By many indicators – despite media portrayals and hand-wringing the past few years – the American economy is strong, and has been for some time. Unemployment is just 4.3%, after reaching a half-century low of 3.4% in early 2023. Prime age labor force participation – looking at those ages 25 to 54 – is at 84.0%, just shy of the record high of 84.6% recorded in January 1999. Real inflation-adjusted Gross Domestic Product in Q2 2024 is nearly 11% higher than its pre-COVID recession high in Q1 2020, a culmination of the fastest recorded economic recovery in US history. And inflation rates are nearly back to the Federal Reserve’s target rate of 2%, with real earnings generally resuming growth over the past two years. Despite the predictions of many – myself included – no recession occured in 2023 (or 2021 and 2022, for that matter).
Yet the soft landing the Fed so eagerly desires – where it can achieve stable prices with low unemployment without triggering a downturn – looks to be at risk of unravelling. It may already be doing so.
The biggest indicator might be the trajectory of the unemployment rate. As mentioned, after reaching a record low of 3.4% in January 2023 and again in April 2023, it has since drifted upward. As of July 2024, it is now 0.9 percentage points higher. From June 2024 to July 2024 alone, it increased by by 0.2 percentage points. Indeed, the pace of increase finally triggered the Sahm rule in July. This rule-of-thumb recession indicator states that, if the three-month average unemployment rate moves above the lowest three-month moving average unemployment rate over the last 12 months by half a percentage point or more, then we are likely in the early stages of a recession. It is noted for its accuracy, having been triggered for every recession since the 1970s.
It is worth noting that, given the strange conditions of the post-COVID economy, that some have called into question the accuracy of the Sahm rule this time around, including by Claudia Sahm herself. The reasons behind the unemployment increase also largely had to do with an influx of workers into the labor force, generally seen as a good thing.
Yet, other indicators are flashing warning signs. While it is just one month’s worth of data, July’s payroll growth itself was unusually weak, at just 114,000. First quarter GDP increased by just 1.4% at an annualized rate, though it rebounded to 2.8% in the second quarter. The four week moving average of initial unemployment claims – seen as a proxy for layoffs – have drifted upwards over the summer. Consumer sentiment fell over the same period, and the yieldcurve – as mentioned in previous posts – remains inverted.
The issue is, if these trends continue, any action the Federal Reserve takes to counter a downturn will likely be too late. Their next policy meeting is in September, but if they decide to cut the federal funds targetrange then, it will take many months to ripple through the economy. In the meantime, as inflation continues to drift downward while nominal interest rates remain elevated, real interest rates – that is, nominal interest rates minus inflation – will further increase. In other words, effective monetary policy will get more restrictive, precisely at the time when it should be going the opposite way.
Many economists – including Claudia Sahm herself – say an emergency rate cut isn’t warranted. I disagree. Action should already have been taken, and any further delay risks exacerbating the situation. It’s in the interest of the United States to maintain an economy utilizing as much of its potential as possible, with employment as full as possible, without triggering inflation. Only time will tell if the current policy course is the one that will achieve this outcome.
The U.S. economy is in a very strange place at the beginning of 2023. To describe its present condition, it’s necessary to go back a few years. In 2020, a lengthy COVID-induced economic depression never materialized as society reopened and both the Federal Reserve and U.S. Federal Government engaged in unprecedented monetary and fiscal policy, respectively. As a result, the recession of 2020 – from February to April – while extremely sharp, was the shortest in American history, and the subsequent recovery the most rapid. By the 1st quarter of 2021, real GDP had already surpassed its Q4 2019 peak, and was 5% larger by Q4 2022. The unemployment rate, which spiked to 14.7% in April 2020 (the highest since the Great Depression), plunged in the following two years. As of January 2023, it stood at just 3.4%, a 53-year low. Another important measure of the health of the labor market – the “prime age” labor force participation rate (of those aged 25 – 54 years old) has almost fully recovered to its pre-pandemic peak.
Real (inflation-adjusted) GDP recovered rapidly following the 2020 recession
The unemployment rate, after reaching a multi-decade high, fell at a record pace from 2020-2022
The labor force participation of “prime age” workers has nearly fully recovered from the 2020 recession
The outstanding success of the economic rebound, however, has been overshadowed by a sudden surge of inflation, which began to materialize in 2021. At its peak, as measured by the Consumer Price Index (CPI), prices rose nearly 9% year-over-year in July 2022, a four-decade high. Though price increases have slowed since then, it remains to be seen whether they will return to the target rate of 2% annually. Stripping out food and energy, which are volatile, the so-called “core” CPI is still showing brisk inflation, with prices rising 5.5% in the year up to January 2023.
