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What’s behind stalled nonsupervisory wage growth?

by New Deal democrat

What’s behind stalled nonsupervisory wage growth?

Wage growth for nonsupervisory workers nominally has been stuck in the +2.3% to +2.5% range (or worse) for three years.  Why?

Over the weekend I was cleaning out some old graphs, and came across this one from the Atlanta Fed, suggesting that the Phillips Curve (the tradeoff between unemployment and inflation) is very much alive, with the tweak that the amount of wage growth follows a decline in the unemployment rate with a one year lag:

The red line is the progression of the Phillips Curve since the beginning of 2011. The dotted line indicates that the Altanta Fed’s model was calling for a significant acceleration of wage growth between the spring of 2016 and spring this year.  [NOTE: all of the discussion in this post is about nominal, not inflation-adjusted wage growth, which has an awful lot to do with the volatility of gas prices.]

Except when we look at wages for nonsupervisory workers, that really hasn’t happened, at least not through February.  The below graph compares the YoY change in the unemployment rate (blue) and YoY wage growth for nonsupervisory workers (red):

As noted above, wage growth has been stuck at between 2.3% YoY and 2.5% YoY with some (mainly negative) exceptions since the end of 2013.

Using the U6 underemployment rate to capture the broader picture doesn’t change the outcome:


So, what’s going on?

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Housing, production, and JOLTS all good news

by New Deal democrat

Housing, production, and JOLTS all good news

We’ve had a good run of economic news this week.

First, in the leading housing sector, both of the most important datapoints made new highs.  Single family permits, which are just as leading as permits overall, but much less volatile, made yet another post-recession high.  Further, the three month rolling average of housing starts, which are more volatile and a little less leading, but represent actual economic activity, also made a new post-recession high:


The headline number for industrial production for February was flat, but once again that was due to the seasonally-adjusted big

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It Takes “Alternative Math” to Claim That Redistribution Is Futile

Via Economists View (some of the comments are worth review as Deirdre McCloskey comments).  Also see below Peter Dorman’s   Review of Economism: Bad Economics and the Rise of Inequality by James Kwak at Econospeak.

Adam M. Finkel at RegBlog:

It Takes “Alternative Math” to Claim That Redistribution Is Futile: The unequal distribution of costs and benefits across society is one of the hottest topics in the regulatory arena—and one that, regretfully, has sparked fundamentally flawed arguments, threatening to distort and obscure much-needed discussion about redistributive policies. …

Although all policies have redistributive effects, some ideologies are viscerally, even militantly, opposed to government interventions that benefit the poor, whether by intention or even as a side effect of an otherwise sound policy. …

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Increased Penalties for the Uninsured Under the Republican’s AHCA?

Caroline Pearson at Avalere has a piece on how the House of Representatives AHAC healthcare program penalizes older and lower income people more so than higher incomes and younger people. Just to refresh your memory, the ACA penalizes people who do not have insurance based upon income.

While the penalties under the ACA are based upon income, the penalties under the AHCA are based upon age determinant premiums. Older people under the AHCA have higher premiums up to 5:1 of the younger insured rather than the 3:1 ratio under the ACA. Remember too, the ACA does not use age as a determinant of the size of penalty which is based upon income. While most likely the healthiest, many Millenials have lower incomes and could an have issues paying the penalty under the AHCA as the size of the penalty at lower income is a larger percentage of annual income. The impact of large groups of the younger and healthier Millenials not buying insurance could be felt in the risk pool potentially forcing higher premiums for everyone. Different than the penalty being paid to the government under the ACA, the penalty under the AHCA is paid to a private company. It will be interesting to see if this is be tested in court also

Younger Adults
Young Adults with Insurance

Older Adults
Old People with Insurance

If young adults are discouraged by the penalty and cannot afford to enroll, it could hurt the risk pool. While a recent RAND analysis showed that young people as a whole moving in or out of coverage may not have a large impact on the risk pool, the healthiest and least expensive young adults not enrolling could still result in a significant negative impact on the pool. A recent CBO report confirms a similar projection of those deterred from enrolling due to the continuous coverage provision will tend to be healthier and a penalty could have a significant negative impact on the risk pool and result in higher premiums. Certainly the size of the penalty regardless of income will have an impact as well as the age/premium factor.

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Should The Complacent Class Be Called The Fearful Class?

by Barkley Rosser  (originally from Econospeak)

Should The Complacent Class Be Called The Fearful Class?

Tyler Cowen has published his most successful book yet, The Complacent Class, now on the Washington Post nonfiction bestseller list and getting reviewed by everybody from The Economist to the New York Times and on.  It is the Book de Jour that all are commenting on one way or another.  Is America declining because so many of its people have become complacent?  (Shame on them.)

