That’s not my line, it’s the headline of an AP article in the Washington Post. The exact words were, “cheaper gas lowers retail sales; spending up elsewhere.” Yes folks, once again we see the march of surprised economists.
The immediate cause was a report from the Commerce Department showing a drop in retail sales of 0.8 percent in January that followed a drop of 0.9 percent in December. These declines do not quite fit with the story of a soaring economy led by a consumption boom. So now in the hunt for culprits, this AP article has apparently fingered lower gas prices.
Back in the good old days before this report was released we used to think that lower gas prices would be a spur to consumption as it freed up money for other purchases, but I guess we have an audible here:
“The modest gain suggests Americans are still cautious about spending their windfall from lower gas prices. …
“Economists were disappointed by the weak showing, but most expect that consumers will eventually spend much of the extra cash left over from lower prices at the pump.
“‘With lower gasoline prices leaving households with more to spend … the labor market on fire and consumer confidence back at its pre-recession level, we had hoped to see a much stronger performance,’ Paul Ashworth, an economist at Capital Economics, said in a note to clients.”
There are two important data points that were apparently missed by the surprised economists. First, the labor market is very far from being “on fire.” The percentage of unemployment due to people voluntarily quitting their jobs is still at extraordinarily levels. This is a key measure of workers confidence in the state of the labor market. Nominal wage growth has been just 2.2 percent over the last year, virtually unchanged from the prior three years.
The other data point apparently unavailable to surprised economists is the saving rate. Contrary to what they routinely assert, the saving rate is actually quite low, meaning that consumption as a share of disposable income is already quite high. People have need to save, for example for things like retirement. Some folks may have heard stories about the retirement income crisis. This refers to the fact that workers approaching retirement no longer have defined benefit pensions and have little savings.
For this reason, we should not expect some big surge in consumption going forward. If we expect to see a sharp uptick in growth we will have to look to some other component. Since there ain’t many choices out there (the textbook says GDP is equal to consumption, investment, government spending, and net exports), some of us are less optimistic than the surprised economists.
That’s not my line, it’s the headline of an AP article in the Washington Post. The exact words were, “cheaper gas lowers retail sales; spending up elsewhere.” Yes folks, once again we see the march of surprised economists.
The immediate cause was a report from the Commerce Department showing a drop in retail sales of 0.8 percent in January that followed a drop of 0.9 percent in December. These declines do not quite fit with the story of a soaring economy led by a consumption boom. So now in the hunt for culprits, this AP article has apparently fingered lower gas prices.
Back in the good old days before this report was released we used to think that lower gas prices would be a spur to consumption as it freed up money for other purchases, but I guess we have an audible here:
“The modest gain suggests Americans are still cautious about spending their windfall from lower gas prices. …
“Economists were disappointed by the weak showing, but most expect that consumers will eventually spend much of the extra cash left over from lower prices at the pump.
“‘With lower gasoline prices leaving households with more to spend … the labor market on fire and consumer confidence back at its pre-recession level, we had hoped to see a much stronger performance,’ Paul Ashworth, an economist at Capital Economics, said in a note to clients.”
There are two important data points that were apparently missed by the surprised economists. First, the labor market is very far from being “on fire.” The percentage of unemployment due to people voluntarily quitting their jobs is still at extraordinarily levels. This is a key measure of workers confidence in the state of the labor market. Nominal wage growth has been just 2.2 percent over the last year, virtually unchanged from the prior three years.
The other data point apparently unavailable to surprised economists is the saving rate. Contrary to what they routinely assert, the saving rate is actually quite low, meaning that consumption as a share of disposable income is already quite high. People have need to save, for example for things like retirement. Some folks may have heard stories about the retirement income crisis. This refers to the fact that workers approaching retirement no longer have defined benefit pensions and have little savings.
For this reason, we should not expect some big surge in consumption going forward. If we expect to see a sharp uptick in growth we will have to look to some other component. Since there ain’t many choices out there (the textbook says GDP is equal to consumption, investment, government spending, and net exports), some of us are less optimistic than the surprised economists.