Inflation peaked at nearly 9% in 2022, a four-decade high
Less volatile “core” inflation remains hot
That America (and much of the world) is experiencing an inflation surge is, especially in retrospect,unsurprising. Inflation, like many macroeconomic concepts, is complicated, but there are a few culprits that can be identified. The COVID-19 pandemic and the responses to it (e.g. lockdowns) first led to a plunge in both aggregate supply and demand in the economy. Then, a combination of policy responses (expansionary monetary policy by the Federal Reserve and fiscal policy by the Federal Government) and reopening of society led to a surge in demand that quickly outstripped supply, especially as supply chains remained disrupted. Moreover, consumers during the pandemic switched from demanding services to goods, creating bottlenecks. Further fiscal stimulus in 2021, in combination with continued loose policy by the Federal Reserve, added fuel to inflationary pressures. Theoretically, policymakers could have avoided much of the inflationary surge by reducing the amount of stimulus and/or timing it better, especially by pulling back in 2021, though this is much easier said than done (especially in retrospect). Econometric models also were not fully prepared to handle a COVID-19 shock to society.
While this surge of inflation is painful and concerning, it should be put into some perspective. The inflation we are experiencing is not unprecedented in history. America has gone through similar inflation bouts following wartime (the supply and demand impacts of the pandemic can be likened to wartime disruptions). Even outside of wartime, the country experienced inflationary episodes. Notably, the consumer price index rose by 2.9% or more every year between 1968 and 1983 – that is, 15 years – well outlasting the end of the Vietnam War in 1975. So far, less than two years has elapsed in which the CPI has exceeded 2.9% growth. The hope is that the Federal Reserve can slow inflation well before it becomes fully entrenched, as it did from the late 60’s to the early 80’s.
While inflation is an important metric, perhaps more important are real wages – that is, how are wages doing relative to prices? After all, higher inflation means little if wages are keeping pace. By one measure, they haven’t done well up until recently. After briefly spiking during the pandemic, real median weekly earnings for full-time workers tumbled from the middle of 2020 to the middle of 2022 by nearly 9%. However, they have risen since the middle of 2022, and are currently about the same as they were right before the pandemic. Assuming continued declines in inflation and – most importantly – productivity advances that determine real wages in the long-run, it is hopeful that real wages can continue their upward trajectory.
Median real (inflation-adjusted) weekly earnings are back to pre-pandemic levels
Contrary to popular opinion, the data does not suggest we experienced or are currently in a recession. Although real GDP did decline in Q1 and Q2 2022 – which matches the shorthand rule-of-thumb recession definition of two consecutive quarters of negative growth – in most other respects, the economy did not show a broad-based decline in other indicators (e.g. payrolls, consumer spending, higher layoffs, etc.) that is necessary to define one. The National Bureau of Economic Research Business Cycle Dating Committee – the ones who formally declare when recessions (and expansions) begin and end – are unlikely to declare that America was in recession in either 2021 or 2022, as there was no evidence of a broad-based decline across the economy. Unemployment claims – a proxy for layoffs – remain low, payrolls expanded at a brisk clip in 2021 and 2022, and the unemployment rate dropped almost continuously during that period, to pick a few measures.
Despite recent media coverage of layoffs, unemployment claims remain very low
Payroll growth remains strong, with an estimated net gain of 517,000 jobs in January 2023 alone
The unemployment rate is typically a “lagging” indicator, meaning it follows the business cycle with a lag. It remains low, and does not reflect a recession during 2021 or 2022
That said, I believe, based on the aggressive interest rate hiking campaign of the Federal Reserve and genesis of treasury yield curves, that a mild recession in 2023 is likely. I expect broad-based economic contraction in the coming quarters, with the labor market deteriorating in the second half of the year. In some respects, a mild recession is welcome. As with prior bouts of inflation, sometimes they are necessary to wring out excessive inflation. If a recession helps bring inflation back down to the 2% target range while unemployment rises modestly to 4 or 5%, to me that is an “acceptable” tradeoff. 4 or 5% unemployment is still very low. Indeed, our current 3.4% unemployment might be unsustaintably low (below the non-accelerating inflation rate of unemployment, or NAIRU), and may be contributing to inflation, especially if it becomes “wage-push” inflation.
This key interest rate – which the Federal Reserve targets – has been rising rapidly over the past year. Rapid interest rate increases often precede recessions
The so-called “yield curve” – the difference between short and long-term bond yields – almost always turn negative shortly before recessions
The so-called “yield curve” – the difference between short and long-term bond yields – almost always turn negative shortly before recessions
That said, regardless of necessity, recessions are painful, and there is no guarantee this year’s likely downturn will be mild. The main reason I predict it to be mild is due to the labor market’s resilience and strength right now, as well as the cushion of savings consumers have. Full employment and savings can help act as buffers to a downturn.
A Lesson Learned
Economic stimulus is effective, but there can be too much of a good thing.
As a result of the stimulus policies during COVID, not only did we avoid another Great Depression, but we fully recovered (by many measures) in record time. Even if we experience another mild recession in the near term, we are likely much better off by several measures than we would have been in the absence of stimulus. This is important. In prior periods, it often took years to recover following downturns, with enormous negative implications for human welfare. The relative “stickiness” of prices prevents markets from correcting in a timely manner, and public policy can help “nudge” it to correct faster.
