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Article Artículo

The Plunge In Labor Force Participation: Why Were Economists So Stupid a Decade Ago?

Neil Irwin has a good piece this morning discussing the evidence on the economy's growth potential. As he points out, the key question is how much slack remains in the economy. The key issue in this debate is the extent to which we can expect employment to rise.

Most of the debate deals with the extent to which we can expect more people to enter the labor market. The current 4.8 percent unemployment rate is reasonably low by any measure. While it can go somewhat lower, that will not allow for much further expansion of the economy. The bigger question is the extent to which we should expect people who are not in the labor force, meaning they are neither working nor actively looking for work, to come back into the labor force if the job market improved. On this point, there is considerable debate.

The basic story is straightforward, if we focus exclusively on prime-age workers (ages 25–54), the labor force participation rates are close to 2.0 percentage points below pre-recession levels and 4.0 percentage points below 2000 peaks. Those who insist that we are near full employment argue that this is pretty much the best we can do and that these drops are permanent. Those like myself, who think we can do much better, argue that we should be able to return to past rates of labor force participation rates (LFPR) among prime-age workers.

In this respect, I would like to enlist the help of the ghost of forecasters past. The figure below shows projections of prime-age LFPR for men from the Congressional Budget Office (CBO) and the Bureau of Labor Statistics (BLS).

Book3 6110 image001

Source: CBO and BLS.

The first bar is a projection CBO made in 2000 for 2008. It projected a LFPR for 2008 of 90.9 percent. The second projection is also from CBO. In 2007 it projected a LFPR for prime-age men in 2014 of 90.5 percent. The third bar is a 2007 projection from BLS for 2016. It projected a LFPR for prime-age men of 91.3 percent. This compares to an actual LFPR last year of 88.5 percent, almost three full percentage points lower.

CEPR / February 24, 2017

Article Artículo

The Paul Ryan Small Savers Tax

As everyone knows, the fundamental principle of the Republican party is to redistribute as much income as possible from the rest of us to the rich. In keeping with this principle, Paul Ryan and the Republicans in Congress are pushing through a proposal to make workers pay larger fees on their retirement accounts. Unlike conventional taxes, which could be wasted on things like education or child care, these fees go directly into the pockets of the financial industry. This way people will be able to see the benefits of their fees in the form of expensive houses and cars for the bankers, as well as the folks going to expensive restaurants and flying first class.

The story here is a simple one. Few workers have traditional defined benefit pensions any longer. For most workers, 401(k) plans have not been an adequate replacement. They are unable to put much money into these accounts and much of the money they do put in is eaten up by fees charged by the banks and insurance companies that administer them. Furthermore, many people end up cashing out these accounts when they change employers, leaving little for retirement.

To address these problems several states are considering measures to allow workers to contribute to plans managed by the state. Illinois has a plan that is going into operation this year while California's will be up and running in 2020. Several other states are considering similar measures.

The advantage of these plans is that workers could keep the same account as they changed jobs. Also, the fees would be much lower, with state managed plans likely averaging fees in the range of 0.2–0.3 percent annually. This compares to fees averaging close to 1.0 percent in privately run 401(K)s, with some charging over 1.5 percent.

CEPR / February 23, 2017

Article Artículo

United States

Workers

The Decline of Blue-Collar Jobs, In Graphs
Many have a renewed interest in the shrinking of manufacturing and other traditional blue-collar jobs since Donald Trump won the 2016 presidential election. White working class voters in several large Midwestern states that Democrats had previously carrie

Dean Baker and Nicolas Buffie / February 22, 2017

Article Artículo

Trump and Trade: He’s Largely Right

There are an awful lot of things to really dislike about Donald Trump and his conduct as president to date, but that doesn’t mean everything his administration does is wrong. In particular, there is considerable truth to what he has said about trade costing a large number of good paying manufacturing jobs and hurting the living standards of the middle class.

Unfortunately, rather than acknowledging this point, the media show the same determination as global warming denialists in saying that trade cannot be a problem. We got two examples of this sort of denialism in recent days.

The first was a piece in the Washington Post criticizing Trump adviser Peter Navarro’s view of trade and the trade deficit. While Navarro makes many questionable arguments in pushing his views on trade, his point that the trade deficit can reduce growth and employment is absolutely correct.

Ever since the crash in 2008 the bulk of economics profession has agreed that we faced a situation of “secular stagnation,” where the economy faced a persistent shortfall of demand. In this context, anything that boosts demand, such as an increase in government spending, private consumption, or a reduction in the trade deficit, leads to more output and employment.

In this context, the piece’s comment, taken from Harvard University economics professor N. Gregory Mankiw, “that a smaller trade deficit means lower investment along with possibly higher interest rates and less consumption” is completely wrong. If the economy is operating below full employment, as it certainly has been through most of the period from 2008 then reducing the trade deficit certainly can be a net addition to growth. As Mankiw says, “even a freshman at the end of ec 10 knows that.”

In this context, Navarro’s claim that a lower trade deficit could bring in $1.74 trillion in tax revenue over the course of a decade cannot be so easily dismissed even though the Post tells us:

“Hooey, say economists across the political spectrum.”

The key question here is whether the economy is now at potential GDP and whether it is likely to be over the next decade, even with a trade deficit that is close to 3.0 percent of GDP ($538 billion in the most recent quarter). On this question, the Congressional Budget Office (CBO) might be on the side of Navarro.

CEPR / February 21, 2017

Article Artículo

Republican Corporate Income Tax Proposal: Press Has No Idea of Its Impact, but Knows It is Bad

Pedro da Costa tells us in Business Insider that the Republican tax proposal, with its border adjustment, is going to be really bad news because it will lead to a spike in inflation. The story is that the 20 percent tax imposed on imports will lead to a one-time jump in the core inflation rate of between 1.4 and 2.1 percentage points.

The implication is that the tax will be almost fully passed on to consumers. With imports at 15 percent of GDP, these numbers would be plausible.

While this is not an impossible scenario, it is worth thinking back to what Neil Irwin told us in the New York Times last week. He warned that the tax would lead to a 25 percent rise in the dollar, which could lead to a financial crisis as a result of the increase in the size of the dollar denominated debt held by developing countries. This is also a plausible scenario, although the prospect of a 25 percent increase in the value of the dollar seems a bit out of line, as I noted at the time.

Anyhow, it is worth stepping back for a moment and thinking this one through. Both Pedro da Costa and Neil Irwin are very good reporters. Neither is just making things up, but they are telling us completely opposite stories about the impact of the Republican tax proposal. In da Costa's version, the dollar moves little, with almost all the adjustment being in price. (It's worth noting that this would lead to a large reduction in the trade deficit.) In the Irwin version, the dollar fully adjusts leaving import prices essentially unchanged for people living in the United States.

My guess is that the Irwin version is closer to reality (not the crisis part), but the more fundamental point is that we actually have very little idea what will happen if this tax is implemented. It seems that many folks are prepared to shoot at this tax because they don't like the people pushing it.

I'm not terribly fond of them either, but this does seem like a serious proposal, which deserves a serious look. For the record, it did not originate with either Trump or Republicans in Congress, but rather Alan Auerbach, a Berkeley professor who I have always taken to be a serious economist. (I don't know his political leanings.)

CEPR / February 18, 2017