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David Brooks cast his column today as a battle between the economic agendas put forward by Larry Summers in a recent report for the Center for American Progress and Marco Rubio in his campaign book, American Dreams. After a brief summary of key points Brooks asks,
“The questions for Summers are: Have we forgotten the lessons of the last quarter-century? Do we think government is smart enough to intrude into millions of business decisions? Do we worry that in making hiring more expensive we will get less of it, and wind up with European-style sclerosis and unemployment levels?”
What lessons of the last quarter century does Brooks have in mind? The major economy with the best record on employment at this point is Germany, with an employment to population ratio (EPOP) that is almost 4 full percentage points higher than in the United States. Its unemployment rate is currently 4.9 percent. There are few countries in which the government intervenes more in the corporate governance process than Germany.
In fact, even France has a higher EPOP among prime age workers (ages 25-54) than the United States. The United States has a slightly higher overall EPOP because we expect students to work and we expect people to retire later. In terms of employers being willing to hire prime age workers, France does better than the United States.
The problem is not that Summers has forgotten the lessons of the last quarter century, the problem is that Brooks is inventing lessons that fit the policies he wants to promote rather than the data.
David Brooks cast his column today as a battle between the economic agendas put forward by Larry Summers in a recent report for the Center for American Progress and Marco Rubio in his campaign book, American Dreams. After a brief summary of key points Brooks asks,
“The questions for Summers are: Have we forgotten the lessons of the last quarter-century? Do we think government is smart enough to intrude into millions of business decisions? Do we worry that in making hiring more expensive we will get less of it, and wind up with European-style sclerosis and unemployment levels?”
What lessons of the last quarter century does Brooks have in mind? The major economy with the best record on employment at this point is Germany, with an employment to population ratio (EPOP) that is almost 4 full percentage points higher than in the United States. Its unemployment rate is currently 4.9 percent. There are few countries in which the government intervenes more in the corporate governance process than Germany.
In fact, even France has a higher EPOP among prime age workers (ages 25-54) than the United States. The United States has a slightly higher overall EPOP because we expect students to work and we expect people to retire later. In terms of employers being willing to hire prime age workers, France does better than the United States.
The problem is not that Summers has forgotten the lessons of the last quarter century, the problem is that Brooks is inventing lessons that fit the policies he wants to promote rather than the data.
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The NYT reported on a decision by the Obama administration to file a complaint before the World Trade Organization over alleged subsidies by China to its exports. The subsidies take the form of government support for product design, information technology, and worker training for exported items. According to the article, the value of these subsidies came to roughly $1 billion over the last three years.
It would have been helpful to put this complaint in some context for readers. China has an explicit policy of holding its currency to a level that is far below its market value. If we assume that the market value of the yuan would be 20 percent higher than the current value, the export subsidy implied by keeping the yuan below its market level would be on the order of $260 billion over the last three years. Even if the gap between the market value and China’s targeted rate is just 10 percent, the implied subsidy would be over $130 billion over this period.
As the piece notes, the administration’s move was intended primarily as a gesture to win support from Congress for fast-track authority to allow the passage of the Trans-Pacific Partnership and the Trans-Atlantic Trade and Investment Pact. The effectiveness of this gesture would be substantially reduced if the NYT had pointed out that the Obama administration continues to do nothing with reference to an export subsidy that is more than 100 times as large.
The NYT reported on a decision by the Obama administration to file a complaint before the World Trade Organization over alleged subsidies by China to its exports. The subsidies take the form of government support for product design, information technology, and worker training for exported items. According to the article, the value of these subsidies came to roughly $1 billion over the last three years.
It would have been helpful to put this complaint in some context for readers. China has an explicit policy of holding its currency to a level that is far below its market value. If we assume that the market value of the yuan would be 20 percent higher than the current value, the export subsidy implied by keeping the yuan below its market level would be on the order of $260 billion over the last three years. Even if the gap between the market value and China’s targeted rate is just 10 percent, the implied subsidy would be over $130 billion over this period.
As the piece notes, the administration’s move was intended primarily as a gesture to win support from Congress for fast-track authority to allow the passage of the Trans-Pacific Partnership and the Trans-Atlantic Trade and Investment Pact. The effectiveness of this gesture would be substantially reduced if the NYT had pointed out that the Obama administration continues to do nothing with reference to an export subsidy that is more than 100 times as large.