That said, our experience with stimulus shows that it is possible to overdo it. We had too much stimulus, and for too long, to the point where we overheated the economy. The scars from prior periods where we did too little likely contributed to policymakers overdoing it this time. In fairness to them, too, inflation proved stubbornly low for four decades, despite prior periods of stimulus. Many likely thought this stubbornness would persist. As noted earlier, too, econometric modeling and forecasting is difficult as it is – and incorporating the impacts of a pandemic environment make it even more difficult. Still, several economists predicted that additional stimulus measures would prove inflationary – and they were correct.
Rather, it’s the convergence of all the above, and so much more, that has me concerned about the health of the republic. Political polarization and income inequality remain at record highs, threatening social cohesion. Public trust in the government and of each other, record lows. How can a country where a global pandemic has become politicized – where we cannot agree upon basic facts – keep it together without serious upheaval? How can we make it through this public health crisis where resistance to the need for continuing mitigation measures – and the need for common sacrifice – has met such serious resistance? That the idea of even putting on face masks and social distancing is somehow a political statement defies the imagination. Compare our response now to what Americans had to endure during World War 2, with food/consumer goods rationing, price controls, mandatory conscription, and war bonds. If this was World War 3 instead of a pandemic, have no doubt – we would be losing, and our national security in peril.
Something needs to change in America to right our listing ship. Granted, gradual progress has been made on multiple fronts. Maybe continued social movements like what we’ve seen over the years will do the trick in the long run. But it may not be enough. Our divisions and stresses run so deep, and they have been clashing and intersecting so severely, it’s hard not to question if the house can still stand without a major, disastrous shift. I’d like to think – and hope – that these turbulent times don’t unravel into something darker. But given the level of anger and distrust, political extremism on both sides, the actions and words of the president, combined with the traumatic blows we have and will continue to experience to our health and economic wellbeing in the months to come – it’s not exactly a recipe for national solidarity.
There is much to celebrate and be grateful for regarding the American experiment. We should do everything in our power to strengthen and preserve it, and safeguard it from disaster.
Just a month ago, I made a post on here predicting that the next recession might occur this year, in the 3rd quarter. At that point, it was mostly a hunch based on observations of different economic indicators, including a precipitous decline in the stock market and an inversion of the yield curve. However, a downturn was far from guaranteed, with most analysts predicting a slowdown instead of outright recession.
Things have deteriorated rapidly since then. The onset of the coronavirus pandemic has led to a series of drastic mitigation measures across the United States and worldwide, aimed at slowing the spread of the virus. Such measures have included border closures, travel bans, forced business closures, stay-at-home orders, and social distancing, among others. The escalating disruptions these measures have and will cause to supply chains and consumer demand have resulted in sharp downward adjustments to previous economic predictions.
It’s hard to understate how grim the forecasts and incoming economic data have become. In its April 9th update on the US Economic Outlook (2020-2020), the University of Michigan’s Research Seminar in Quantitative Economics (RSQE) is projecting a 2nd quarter decline in GDP of 25% – on an annualized basis – by far the most rapid contraction since the Great Depression. The average unemployment rate for the 2nd quarter is expected to shoot up to 14% – again, the highest level since the Great Depression – and remain at 7% through the end of the year. Some predict it will reach even higher, with St. Louis Federal Reserve President James Bullard floating the possibility of unemployment reaching 30% in the 2nd quarter. For comparison, just in February, the U.S. total U3 unemployment rate was just 3.5%.
While a large amount of uncertainty is inherent in these estimates, due to the unpredictable nature of the pandemic and policy responses, it is certain that the economic impacts will end up being extremely severe and long-lasting. In just the past three weeks, around 17 million people have filed unemployment claims. Given approximately 162.9 million in the total labor force, this means that, already, about 10% of the workforce has lost their jobs, bringing the unemployment rate into the double-digits, with surely more damage to come in the coming weeks and months. Furthermore, even if states were to immediately lift their mitigation measures and re-open the economy, there will undoubtedly remain a chilling effect on consumer confidence/spending that will hinder any recovery.
No matter how you measure it, this pandemic has resulted in an economic collapse the likes of which we haven’t seen since the Great Depression. Somewhere at the end of this tunnel, there is light; but given the events of the past several weeks, it might be a long while before anyone can see it.
A sudden, sharp contraction in payrolls was recorded for March 2020.
Unemployment claims have risen to record levels at an unprecedented speed.
An abrupt increase in the U3 unemployment rate (3.5% in February 2020 to 4.4% in March)
Given my lack of expertise regarding the matter and the simple fact that virtually no one can accurately predict recessions, I’ll try to make this post brief. But since everyone has been making predictions – especially with the emergence of the coronavirus scare – I thought it would be fun to try it out for myself.
Also, to further clarify: I’m probably going to be wrong about this. I hope I’m wrong. Even if I were to it right, it would largely be coincidental, as much of this prediction is based on a hunch rather than any significant analysis.
