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Posts from the ‘Politics’ Category

Marketplace of Ideas

Before we wrap up the week’s news, some guiding wisdom from the immortal Pete Seeger: “I’m convinced that it’s impossible to have education without controversy. People who think that’s false will find themselves trapped.”

  • It could have been worse” has become a common refrain recently when it comes to the legislation cobbled together by Congress. The new farm bill is the latest specimen. The House this week finally passed compromise legislation, after what NPR describes as a “two-year-long legislative saga.” The bill now heads for a vote in the Senate. While a lengthy and complicated piece of legislation, the farm bill can be broken into two broad components—the Supplemental Nutrition Assistance Program (food stamps) and agricultural subsidies. The current legislation cuts spending for both components, but the American Enterprise Institute warns that the changes to the agricultural subsidies program is a bait-and-switch maneuver that could cost taxpayers more in the end. AEI has devoted an entire website to promoting a return to free-market principles for agribusiness: The American Boondoggle.
  • This week’s report on fourth quarter GDP growth shows a slowing of the economy at the end of 2013 to a 3.2% annualized pace from 4.1% in the third quarter. Not many are expressing disappointment about that result. While not stellar compared to the rates achieved before the recession, there seems to be a consensus among analysts and policymakers that any growth rate above 2% may actually be overshooting the economy’s potential, given lingering adjustments from the 2007-08 financial crisis.
  • A new policy initiative from the Obama administration recruits some of the nation’s largest employers to address the problem of long-term unemployment. According to the latest data from the Bureau of Labor Statistics, nearly 40% of unemployed workers are in the long-term category—those looking for a job for 27 weeks or longer. The long-term unemployed face a compounding series of economic hardships, which may be destructive to the productive capacity of the overall economy. Studies suggest that employers tend to be biased against the long-term unemployed, passing over their resumes, regardless of skills or experience, for workers who have held a job more recently. The plight may be especially difficult for older unemployed workers: The Guardian this week takes a closer look programs to assist those aged 55 and up.
  • Finally, it’s that time of the year when people all over the United States, from all different backgrounds, return to a common ritual passed down through generations. That’s right, it’s Super Bowl weekend. What does it mean for the economy? While the economic boon to the host city—or region, in the case of New York/New Jersey this year—is debatable, there are some hard data on the implications for the financial markets: According to the Super Bowl Indicator, U.S. equity markets will have an up year if the winner is an original NFL team or an NFC team. If or an AFC team or a former AFL team wins, equities will suffer. What does that mean for this year’s contest? Bet on the Seattle Seahawks, an NFC team, if you want stocks to rise. However, the last two Super Bowl victories for the Denver Broncos, the AFC team, in 1997 and 1998, corresponded to gains in the S&P 500 of 33% and 29% respectively. Place your bets!

State of the Union – A Word Search

Next year, try spicing up the State of the Union like we did at my house, with State of the Union BINGO!!!

SOTU BINGO

It’s simple really, just pick a few themes that you know will run rampant throughout the speech and create a couple of bingo cards. When the President talks about opportunity, America, community, health care, and Iran…BINGO, you hit the payday!

In the name of fairness, you’ll need to avoid the most obvious choices; for instance, the most commonly spoken word in last night’s nearly 7,000 word speech was “the,” uttered 277 times by President Obama. However, there were 197 words spoken more than five times during the Address.

A brief analysis of these words shows that the message was one of jobs, security, and community. There was naturally an over-arching theme of unity and the ongoing reinforcement of the strength of America and Americans.  Those themes are a good bet in any year…

A categorized list of significant words spoken more than five times is provided below.

012914 Search

Source: AIER word count from transcript pulled from CNN.

Marketplace of Ideas

MPI: War on PovertyThe 50th anniversary of President Johnson’s address launching the War on Poverty has prompted a spirited debate this week.  Here are some of the key stories in the news:

  • Has the War on Poverty been a success? Some say we’re winning and some say we’ve lost. The Atlantic says you should forget about the poverty rate altogether—it’s deeply flawed. The official measure of poverty, compiled by the Census Bureau, is based on an estimate of basic food expenditures. Critics point out that this overly simplistic calculation fails to account for changes in households’ consumption bundle since the official poverty measure was developed in the 1960s. It also doesn’t factor in income assistance and other programs to aid the poor. Since 2011, the Census Bureau has published an alternative measure that might be more effective, but the data doesn’t go back far enough to assess the change in poverty over time.
  • A key tactic in Johnson’s War on Poverty was raising the minimum wage. While the purchasing power of minimum wage workers peaked when Johnson was in office, such workers earn less today than they did in the 1960s, adjusted for inflation. Polls show there’s now broad-based support for a hike in the minimum wage. Bruce Rauner, a republican gubernatorial candidate from Illinois, has argued that a hike in the federal minimum wage makes more sense than state-by-state changes. What are the broader implications for the economy? Some worry it will only lead to higher unemployment; the Washington Post takes a closer look at the data.
  • What about workers who can’t find a job? Congress has struggled this week over legislation to extend unemployment insurance benefits for the long-term unemployed. The standard period for jobless benefits is 26 weeks, but the latest report from the Labor Department shows that 37.7% of the unemployed have been out of work for 27 weeks or longer. The same report shows a drop in the unemployment rate to 6.7% from 7.0%, but mostly due to a drop in the labor force participation rate. This suggests that some unemployed workers are so discouraged that they’ve given up looking for a job. One argument against an extension of jobless benefits is that the $6.4 billion necessary to fund it would be better spent on small business investment, to boost job creation. The Economist looks at one controversial proposal to guarantee jobs for everyone.

If you’re curious about what Johnson actually said in his state of the union address 50 years ago—rather than what pundits and politicians are saying about it today—you can read and listen to the entire speech here.

No Change to Economic Outlook from Budget Deal

Bipartisan Budget Act of 2013The budget deal passed last week has been hailed as a “major breakthrough” and a “step in the right direction.” Conservative columnist Charles Krauthammer said that his “heart leapt” at the deal. But the so-called Bipartisan Budget Act of 2013 is mostly receiving praise for its political implications, not its fiscal outcome. In short, it’s better than another government shutdown. But claiming that the budget deal is a success because at least both sides could agree on something is a bit like saying it doesn’t matter where you drive your car—down the road, into a wall, over a cliff—or how far you get, as long as you’re in motion.

We at AIER have toiled over the details of the agreement in attempt to offer you some insights into its economic impact. We’ve come up empty handed. Why? Because while some of the adjustments to expenditure levels for certain programs will undoubtedly make a huge difference to the lives of some people, the impact on the overall economy is peanuts.

The budget deal—formally H.J. Res. 59—provides roughly $48 billion in relief from the mandated cuts of the sequester in 2014 and 2015, evenly divided between defense and non-defense programs. That reduces the shrinkage of the federal budget, with discretionary outlays dropping to $1.012 trillion in fiscal year 2014 instead of $967 billion, about a 4.5% difference. That means the size of the headwind to the economy from reductions in federal government outlays—often referred to as “fiscal drag”—will be slightly less than initially anticipated. But we’re talking about just a few tenths of a percentage point off GDP growth next year—a fraction of the reductions in recent years.

The budget deal sustains the longer-term goals for deficit reduction by extending the sequester cuts for two extra years, into 2022 and 2023. Raise your hand if you think there’s a chance actual federal government expenditures in 2022 and 2023 will bear any resemblance to the plan inked last week. I can’t see you, but I’m guessing your hand isn’t raised.

The real story is that the budget deal does not represent the outcome of a thoughtful debate about the fiscal goals and priorities of the nation. Rather, it represents the bare-minimum necessary for the federal government to keep functioning. Washington may congratulate itself over that fact, in yet another lowering of the bar for fiscal accountability. Meanwhile, the rest of the economy will continue to chug along. Check out our latest Business Cycle Conditions report to see where we think it’s going.

[photo: MorgueFile.com]

Marketplace of Ideas

Before you tune out for the weekend, dive into some of this week’s economic news:

  • Marketplace of IdeasThe New York Times has published a striking map of the uninsured in the U.S, based on census data.  Unsurprisingly—thanks to RomneyCare—Massachusetts has the fewest uninsured residents. The least-insured populations are in the southern and western states. Among the areas with the worst coverage—corresponding to the “hottest” areas on the map—in Buffalo County, South Dakota, 43.8% of the population is uninsured. That’s topped only by the Aleutians East borough in Alaska, where 66.2% of the population is uninsured. What do these two areas have in common? In the Aleutians East, 64% of the population is of Native American or Asian descent. In Buffalo County, 82% of the population is Native American. Native Americans are exempt from the personal mandate of the Affordable Care Act.
  • Only 33% of Americans believe their children will have better lives than they do, reports the Financial Times in an article on declining living standards in the industrialized world. While it would be reassuring to assume that the doom and gloom is just hype, even conservative politicians like Marco Rubio admit that their economic ladder-climbing success stories would not be possible these days. Part of the problem, according to the FT, is that the “emergence of a global labour force has helped hold down wages” in the West, and that’s unlikely to change anytime soon. The political consequence of these grim trends? A turn toward populism on both the left and the right.
  • New York City Mayor Michael Bloomberg used his final speech before leaving office to warn that pension and health-care expenses threaten to derail economic prosperity by gobbling up funds that could be more productively used for investment, or to bolster the social safety net. The business mogul has been a darling of Wall Street during his 12 years in office—he received a standing ovation from his audience at the Economic Club of New York—but has borne criticism for being out of touch with the so-called 99%. This is the man who claimed that stays in NYC homeless shelters were up because “improvements” had made them a “much more pleasurable experience” than ever before. After leaving office, Bloomberg plans to proselytize his brand of governance through a consulting group—a kind of “urban SWAT team”—aimed at reshaping cities.  Look out, Detroit!
  • Last but not least, the Fed finally announced a tapering of its asset purchase program, to $75 billion per month from $85 billion. In a valiant effort to interpret the statement accompanying the Fed’s decision, the New Yorker asks, is Chairman Bernanke a genius or a fool? The financial markets have taken the tapering announcement in stride, with stocks up globally and bonds roughly flat. What does it mean for the economy? That depends on whether you think QE had much direct impact on the economy to begin with.