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Erskine Bowles, the superhero of the fiscal austerity crowd, took time off from his duties on corporate boards to once again argue the need to “put our fiscal house in order.” He apparently hasn’t been following the numbers lately. If he had, he would have noticed that growth rate of Medicare and other government health care programs is now on a path that is lower than the proposals that he and Alan Simpson put forward in their report. (He refers to their report as a report of the National Commission on Fiscal Responsibility and Reform. This is not true. According to its bylaws a report would have needed the support of 14 of the 18 members of the commission. The Bowles-Simpson proposal only had support of 10 members of the commission.)
Bowles also inaccurately claims they proposed delaying deficit reduction until after the economy had recovered. In fact, the report proposed deficit reduction of $330 billion (2.0 percent of GDP) beginning in the fall of 2011. This was long before the economy had recovered or would have in any scenario without a large dose of fiscal stimulus.
Bowles also fails to give any reason whatsoever why the country would benefit from dealing with large projected deficits a decade into the future. These projections may themselves be far off the mark, as has frequently been the case in the past. It is also worth noting that the rise in the deficit depends on projections of sharply higher interest rates in the years after 2020. There is no obvious basis for assuming this would be the case.
In the event that large deficits do prove to be a problem in 2025 and beyond there is no obvious reason why we would think that the Congress and president would not be able to deal with them at the time. That is what experience would suggest. In the mean time, we have real problems like millions of people unable to find jobs and tens of millions who have not shared in the benefits of growth for the last fifteen years. Or, to put it in generational terms, we have tens of millions of children growing up in families whose parents don’t earn enough to provide them with a comfortable upbringing.
Erskine Bowles, the superhero of the fiscal austerity crowd, took time off from his duties on corporate boards to once again argue the need to “put our fiscal house in order.” He apparently hasn’t been following the numbers lately. If he had, he would have noticed that growth rate of Medicare and other government health care programs is now on a path that is lower than the proposals that he and Alan Simpson put forward in their report. (He refers to their report as a report of the National Commission on Fiscal Responsibility and Reform. This is not true. According to its bylaws a report would have needed the support of 14 of the 18 members of the commission. The Bowles-Simpson proposal only had support of 10 members of the commission.)
Bowles also inaccurately claims they proposed delaying deficit reduction until after the economy had recovered. In fact, the report proposed deficit reduction of $330 billion (2.0 percent of GDP) beginning in the fall of 2011. This was long before the economy had recovered or would have in any scenario without a large dose of fiscal stimulus.
Bowles also fails to give any reason whatsoever why the country would benefit from dealing with large projected deficits a decade into the future. These projections may themselves be far off the mark, as has frequently been the case in the past. It is also worth noting that the rise in the deficit depends on projections of sharply higher interest rates in the years after 2020. There is no obvious basis for assuming this would be the case.
In the event that large deficits do prove to be a problem in 2025 and beyond there is no obvious reason why we would think that the Congress and president would not be able to deal with them at the time. That is what experience would suggest. In the mean time, we have real problems like millions of people unable to find jobs and tens of millions who have not shared in the benefits of growth for the last fifteen years. Or, to put it in generational terms, we have tens of millions of children growing up in families whose parents don’t earn enough to provide them with a comfortable upbringing.
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I see Robert Waldmann has taken up the old challenge from the Social Security privatization days of whether it was possible to get a 7.0 percent real return when price to earnings ratios in the stock market were over 20 to 1 (2005 days) or 30 to 1 (late 1990s privatization craze). He claims to have done the trick by assuming that stock prices grow at a 3.0 percent real rate (the same as the growth rate for the economy), stocks pay out 1.9 percent in dividends, and effectively pay out 3.3 percent of their value to shareholders in the form of share buybacks.
I’ll make two quick points on this one. First, the assumption of 3.0 percent real GDP growth is far above what the Social Security trustees were assuming at the time (@ 1.5-1.8 percent). It is also above most current projections which tend to be near 2.0 percent for long-run growth. Waldmann’s projection may well prove right, but the point is that he is using a different growth projection than is being used in other contexts (like projecting the size of the Social Security shortfall).
The other problem is that he has companies paying out an amount equal to 5.2 percent of their stock price either as dividends or share buybacks. If the price to earnings ratio is over 20 (it is), then he has them paying out more than 100 percent of their profits to shareholders. That doesn’t seem like a sustainable policy in the long-run, but I am prepared to be shown otherwise.