That said, I believe the U.S. will enter a recession in the 3rd quarter of 2020. Here are my reasons why:
1. Coronavirus. Whether or not the virus ends up causing major disruptions in supply chains, there’s no doubt that the fear of it will (and has) caused a deterioration in consumer/business confidence, and likely will lead to a pullback in the appetite for risky investments. We can already see this manifesting in the sharp declines of stock exchanges across the world the past two weeks. Relatedly, the pullback in the stock markets, if they are to continue, could have a “wealth” effect impact, in which consumers feel less wealthy due to the declines in the markets, leading them to pull back on consumer spending. Though consumer sentiment has not yet recorded a deterioration (see chart), economic uncertainty has already increased to levels not seen since the last recession (see chart).
2. A fading of fiscal stimulus. Absent new initiatives by Congress, the Hutchins Center on Fiscal & Monetary Policy predicts that the “fiscal impact” of all U.S. governments will turn negative beginning in the 2nd quarter of 2020 (see chart). Doing so is hardly unprecedented during this expansion. But when coinciding with the other economic setbacks (e.g. increased uncertainty, declining investment, etc.), it could be enough to tip us into recession.
3. The “yield curve” (difference between short term treasury rates and long term treasury rates) first inverted in March 2019 (as measured by the 10-year vs. 3 month treasuries – see chart). This indicates that markets expect interest rates in the long term to be lower than today, suggesting slower economic growth. Indeed, most recessions over the past several decades have been preceded by a yield curve inversion. Given that the average duration between inversion and recessions has been about 1 1/4 years for the past few recessions, it could be interpreted that a downturn would begin around the start of the 3rd quarter this year.
4. Declining domestic business investment. As the chart below illustrates, most economic downturns are usually preceded by declines in domestic business investment. Domestic business investment has already been declining since the 1st quarter of 2019. While it’s true we had another major decline back in 2015, this most recent deterioration has occurred even before the impact of coronavirus has been felt. Since this will likely create put further downward pressure on investment levels, I believe the chances of a downturn are higher.
5. A plateauing of commercial and industrial lending. Similar to the business investment, we had another plateau in commercial/industrial loans in 2017. However, this most recent plateau could turn negative with the onset of coronavirus concerns among lenders that has not yet been reflected in the data.
6. An unusually long expansion. As most economists would tell you, it’s true that expansions don’t just die of old age, and the length of an expansion has almost no relationship to when it will end. That said, given that this is already the longest expansion on record, I think it is likelier to end sooner rather than later, based on historical precedent. Additionally, while it is true expansions have become longer and longer since the 1950s, they tend to do so in gradual increments. Since the preceding longest expansion lasted 10 years, and this one is almost 11 years, I can’t imagine it going for much longer. The chart below shows this visually: it’s unusual for us to have such a long stretch of stable 4-week moving averages of initial unemployment claims. The likelihood that this will end soon is, in my estimation, quite high.
There are obviously millions of other variables I should consider, and I’ll again emphasize I have no expertise in this type of forecasting, and my predictions are based on interpretations that may or may not be accurate. But based on these indicators, I’m betting a downturn will begin in the 3rd quarter of 2020. Let’s see how well I do in the coming quarters.
With today marking the beginning of the 2020s (and with a presidential election just eleven months away), I thought I would voice what I think should be the country’s primary policy priorities for the coming decade.
1. Political reform. Before addressing popular issues like healthcare, climate change, taxes, etc., I think it’s critical that lawmakers first spend political capital to reform our political system. Put simply, the system is broken, and along multiple fronts, impeding our ability to get things done and to properly represent the will of the people.
First, our congressional districts’ voting systems. Most states have a “first past the post” voting system, whereby candidates who gain a plurality (but not necessarily a majority) of votes in a district win the entire district. This means that candidates whom most district residents are opposed to can still win. It also means that people only have an incentive to vote for candidates from major parties, encouraging the development of a two-party oligopoly. This means that Congress is much less representative than it could be, and it limits the options people have when voting. Some reforms that would make districts more representative and proportional would be welcome.
Second, the shape of our congressional districts. In most states, the state legislature determines the boundaries of congressional districts. This gives way to gerrymandering, further leading to a Congress that is not representative of the people. A solution that has already been implemented in some states is the appointment of an independent commission to determine district boundaries.
Third, money in politics. It’s clear that the meteoric rise in the cost of winning a congressional or presidential campaign (as well as the rise in money spent on lobbying) is warping the priorities of our politicians, in favor of the rich and well-connected. This is basically a form of legalized bribery and corruption. This needs to be limited so our political institutions reflect the will of the people. Perhaps something to start would be public funding of campaigns, in which all candidates get an equal amount of money, but only from public coffers.
Fourth, congressional term lengths. I think that, for the House of Representatives in particular, their 2-year terms are too short, forcing them into near constant campaign mode. Lengthening the terms of legislative and executive positions – maybe 4 years for House of Representatives, 5 years for President, and 6 years for Senators – would help to enable greater bipartisanship and greater legislative productivity.