How Do America’s Rich Feel About the Economy?

The state of the U.S. economy often depends on whom you ask. For example, a new piece in the Washington Post says that, according to the nation’s wealthy people, the economy is doing great.

The Post looks at a survey done by the American Affluence Research Center that asks families in the top 10 percent of net worth their opinions on a number of issues. The recent results show that economic sentiment among these families is at their highest levels since 2007.

From the Washington Post:

It shouldn’t be terribly surprising. The stock market is up 24 percent this year. Unemployment among the educated is at very low levels. It stands to reason that the economy looks to be recovering much better if you’re someone with large investment holdings and a high-level job than if you’re scraping by at a lower-wage job and not benefiting from a run-up in asset prices.

Economic sentiment might be lower among the 46 million Americans who, according to a piece in the Atlantic, lived below the poverty line in 2012.

That number, which represents 15 percent of the country, might seem insurmountable, but, according to the piece, the fix for poverty in America could be as easy as giving everyone in the country a $3,000 bonus.

From the Atlantic:

In 2012, those 46.5 million impoverished Americans were, collectively, $175 billion dollars below the poverty line. That figure is equivalent to 1.08 percent of the country’s GDP, one-quarter of the country’s $700 billion military budget, and exactly what we spend on Social Security disability benefits. Finding an optimal way to get $175 billion to these 46.5 million people is all that stands in the way of a country with an official poverty rate of zero.

Using the dataset from the latest Census poverty report, I determined that if we cut a $2,920 check to every single American—adults, children, and retirees—we could cut official poverty in half. 

Of course, there is a caveat to this plan: in order to fund the $3,000 payday for the impoverished, the Atlantic piece suggests increasing taxes the country’s wealthiest citizens, which might knock their economic outlook down a peg.

Read the Washington Post story here. 

Read the Atlantic story here.

An Unreliable Unemployment Rate?

An economics report from the Wall Street Journal suggests that the Fed might not take action on its bond-buying programs this October because of some unusual statistics tied to the country’s unemployment rate.

The piece explains that the Fed has often used the unemployment rate as a barometer of what to do with bond-buying programs and interest rates, but slow growth and a decline in people in the workforce are causing the organization to hold off on its bond decision.

From the Wall Street Journal:

“The unemployment rate is behaving in peculiar ways. It is coming down as people leave the labor force and exit the tallies of those seeking employment. In normal times, the labor force grows as the population grows, and employment must grow in excess of that labor force growth in order to reduce the unemployment rate. Now, because the labor force isn’t growing much, even small employment gains are bringing down the unemployment rate, even though millions of Americans remain parked on the sidelines.”

In other words, the unemployment numbers might not be as a strong an indicator of what the Fed should do about bonds as it has been in the past. This “disconnect makes it very hard to for them to send clear signals or make decisions with conviction.”

Read the full story here.

How to Fix Healthcare.gov

In light of the launch of Healthcare.gov and its ongoing technical problems, Lydia DePillis thinks it might be time for the government to reconsider how it handles its tech projects.

Her article for the Washington Post looks at ways the government could adjust its technical strategy to get better results from projects like healthcare.gov in the future, including considering proposals from companies that don’t have governmental experience and making the software more open to the tech development community.

Still, DePillis thinks the long-term fix is a fundamental change in how the government goes about planning its projects.

From the Wonkblog on WashingtonPost.com:

The software development version … is what’s known as the “waterfall” model, where bidders describe what they’re going to do, and then proceed to design and construct it — with testing all the way at the end. A big problem with Healthcare.gov was that the team didn’t have time to run many tests before the Oct. 1 cutoff date, which meant nobody knew quite what would happen when it went live. 