Note: corrections made — thanks folks.
I see Robert Waldmann has taken up the old challenge from the Social Security privatization days of whether it was possible to get a 7.0 percent real return when price to earnings ratios in the stock market were over 20 to 1 (2005 days) or 30 to 1 (late 1990s privatization craze). He claims to have done the trick by assuming that stock prices grow at a 3.0 percent real rate (the same as the growth rate for the economy), stocks pay out 1.9 percent in dividends, and effectively pay out 3.3 percent of their value to shareholders in the form of share buybacks.
I’ll make two quick points on this one. First, the assumption of 3.0 percent real GDP growth is far above what the Social Security trustees were assuming at the time (@ 1.5-1.8 percent). It is also above most current projections which tend to be near 2.0 percent for long-run growth. Waldmann’s projection may well prove right, but the point is that he is using a different growth projection than is being used in other contexts (like projecting the size of the Social Security shortfall).
The other problem is that he has companies paying out an amount equal to 5.2 percent of their stock price either as dividends or share buybacks. If the price to earnings ratio is over 20 (it is), then he has them paying out more than 100 percent of their profits to shareholders. That doesn’t seem like a sustainable policy in the long-run, but I am prepared to be shown otherwise.
Note: corrections made — thanks folks.
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Okay, we’ll try it with pictures this time. I have been trying to explain that the monthly wage data are erratic. If we accept the numbers at face value then we would have to believe that workers go from getting healthy pay gains one month to pay cuts the next. To me that seems pretty implausible, but apparently many reporters and some economists think this is the way the economy works.
So today we do it with pictures. The folks who believe that the monthly wage data released by the Labor Department are giving us real insight into the movement in wages think that monthly wage changes look like this.
Percent Change in Average Hourly Wage
Source; Bureau of Labor Statistics.
That doesn’t look like the economy I see, but hey, what do I know?
Okay, we’ll try it with pictures this time. I have been trying to explain that the monthly wage data are erratic. If we accept the numbers at face value then we would have to believe that workers go from getting healthy pay gains one month to pay cuts the next. To me that seems pretty implausible, but apparently many reporters and some economists think this is the way the economy works.
So today we do it with pictures. The folks who believe that the monthly wage data released by the Labor Department are giving us real insight into the movement in wages think that monthly wage changes look like this.
Percent Change in Average Hourly Wage
Source; Bureau of Labor Statistics.
That doesn’t look like the economy I see, but hey, what do I know?
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Robert Schiller had an interesting piece in the NYT on how uncertainty about the economy may be leading to extraordinary low long interest rates. However, he adds in the strange comment that savings is not low, in spite of the very low return available to savers:
“Yet according to the Bureau of Economic Analysis, personal saving as a fraction of disposable personal income stood at 4.9 percent for the United States in December. That may not be an impressive level, but it’s not particularly low by historical standards.”
This comment is strange, because in fact a 4.9 percent saving rate is in fact quite low by historical standards.
The only periods in which the saving rate was lower than it is today were when the wealth effects from the stock and housing bubble led to consumption booms at the end of the 1990s and the middle of the last decade. The current saving rate is far below the average for the 1960s, 1970s, and 1980s.
It is worth noting that the actual saving rate out of income may be even lower than the data indicate. There is currently a large negative statistical discrepancy in the GDP accounts (@ 0.8 percent of GDP), which means that measured income is larger than measured expenditures. My explanation for this unusual gap is that capital gains income is showing up as normal income, leading to an overstatement of true income. (Capital gains are not supposed to count as part of income for GDP accounting purposes.) if this is true, then actual saving rate could be as much as a percentage point lower than the reported rate.
Robert Schiller had an interesting piece in the NYT on how uncertainty about the economy may be leading to extraordinary low long interest rates. However, he adds in the strange comment that savings is not low, in spite of the very low return available to savers:
“Yet according to the Bureau of Economic Analysis, personal saving as a fraction of disposable personal income stood at 4.9 percent for the United States in December. That may not be an impressive level, but it’s not particularly low by historical standards.”
This comment is strange, because in fact a 4.9 percent saving rate is in fact quite low by historical standards.