Fifth, the electoral college. The founders originally created the electoral college to ensure the interests of states with small populations weren’t quashed by states with large populations. This setup, they thought, would force presidential contenders to pay attention to the interests and needs of the smaller states. Instead, we see presidential candidates mostly focusing their campaigns on heavily populated “swing states”, which are critical for candidates to win the electoral vote. The electoral college also has the propensity of enabling situations where the loser of the popular vote still wins in the electoral vote. Reform or abolishment of the electoral college is needed to correct for these flaws
2. Fiscal Sustainability. I’ve blogged about this before and while I don’t think it necessarily needs to be the 2nd most important priority, it definitely needs to be a top priority. Without a sustainable federal budget, it will be impossible to address all our other policy priorities in the long run. I also think fiscal sustainability must entail a mixture of revenue increases and spending cuts, which would be most politically acceptable and would arguably be the least burdensome (as it relies less on just one source of deficit reduction).
On the revenue side, there are several options to consider. First and foremost, tax expenditures (e.g. tax exclusion of health insurance, deductions, etc.) should be reduced. Presently, it’s estimated that around $1 trillion in revenue is lost every year via tax expenditures. Other options include equalizing the tax treatment of “earned” and “unearned” income, expanding or eliminating the payroll tax cap on wages, implementing a carbon tax and/or other new taxes, and/or raising rates on existing taxes on income, payroll, etc. (among others).
On the expenditures side: primary focus should be given to reducing the costs of Medicare and Medicaid, which are the biggest budget busters in the coming decades. This can be partially achieved through comprehensive healthcare reform that successfully lowers system-wide unit healthcare costs. Social Security reforms should then come next, which might include progressively reducing benefit growth and means testing. Finally, though the savings won’t be as significant as with “entitlement” reforms, significant savings could be achieved via the defense budget, especially if U.S. military priorities and obligations are scaled back.
3. Anthropogenic climate change. The evidence is overwhelming that not only is the earth warming rapidly, but that human activity is the primary driver of this trend. There is near universal scientific consensus on this. There is also widespread consensus amidst the scientific community that, while this warming will have different impacts on different regions of the world and at different times, the long-term effects are likely to be overwhelmingly negative and destructive. It’s in our specie’s interest to both reduce our contributions to this trend and prepare for the climate change that is already inevitable. While we can disagree on the inherent unpredictability of how damaging climate change will be and what actions might be appropriate to address it, current evidence strongly suggests that the risks of inaction outweigh the risk of action. Given how monumental a shift this will be for our economy and society, policy solutions will have to be comprehensive, diverse, and well thought-out. And they need to happen ASAP.
4. Policies on Basic Human Needs. This one is very broad/general, encompassing things like healthcare, food security, poverty alleviation, etc. But I think this should also be placed at the top the priority list. While the U.S. is the wealthiest country in human history, with a very high general standard of living and level of human development, too many people in this country are still mired in poverty, lack access to decent healthcare/health insurance, are food and home insecure, etc. This includes millions of people who are working full or part-time. I believe from an economic, societal, and moral perspective, it is in our national interest to ensure that all Americans are guaranteed a minimum standard of living, based upon the basic pillars of human need. I believe that, designed properly, we can create a “poverty floor” that is both comprehensive, affordable, and all without creating mass disincentives to work or without undermining our economic prosperity. Such a guarantee should not be generous or luxurious; rather, it should be just enough to ensure survival, security, and that basic needs are met. Andrew Yang’s proposals for a Universal Basic Income (UBI) and human-centered capitalism serve as excellent models/starting points for what eventual solutions could entail. Also, it’s worth noting that this area is where addressing our existing long run fiscal sustainability is particularly critical.
5. Investments/reforms in research and human/physical capital. Basic research and human/physical capital are essential elements to productivity, economic growth, and rising living standards. Human capital is largely (though not entirely) determined by the quality of a nation’s education and workforce system(s), while physical capital encompasses things like roads and other forms of infrastructure. Meanwhile, basic research allows for discovery and innovation that also enables productivity gains. I believe our nation needs to placed renewed focus on these elements. We need a top-notch education system and culture of learning, as well as efficient increases in funding for infrastructure and basic research. These have been driving forces of our economic growth in the past; but over the last several decades, have been neglected, and we’re suffering the consequences today.
These five priority areas are by no means comprehensive, but I believe they should top the list of the current and future administrations of this decade. Address these, and we’ll be closer yet to securing the blessings of liberty envisioned by the nation’s founders.