“That style of development is something that the government continues to latch onto, because it seems to be easy to understand, easier to procure for. But it generates a tremendous amount of risk,” Larry Fitzpatrick, IT director for the Financial Industry Regulatory Authority says. 

She goes on to say that a different developmental model, something like Agile, which has less “static stages” and emphasizes constant testing and reevaluation, might lead to more functional products from the government. The problem with this, she says, is that government officials would have to get used to “not knowing exactly what it will look like.”

Check out her full story here.

The Marketplace of Ideas

Here’s what’s going on in the online world of economics.

  • babiesRichard V. Reeves and Kimberly Howard have written a paper on the “Parenting Gap“–the idea that the quality of a child’s parenting effects social mobility.  They found that, across the board, the children of stronger parents have more success, from pre-school through adulthood.  So what makes a strong parent?  Emotional support, quality time, and conversation are a few of the illusive qualities of strong parenting.  Read the full report here. [Brookings]
  • Emmanuel Saez has updated his paper “Striking it Richer: The Evolution of Top Incomes in the United States” with preliminary 2012 data.  [UC Berkley]
  • If you haven’t yet jumped on the smartphone bandwagon, you might be be smarter than your outdated phone: The Pew Research Center has found a 16% decline in the average cost of a smartphone over the past two years.  According to the report, much of this steady and marked decline comes from the increase of smartphones being sold and used in emerging markets.  So while “The devices tend to be quite prevalent at the upper end of the income distribution,” their prevalence amongst all age groups and income levels will likely start to become more ubiquitous.  [Pew]
  • Where do we stand with the nominations for a new Fed Chairman?  This week, a group of more than 300 economists, including such big names as Joseph E. Stiglitz and Alan S. Blinder, signed a letter to President Obama urging the appointment of Janet Yellen.  Read the Wall Street Journal’s reaction here.  [Institute for Women’s Policy Research]
  • There is a lot of talk about the correlation between majors and future earnings, and a lot of talk about women and their career choices.  Anthony Carnevale, an economist at Georgetown University, is studying the cross section: women in lucrative majors who go into non-lucrative fields [NPR]

Three Central Banking Takeaways from Amar Bhidé

Quantitative easing hasn’t done much to improve wealth or confidence in the U.S., according to an op-ed in the Wall Street Journal this week. Amar Bhidé, a professor at Tufts University’s Fletcher School, and Columbia University’s Edmund Phelps argue that if the Federal Reserve wants to improve the economy, it should wind down the stimulus program and concentrate on bank regulation.

I talked to Bhidé about three big ideas that led him to come down against quantitative easing and for vigilant bank supervision, and what he thinks central banking can and can’t accomplish.


1. The economy is so complex that even the best statistical models can’t accurately predict the effects of monetary and fiscal policy.

“I’m completely agnostic about what monetary policy or fiscal policy does,” Bhidé says. “I don’t think there is good evidence that it does what it’s supposed to do, but then again, the absence of evidence is not evidence of absence.”

“What we do know is that the world is way more complex and diverse than a statistical process can predict. People respond to different economic conditions in unpredictable ways–just because consumption went up by a certain percent last time doesn’t mean the same thing will happen again.”

2. In the absence of solid scientific evidence, we should rely on other criteria when determining monetary policy.

“One criterion can be, for example, has this action been done repeatedly in the past without causing great harm?” Bhidé says. “If it has, you can give the measure a pass.”

“Other criteria are particularly important in matters of public interest. If one group of people may be hurt in the short run by adopting a measure, was there a process by which their voices and the voices of their representatives were heard?

For example, with quantitative easing, the Fed may say that if they hadn’t adopted the stimulus program things could have been much worse. That may be true; it can’t be proven or unproven. But, on the face of the issue, the Fed has engaged in a perverse form of redistribution. It’s driven up stock prices, which largely benefits the wealthiest 1 percent who own almost half the country’s stocks. Meanwhile, they deprived Grandma and Grandpa of interest on their CDs. So they have impoverished one large group of people who are already living on the edge to begin with, and enriched another group of people who were already quite wealthy.”

3. Tougher bank examinations would help prevent another financial crisis. But in order for regulators to do their jobs, we need sweeping reform of the banking industry.

“Banks have become unexaminable, because they’re too complicated. So we rely on top-down measures like capital requirements, which turn out to be pretty useless. We need to break up banks to restructure them and make them more examinable. That means not just separating investment and commercial banking, but making sure that banks engage in a relatively simple set of activities.”