The only periods in which the saving rate was lower than it is today were when the wealth effects from the stock and housing bubble led to consumption booms at the end of the 1990s and the middle of the last decade. The current saving rate is far below the average for the 1960s, 1970s, and 1980s.
It is worth noting that the actual saving rate out of income may be even lower than the data indicate. There is currently a large negative statistical discrepancy in the GDP accounts (@ 0.8 percent of GDP), which means that measured income is larger than measured expenditures. My explanation for this unusual gap is that capital gains income is showing up as normal income, leading to an overstatement of true income. (Capital gains are not supposed to count as part of income for GDP accounting purposes.) if this is true, then actual saving rate could be as much as a percentage point lower than the reported rate.
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Allan Sloan is a reasonable conservative, which means that he usually makes reasonable arguments, even if some of us to his left may disagree with them. Today’s piece criticizing President Obama’s proposal to cap the amount in a tax sheltered IRA at $3.4 million isn’t up to the usual standards.
The gist of Sloan’s argument is that $3.4 million would not be enough to generate the same retirement income in annuity as President Obama will get in his pension when he retirees. By Sloan’s calculation, the $3.4 million will allow a couple to get a dual-life annuity of roughly $100,000 a year, half the size of President Obama’s pension of $200,000 a year. He considers this unfair.
I’m a bit at a loss at seeing the unfairness. President Obama gets paid $400,000 a year. This puts him well into the top 1 percent of wage earners. Is that unfair? Of course his paycheck is less than one-twentieth the average for CEOs of Fortune 500 companies, many of whom probably lack the skills needed to operate a lemonade stand.
It’s not clear exactly what sort of yardstick President Obama’s is supposed to provide. He is obviously at the top of his field, so is it surprising that he would get paid relatively well and also enjoy a comfortable retirement?
Just to be clear, no one is preventing people from accumulating more than $3.4 million to support their retirement. They just won’t enjoy a taxpayers’ subsidy for the amount in excess of $3.4 million. To those of us who will never have anything close to $3.4 million in a retirement account, the unfairness works in the opposite direction.
If most of us want to have an income of $100,000 plus in our late sixties and seventies then we will have to get the bulk of it by working. This means we will be paying income taxes of 15 to 25 percent, in addition to a payroll tax of 15.35 percent. The person who has accumulated $3.4 million tax free in a Roth IRA and then able to get $100,000 a year in tax free income in an annuity looks like they are doing pretty well. President Obama and his wife may be doing better, but it’s hard to have too much sympathy.
Allan Sloan is a reasonable conservative, which means that he usually makes reasonable arguments, even if some of us to his left may disagree with them. Today’s piece criticizing President Obama’s proposal to cap the amount in a tax sheltered IRA at $3.4 million isn’t up to the usual standards.
The gist of Sloan’s argument is that $3.4 million would not be enough to generate the same retirement income in annuity as President Obama will get in his pension when he retirees. By Sloan’s calculation, the $3.4 million will allow a couple to get a dual-life annuity of roughly $100,000 a year, half the size of President Obama’s pension of $200,000 a year. He considers this unfair.
I’m a bit at a loss at seeing the unfairness. President Obama gets paid $400,000 a year. This puts him well into the top 1 percent of wage earners. Is that unfair? Of course his paycheck is less than one-twentieth the average for CEOs of Fortune 500 companies, many of whom probably lack the skills needed to operate a lemonade stand.
It’s not clear exactly what sort of yardstick President Obama’s is supposed to provide. He is obviously at the top of his field, so is it surprising that he would get paid relatively well and also enjoy a comfortable retirement?
Just to be clear, no one is preventing people from accumulating more than $3.4 million to support their retirement. They just won’t enjoy a taxpayers’ subsidy for the amount in excess of $3.4 million. To those of us who will never have anything close to $3.4 million in a retirement account, the unfairness works in the opposite direction.
If most of us want to have an income of $100,000 plus in our late sixties and seventies then we will have to get the bulk of it by working. This means we will be paying income taxes of 15 to 25 percent, in addition to a payroll tax of 15.35 percent. The person who has accumulated $3.4 million tax free in a Roth IRA and then able to get $100,000 a year in tax free income in an annuity looks like they are doing pretty well. President Obama and his wife may be doing better, but it’s hard to have too much sympathy.
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