Since FDR’s New Deal in the 1930s, there has been an arduous ideological civil war over the proper role of government – especially the federal government – in ensuring the basic welfare of American citizens. This varies from complete opposition to any government-provided safety net, to support for moderate conditional assistance, to support for generous, unconditional assistance. Typically, the arguments have centered on who should be responsible for what – either individuals (e.g. personal responsibility),the government, or some combination of both. Meanwhile, as this debate has continued, a significant divergence has emerged between the public’s increased expectations of fundamental economic rights/protections and the piecemeal, halting construction of America’s social safety net over the past century. As a result, much of the safety net is de facto dependent on employers. And while other developed countries do mandate that employers provide for certain elements of economic security, I would argue that America is unique in the extent we rely on them. Examples include:
Employer-sponsored health insurance
Employer-based retirement plans (e.g. 401(k)s)
Medical leave
Overtime pay
Disability insurance
Paying into unemployment insurance
Minimum wage
This is not to say that these commercially-provided “benefits” are generous relative to other developed countries – typically, quite the opposite. But the fact that our public social safety net is relatively stingy in itself – with conditional public medical coverage, social security benefits that cover only a fraction of working years income, etc – puts greater pressure on employers (in addition to individuals) to fill the gap than what employers in other countries might face. For multiple reasons, this is highly problematic:
Crucial employer-provided benefits – especially health insurance and retirement – can effectively “tether” employees to companies.If a company is a bad match for an employee – e.g. incompatible work styles, skills mismatch, lack of passion for the work, etc. – that employee might still decide to stay with the employer, simply because the employer provides critical “benefits” like health insurance and retirement. For all parties involved, this is inefficient and detrimental. Such mismatches can lower productivity growth relative to what it otherwise would be, hurting employers’ bottom lines and economy-wide increases in output and living standards. For employees, this situation can be stressful and limit their ability to pursue a happy, fulfilling career. Understandably, employers might respond that offering such benefits are necessary to attract workers and keep them from leaving. But wouldn’t it be healthier for everyone if employers didn’t feel as much pressure to do this – if they could instead compete more on a wage/salary basis to attract/retain employees?
Such well-intended expectations and requirements can end up being burdensome and unfair, especially for small businesses. It’s easy to see how mandates or expectations that small businesses provide for certain costly “benefits” – whether it be health insurance, overtime, paid time off, sick leave, etc. – could (in some situations) unfairly crush vulnerable business start-ups in a competitive market. In addition to being economically harmful, such situations run counter to the country’s culture of innovation, entrepreneurship, and work-to-succeed attitude.
Basic economic security and human welfare are just too important to leave to businesses to ensure. Private businesses and corporations are, at their core, profit-seeking institutions. There’s nothing inherently wrong with that, and in multiple ways, profit-seeking can be a beneficial activity to society at large. Pursuit of profit can drive innovation and productivity growth, thereby leading to increased living standards – especially in the long run. Profits can also help to match supply with demand (though not in all situations – think externalities), ensuring there are few shortages of goods and services. It’s the miracle of capitalism. At the same time, this strive for profits can place pressure to limit – or eliminate – things that are essential for people to live securely and with their basic needs met (e.g. health insurance, “living wages”, etc.). This is especially true for businesses that adopt a short-term mindset, but even for those with long-term mindsets, changes in economic conditions or their market sector can push them to scale back what they provide for employees (or to not provide in the first place). And I would argue that a lot of these “benefits” are truly crucial for a prosperous society with human security. Health insurance can improve health and save lives, which is good for human well-being and for the productivity of workers. Retirement benefits? Crucial for taking care of people in old age, and for continuing consumer spending that drives our economy. Paid sick leave? Again, crucial for human well-being and worker productivity economy-wide. Why are we relying on employers for such crucial aspects of a society’s safety net?
Both sides of the aisle need to think about this.
I think that liberals and conservatives could both agree that this setup ultimately doesn’t align with their core beliefs or interests. For conservatives, obviously cultural and legal expectations that businesses provide certain “benefits” is considered overly burdensome and unfair to businesses/business owners. For liberals, their belief that people should have fundamental economic rights/welfare protections should make them skeptical of the inherent shakiness of an employer-reliant setup.
It should also make them challenge their existing beliefs. For liberals, they might want to think twice before creating welfare mandates for employers to provide to employees (such as the Affordable Care Act’s employer mandate), given the unintended consequences of such mandates and their effect of cementing an employer-centric safety net. For conservatives, they might want to reconsider their opposition to some forms of strong & universal public safety net programs, as such programs could significantly alleviate some of the burdens that businesses face today. It would be a recognition by both sides that the other has some valid arguments – that sometimes, businesses can be unnecessarily over-regulated, and sometimes, comprehensive public safety net programs are in everyone’s best interest.
Ideological alignment on this argument will by no means end the deep divisions between both sides regarding America’s safety net. But it could eventually help narrow down to solutions that are in the interests of all.
In recent years, a bold new policy option has become a popular item of discussion among progressives and conservatives alike: the Universal Basic Income (UBI for short). While there are many disagreement on what an optimal UBI would like like, it typically entails guaranteeing every citizen of a polity a set amount of guaranteed income, no strings attached. Such payments might be made every month, every year, or some other set interval of time. 2020 Democratic Presidential contender Andrew Yang’s “Freedom Dividend” proposal, for example, entails providing every U.S. citizen over the age of 18 $1,000 per month, or $12,000 per year (his rationale and details of the proposal are outlined in his book, The War on Normal People, which I am currently reading). Progressives are obviously interested in it as a means for poverty alleviation, and typically wish to see it as a supplement to the current welfare state. In contrast, conservatives typically envision the UBI as a more cost-effective replacement for the current welfare state (e.g. elimination of administrative waste).