The book has much to offer.  It is chock  full of many interesting facts, although many of them Tyler has publicized at one point or another on his blog, Marginal  Revolution.  He even pushes some newly fashionable ideas that have been in the dark for too long, such as a sort of cyclical theory of history.  And he certainly makes the case that there are lots of trends that seem to show the American people not being as energetic or adventurous as they used to be, with headline data including reduced interstate migration, reduced changing of jobs, reduced patenting, and reduced entrepreneurial startups, among other things.  He does note some external matters that may be adding to some of this, with building codes and land use restriction in economically dynamic urban areas a big culprit as it makes it harder for many to take advantage of the high paying jobs in those areas.  He has also noted that we may be running out of new scientific knowledge to learn or discover, which makes it harder to find dramatic things to patent, and indeed he wrote a previous book about this, blaming this as a major reason for secular stagnation.

But the big question is whether the title is an accurate representation of what is in the book, which has come up in a series of inconclusive blogposts about “Who is the Complacent Class?”  Frankly, it is not clear  that there is one, or if there is one, they are not the people who are responsible for the data he puts forth as supposedly claiming there is one.  If there is a complacent class in the US, it is the top 1 or 2 percent of the wealth and income distribution, who get lots of attention, but who are not the people who are not moving across state lines or changing jobs.  That is going on in the other 98 percent mostly.

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The Role of Experts in Public Debate

Jonathan Portes asks, “What’s the role of experts in the public debate?” He assumes it is his prerogative, as an expert, to define that role:

I think we have three really important functions.

First, to explain our basic concepts and most important insights in plain English. Famously, Paul Samuelson, the founder of modern macroeconomics, was asked whether economics told us anything that was true but not obvious.  It took him a couple of years, but eventually he gave an excellent and topical example – simply the theory of comparative advantage.

Similarly, I often say that the most useful thing I did in my 6 years as Chief Economist  at DWP was to explain the lump of labour fallacy – that there isn’t a fixed number of jobs in the economy, and increased immigration or more women working adds to both labour demand and labour supply – to six successive Secretaries of State. So that’s the first.

Second is to call bullshit.

O.K. I call bullshit. What Portes explained “to six successive Secretaries of State” was a figment of the imagination of a late 18th century Lancashire magistrate, a self-styled “friend to the poor” who couldn’t understand why poor people got so upset about having their wages cut or losing their jobs — to the extent they would go around throwing rocks through windows, breaking machines and burning down factories — when it was obvious to him that it was all for the best and in the long run we would all be better off… or else dead.

I call bullshit because what Portes explained to six successive Secretaries of State was simply the return of the repressed — the obverse of “Say’s Law” (which was neither Say’s nor a Law) that “supply creates its own demand,” which John Maynard Keynes demolished in The General Theory of Employment, Interest and Money and that John Kenneth Galbraith subsequently declared “sank without trace” in the wake of Keynes’s demolition of it.

I call bullshit because when Paul Samuelson resurrected the defunct fallacy claim that Portes explained to six successive Secretaries of State, he did so on the condition that governments pursued the sorts of “Keynesian” job-creating policies that the discredited principle of “supply creates its own demand” insisted were both unnecessary and counter-productive.

But the lump of labor argument implies that there is only so much useful remunerative work to be done in any economic system, and that is indeed a fallacy. If proper and sound monetary, fiscal, and pricing policies are being vigorously promulgated, we need not resign ourselves to mass unemployment. And although technological unemployment is not to be shrugged off lightly, its optimal solution lies in offsetting policies that create adequate job opportunities and new skills.

[Incidentally, as Robert Schiller has noted, the promised prevention of mass unemployment by vigorous policy intervention did not imply the preservation of wage levels. Schiller cited the following passage from the Samuelson textbook,  "...a decrease in the demand for a particular kind of labor because of technological shifts in an industry can he adapted to -- lower relative wages and migration of labor and capital will eventually provide new jobs for the displaced workers."]

I call bullshit because what Portes explained to six successive Secretaries of State was not even Paul Samuelson’s policy-animated zombie lump-of-labour fallacy but a supply-side, anti-inflationary retrofit cobbled together by Richard Layard and associates and touted by Tony Blair and Gerhard Schroeder as the Third Way “new supply-side agenda for the left.” Central to that agenda were tax cuts to promote economic growth and “active labour market policies” to foster non-inflationary expansion of employment by making conditions more “flexible” and lower-waged:

Part-time work and low-paid work are better than no work because they ease the transition from unemployment to jobs. …

Encourage employers to offer ‘entry’ jobs to the labour market by lowering the burden of tax and social security contributions on low-paid jobs. …

Adjustment will be the easier, the more labour and product markets are working properly. Barriers to employment in relatively low productivity sectors need to be lowered if employees displaced by the productivity gains that are an inherent feature of structural change are to find jobs elsewhere. The labour market needs a low-wage sector in order to make low-skill jobs available.

