July 13, 2015
I seem to have missed the annual boastfest last year, but I will put in a few words this time. (For those interested, you can find the original set here and a 2013 sequel.)
Financial Transactions Taxes
First, one of big five predictions of things to come seems to be happening. The idea of a financial transactions tax (FTT) has made it into polite circles. Two of the declared presidential candidates openly support it, with long-time proponent Bernie Sanders leading the way. The Tax Policy Center of the Brookings Institution and the Urban Institute did an analysis showing that a tax could raise more than $50 billion a year and would be highly progressive. And Representative Chris Van Hollen, a member of the Democratic Party leadership in the House, proposed an economic plan that had a FTT as its financing mechanism.
The financial industry is of course hugely powerful. The cost of the tax to the industry swamps the cost of Dodd-Frank and any other financial reform measures currently being discussed. For this reason, the Wall Street folks will do almost anything to stop a FTT, so we are very far from having a bill passed into law or even being seriously debated. But we have made enormous progress. The FTT is no longer treated as a nutty idea.
The Death of the Young Invincibles and the Affordable Care Act
There are a few other areas where I will take some credit. First, I helped to kill the young invincibles. This is the idea that healthy “young” people are somehow essential for the smooth workings of the health care exchanges created by the Affordable Care Act. It is essential that healthy people sign up for the exchanges, but it doesn’t matter that they are young. In fact, it is actually better for the system to get an older healthy person since they will pay three times as much on average in premiums as a healthy young person.
Reporters seem to have come to understand this basic point. (A Kaiser Family Foundation study was very helpful.) There is much less talk of the need for young people to sign up for the exchanges.
The End of “Free Trade”
In another area, reporting on trade agreements seems to be improving as it is less common to hear reports refer to these deals as “free trade” agreements. There appears to be a growing recognition among reporters that these deals are primarily about putting in place a new regulatory structure. (In fact, the goal is a business friendly regulatory structure, but we’ll leave that one aside for now.) For the most part these regulations have little to do with trade and some quite explicitly involve more protection, such as patent and copyright protection.
You Do Need a Weatherman to Know How the Economy Is Doing
Reporting on the economy can get embarrassing at times. While the underlying rate of growth in the economy tends not to change much from quarter to quarter barring some big and readily noticeable event, like a big stimulus package or the collapse of a bubble, the weather is erratic. Economists and economic reporters should be able to distinguish between weather-driven events and economic fundamentals, but unfortunately often strike out in this area.
We heard many reports of an economic boom in the late fall and early winter based on economic data from the second half of 2014. In fact, this “boom” was entirely attributable to the recovery from the weather-driven 2.1 percent drop in GDP in the first quarter. The story is about as simple as it gets. People who put off buying a car because it was below zero, or there were two feet of snow on the ground in the winter, went out to buy one in the spring or summer when the weather was better.
Unfortunately, these folks seem to be slow learners. We had another unusually bad winter this year. That quickly ended the talk of the boom, but instead we got silly pieces about how the psychology of the American consumer had permanently changed and people no longer want to spend. (This is especially odd at a time when the consumption share of GDP is at an all-time high.) The Wall Street Journal even penned a plea to the “stingy American consumer.”
Anyhow, I have been on the case trying to keep folks’ eyes on the economy rather than the weather.
Japan’s Economic Boom
Remember reading about how Shinzo Abe’s Keynesian policies turned around Japan’s economy? Actually I don’t either, but hey, it is hard to get news from the other side of the world (maybe when the boat gets in). Well, according to secret data from the OECD, Japan has seen a surge in employment in the two and a half years since Abe took office. The employment to population ratio (EPOP) rose from 70.7 percent in the third quarter of 2012 to 73.1 percent in May of this year, an increase of 2.4 percentage points. By comparison, the employment boom in the United States has led to a 1.7 percentage point rise in its EPOP over the same period.
The EPOP for workers between the ages 16–64 in Japan now stands 2.2 percentage points above its pre-recession level, while it is still down by 3.0 percentage points in the United States. Most of the rise in EPOPs in Japan was among women. The EPOP for women in this age group is now a full percentage point higher than it is for women in the United States.
The Shift to Labor Income
Another piece of top secret data, available to those of us who have access to the Internet, is the recent shift back of income from capital to labor. I have yet to see anything written on this topic, but there has been a clear shift back to labor in the year and a half. The labor share of income in the corporate sector bottomed out at 66.0 percent in 2013. It rose to 66.7 percent in 2014 and reached 67.5 percent in the first quarter of 2015. (The quarterly data are erratic, so this could be partially reversed in upcoming quarters.) This means that roughly 40 percent of the four percentage points shift from labor to capital in the downturn has been reversed in the last year and a half.
This is important both for our understanding of the recent shift to capital and also for immediate policy purposes. If I am right that the story of the shift from labor to capital is simply the bottom falling out of the labor market in the recession, then we don’t have to deal with all the various convoluted stories about a new normal where more income goes to capital and workers don’t have the same earnings capacity. As the old saying goes, it’s the demand stupid.
The immediate policy question is then whether the Fed will allow the labor market to continue to tighten so that labor can regain the lost ground. If the Fed starts raising rates to choke off the rate of employment growth, then we could end up with a story where the shift to capital, or at least a substantial portion of it, ends up being a permanent feature of the U.S. economy.
This would be very bad news in my view. It’s bad news because workers should be sharing in the gains of economic growth. It’s also bad news since it would mean that an agency of the federal government, the Federal Reserve Board, is intervening in the economy to ensure that workers are not able to restore their share of income to pre-recession levels. Redistributing income from labor to capital doesn’t seem like the proper role for the government.
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