While I personally have not made up my mind as to whether a UBI would be a good idea in general, I’m tentatively in support of one on a trial basis, depending on the details and how it is implemented. The following is a brief list of the pros and cons of implementing a UBI, as I see it:
Pros
Potential reduction or elimination of extreme poverty and/or poverty, both in income terms and in terms of having basic needs met
Reduction of financial-related stress and possible resultant boost in worker productivity
Ability for employees to choose employment that better matches their skills and preferences, boosting economic efficiency and productivity
Possible increase in educational attainment, as some decide to use UBI to learn new skills
Higher consumer spending among lower and middle-income Americans (as they have a higher marginal propensity to consume), potentially boosting economic growth and employment
Potential reduction in “crimes of desperation” and suicides
Potential for increased societal trust and trust in institutions
Less administrative cost than traditional welfare programs (as the benefit is unconditional)
Cons
Cost, obviously, is a big concern. According to an analysis by the Center on Budget and Policy Priorities, a $10,000/year UBI alone ($2,000/year less than Yang’s Freedom Dividend proposal) could cost up to $3 trillion annually. While there is a lot of uncertainty in these types of estimates, if $3 trillion is an accurate figure, this represents about 3/4ths of the current entire federal budget. Some, like Yang, claim that substituting UBI as a replacement for other welfare programs, in addition to new taxes, spending cuts, and a UBI-induced boost in economic activity will help pay for one. But again, it all depends on the details.
Uncertain impact on labor force participation. This again depends on the details of the UBI, especially the amount, but it’s probably safe to assume that a UBI of any sorts will lead some to reduce or eliminate their labor market participation. However, this could be offset by a few things. With a UBI, since people’s basic needs would be better met, some might join the labor market to pursue their passions and supplement the UBI. Additionally, if there is a boost to economic growth and job opportunities due to the UBI, this might draw more people into the labor market.
Difficulties in defining who should get the benefit. Do we limit this to U.S. citizens? U.S. residents?
Differences in cost of living in different regions of the U.S. means the effective purchasing power of the UBI will vary by region. This could sow discontent.
The taxes required to partially or fully finance a UBI could reach levels that do effect the supply side of the economy in ways that slow economic growth. Furthermore, if such taxes (especially regressive taxes, such as a value added tax) effect lower-income Americans, the benefit they receive from a UBI could be partially or fully offset by the additional tax burden.
I’ll have lots more to say about the matter once I finish The War on Normal People. But defenitely something to consider as we head into 2020.
As the 2020 presidential campaign heats up, the crowded field of Democratic presidential contenders have unveiled a smorgasbord of policy proposals. From Kamala Harris’ basic income plan and Elizabeth Warren’s free college plan to Bernie Sanders’ (I’d argue absurdly generous) Medicare For All proposal, the candidates have been scrambling to top one another on the boldness and comprehensiveness of their policy ideas. This isn’t inherently a bad thing. Many of the issues they’re focusing on are real and need to be addressed by policymakers. Continued proposals and discussion around them can also serve to move the Overton window on what is and what is not acceptable in terms of intervention by the federal government.
However, their policy proposals are almost completely disconnected from our current fiscal situation. Not only do the candidates usually fail to propose concrete measures to pay for their expensive policy schemes, but they also lack plans to address our existing fiscal imbalances.
While I’m certainly open to bold policy that addresses some of our country’s most pressing issues, I’m an outlier in the sense that I think our #1 priority right now, before anything else, should be to put our fiscal trajectory on a sustainable path. Because right now, we’re on a ship that’s slowly sinking.
Our Fiscal Situation is Grim
The United States has been running annual budget deficits (e.g. expenditures exceeding revenues) since 2001, paid for by the accrual of debt through borrowing. After a surge during the financial crisis, these deficits started closing as the economy gradually recovered during the 2010s, reaching a low of just under $500 billion in 2015. However, it has steadily started to creep back up since then, to nearly $800 billion in 2018. Going forward, the Congressional Budget Office expects the budget deficit to clock in at $896 billion (4.2% of GDP) for FY 2019, with deficits permanently topping $1 Trillion starting in FY 2022. As a result of these fiscal shortfalls, public debt as a percentage of GDP is currently at about 78%; it is projected to rise to 92% by 2029 and a whopping 150% by 2049.
This is simply unsustainable. The fact that we are already projected to run a deficit of nearly $1 trillion in Fiscal Year 2019 – more than 4% of GDP – when the economy is at or near full employment is quite distressing, to say the least. The budget deficit should be continuing to shrink as the economic expansion continues, and now is the optimal time to try to balance our books. Instead, the opposite is happening, exacerbating our long-run challenges and arguably giving us much less room to respond to a future economic downturn.