I call bullshit because in defending the outcomes of supply-side labour policies, Portes soft-pedaled the stated low-wage objectives of the Third Way agenda. In a London Review of Books review, Portes admitted that “it may drive down wages for the low-skilled, but the effect is small compared to that of other factors (technological change, the national minimum wage and so on).” In the Third Way supply-side agenda, however, a low-wage sector was promoted as a desirable feature — making more low-skill jobs available — not a trivial bug to be brushed aside. In other words, in “driving down wages for the low skilled” the policy was achieving exactly what it was intended to but Portes was “too discreet” to admit that was the stated objectives of the policy.

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Trumpcare Saves Social Security By Killing People!

by Barkley Rosser  (originally from Econospeak)

Trumpcare Saves Social Security By Killing People!

Yes, there it is in black and white in Table 3 footnote f on p. 33 of the Congressional Budget Office (CBO) official report on the proposed American Health Care Act, aka Trumpcare. Between now and 2026 spending by the Social Security Administration is projected to decline by $3 billion if Trumpcare passes. This is due to a projected 1 out of 830 people dying who would not under the status quo, this based on a study of what happened to death rates in Massachusetts after Romneycare came in. The projected deaths are about 17,000 in 2018 and up to about 29,000 in 2026.

Another great thing? There will be a reduction in accumulated deficits of about $300 billion, with a reduction of revenues of about $0.9 trillion and a reduction of outlays of about $1.2 trillion. The former will be due to cuts in taxes on high income people while the latter will be due to eliminating subsidies to help poorer people pay for health insurance on the exchanges as well as cutbacks in Medicaid spending for even poorer people. How fortunate can we get?

Barkley Rosser

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The Emerging Market Economies and the Appreciating Dollar

by Joseph Joyce

The Emerging Market Economies and the Appreciating Dollar

U.S. policymakers are changing gears. First, the Federal Reserve has signaled its intent to raise its policy rate several times this year. Second, some Congressional policymakers are working on a border tax plan that would adversely impact imports. Third, the White House has announced that it intends to spend $1 trillion on infrastructure projects. How all these measures affect the U.S. economy will depends in large part on the timing of the interest rate rises and the final details of the fiscal policy measures. But they will have consequences outside our borders, particularly for the emerging market economies.

Forecasts for growth in the emerging markets and developing economies have generally improved. In January the IMF revised its global outlook for the emerging markets and developing economies (EMDE):

EMDE growth is currently estimated at 4.1 percent in 2016, and is projected to reach 4.5 percent for 2017, around 0.1 percentage point weaker than the October forecast. A further pickup in growth to 4.8 percent is projected for 2018.

The improvement is based in part on the stabilization of commodity prices, as well as the spillover of steady growth in the U.S. and the European Union. But the U.S. policy initiatives could upend these predications. A tax on imports or any trade restrictions would deter trade flows. Moreover, those policies combined with higher interest rates are almost guaranteed to appreciate the dollar. How would a more expensive dollar affect the emerging markets?

On the one hand, an appreciation of the dollar would help countries that export to the U.S. But the cost of servicing dollar-denominated debt would increase while U.S. interest rates were rising. The Bank for International Settlements has estimated that emerging market non-bank borrowers have accumulated about $3.6 trillion in such debt, so the amounts are considerable.

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Trumponomics

Trump’s America First economic strategy looks a lot like the import substitution economic development strategy that was so popular several decades ago—notably in Latin America and South Asia..  But it only had limited success, especially compared to the export led growth strategy followed in East Asia.  Import substitution tended to produce fragmented, inefficient and low productivity industries protected from foreign competition by high tariffs and other trade barriers

Take autos, for example.  It does not take a lot more labor to build a $30,000 or $60,000 car than a $15,000 car.  But no one can profitably manufacture a $15,000 car using expensive American labor.  That is why most auto imports are economy or luxury cars.  But this is exactly what Trump is asking Detroit to do.  SEER suspects that the auto CEOs told Trump what he wanted to hear and went back home and did nothing. If for no other reason, the auto industry is operating at very high capacity utilization and does not have the idle capacity to dedicate to small car and truck production. If questioned, they can say it is more difficult than they thought and they are still working on it. That is probably preferable to  actually building some white elephant. Most manufactured imports are not profitable to make in the US at current prices.

 

The Border Adjustment Tax ( BAT) appears to be dead, but who knows.  SEER does not accept the idea being pushed that the dollar will automatically rise to offset the tariffs. It is an interesting theory, but SEER has not been able to find a single historic example of it ever actually happening.  The trade deficit is driven by the domestic savings-investment gap – including the federal deficit as negative savings.  BAT will be a major source of federal revenues and will dampen the savings- investment gap as well as the trade balance.  The impact of BAT on the dollar appears indeterminate as far as SEER can tell. But the bottom line is that the Republicans have long worked to shift taxes from income to consumption and BAT is just another example of that.

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