, (D-Ohio) and Rep. Ro Khanna (D-Calif.), have also proposed significantly progressive tax ideas, in their cases through large expansions of tax credits for lower-income working households.

With all that going on, old boomers like myself can perhaps be forgiven for walking around humming Bob Dylan's"The Times They Are a-Changin'." (Come senators, congressmen/ Please heed the call/ Don't stand in the doorway/ Don't block up the hall) But are they (a-changin')? If so, why and in which direction?

That's too complex a question for one post, so let's narrow it down to progressive taxation. Yes, I think they are. Whether Congress legislates some version of any of these plans is, of course, a function of political outcomes that no one can foresee, but if Democrats control federal politics, I can see the tax code a-changin' in a progressive direction.

Part of that outcome would be driven by a widespread sense among Democrats across their caucus, and including moderates, that the Trump tax cuts were a serious mistake, exacerbating existing market inequalities, robbing the Treasury of much-needed revenue, incentivizing production abroad and opening more loopholes for tax avoidance and evasion. Another motivation, further to the left of the caucus, is the belief that earlier Democratic administrations did not go far enough in this space, nibbling at the edges of inequality instead of trying to take a bigger bite out of it.

The fact that the leftward caucus's ideas are being taken so seriously signals their ascendancy. Another big reason for this spate of progressive ideas is that the moderate wing of the Democratic Party hasn't done enough to push back on inequality, which — as measured by, say, industry and wealth concentration — is getting worse, not better.

Their ascendancy resonates. Who do you think captures the urgency of the current moment in our political economy: the 39th-richest guy in the world laughing off AOC's idea in the Swiss Alps, or AOC herself? Different people will have different answers to this question, but for most of us, I'll bet it's the latter.

At this stage, the usual technocratic suspects, myself included, are trotting out their defenses of and attacks on these ideas. Warren's wealth tax, for example, creates real implementation challenges. Valuing and taxing wealth has largely been outside the scope of our tax system, and it creates the need for a stronger IRS with solid connections to similar agencies in places where wealth goes to hide. (Now there's a bit of global coordination we need to see a lot more of!)

To be clear, such advances are in her proposal.

Arguments that high marginal tax rates on income, closing loopholes or taxing income derived from wealth (e.g., capital gains) will hurt investment, productivity and growth, are a lot harder to sustain, given our history. Research shows much smaller responses to tax changes than conservatives tout and the obvious phoniness of the claims to sell the Trump cuts, which are, in one of least surprising outcomes in the history of tax policy, not "paying for themselves."

But weedy, predictable arguments are not the point right now. What's exciting about this moment are the directional aspirations of the most diverse group of progressive policymakers we've ever seen at the federal level.

Sticking with Alpine references, I don't mean to lean too far over my skis. But it's possible that the sun is setting on the Davos elites and rising on bold, progressive policymakers.
 -- via my feedly newsfeed