And while it is true the United States is in no imminent danger of a fiscal crisis in the short run, the risks mount as debt to GDP continues to increase in the coming decades. Debt has a curious way of becoming a dangerous feedback loop. As debt is incurred, the government must make new interest payments to service it. Higher spending on interest payments can mean more borrowing, leading to more debt, forming a vicious loop. Annual interest payments are already expected to reach nearly $1 trillion by 2029, nearly triple the amount projected for 2019. Even slight spikes in interest rates could increase these outlays by hundreds of billions more. Eventually, if government debt levels and interest payments are or are expected to increase to unsustainable levels by investors, they could flee the bond market, driving up interest costs further and making a financial crisis a reality. The situation could even become so dire that the government is unable to borrow in bond markets to service existing debt, leading to unprecedented, catastrophic debt defaults.
Some might argue that, because the United States prints its own currency it technically cannot default. However, even if is the case that the U.S. can “print” dollars to finance its deficits and payments, doing so (and thereby expanding the monetary base) runs a serious risk of stoking damaging inflationary pressures – especially when the economy is operating at full capacity.
Ever-higher borrowing through the bond market also means less funds available for private firms to expand and grow. Again, this is most serious when the economy is at full capacity. As entities compete for ever scarcer funds, this can put upward pressure on interest rates and ultimately damage the economy’s capacity to grow.
In short, the risks posed by our current fiscal path are serious and have the potential to seriously undermine our national well-being if it is not addressed soon by policymakers. Given how integral the government’s fiscal health is to allow it to do virtually anything, I think it should be catapulted to #1 on our priority list.
Sustainability first. Expensive new initiatives second.
Much focus by commentators has been on the hypocrisy of the Republican party, who consistently claim the mantle of fiscal responsibility when out of power, then exacerbate deficits when in power (though to be fair, both parties are guilty of this). A prime example of this is when Trump vowed to eliminate the national debt by the end of his term when campaigning; instead, he and a Republican congress have overseen a dramatic increase in the annual deficit as well as the national debt. Much of this has stemmed from their policies, such as the $1.5 trillion (over 10 years) tax reform bill which caused revenues to decline in real dollars (when accounting for inflation) and relative to baseline revenue forecasts (had the cuts not occured). That said, Democrats themselves are quite hypocritical for criticizing the Republicans, then proposing policies that would exponentially exacerbate the situation.
Instead, both parties should be competing to create bold fiscal solutions, to be implemented ASAP. And they should be realistic about what they propose, too, with Democrats acknowledging the need for some spending cuts, while Republicans recognize the need for more revenue. I encourage policymakers to continue thinking about and discussing innovative solutions to all our national issues – but to prioritize the fiscal issue first.
One of the most underappreciated government-funded services available in any country is its workforce development system. At its core, such a system serves multiple purposes, which include (but are not limited to): rapid re-employment of displaced workers, enabling and providing for the improvement of the stock of human capital, linking individuals to stable employment at higher, self-sufficient wages, matching employer’s demand for workers with supply, and alleviating systemic poverty in the process. As such, it serves to complement the market and its various needs.
To a large extent, there have been many successes in workforce development. Every year in the United States, thousands of workers are trained and re-employed in a comprehensive network that is unique in structure to each state. I myself have been witness to this. For the past year, I’ve worked for an innovative, private workforce development firm called America Works. While my roles within the company have varied significantly, a large proportion of my time has been spent as a de facto case manager, helping to execute Milwaukee’s local implementation of the federally-funded Workforce Development and Opportunity Act (WIOA). From this vantage point, I’ve gained a lot of insight into how the workforce system as a whole functions. As noted, it has much to admire. But it also leaves a lot to be desired.
The following are my observations to fundamental problems within the workforce development system (with a focus on Wisconsin, though the problems are certainly not limited to Wisconsin), as well as possible solutions to each problem. Ultimately, the goal would be to achieve improvements in the measurable outcomes noted in the first paragraph.
Problem 1: A lack of inter-agency communication.In Wisconsin alone, there are hundreds if not thousands of agencies and actors that serve various roles in the workforce system. These include the unemployment insurance agency, workforce development boards, sub-contracting workforce development agencies, training providers, Trade Adjustment Act (TAA) service providers, Wisconsin’s version of TANF (W-2), the Department of Vocational Rehabilitation (DVR), and a myriad of social service agencies and community service organizations that can offer supportive services. Too often, though, these agencies and individuals within them fail to communicate with the others about the services they offer and how to best contact them. This leads to inefficient service provision and oftentimes a failure to provide timely services to address the needs and barriers of the workforce. Additionally, a lack of communication limits the marketing of services from one part of the system to individuals in another part of the system. Solutions:First, local workforce development boards should publish and distribute updated local workforce development service information. This can take the form of listing local services and the agencies or actors that provide them (as well as their contact information) on their website, as well as publishing brochures that contain this information and distribute them to local actors. Second, actors in the local system should take the initiative to have regular communication with the other actors, and, at the very least, establish a point-of-contact.
Problem 2:Too many unfunded mandates from the top-down.In the workforce development system, like in other government capacities, rules and funding flow from the top-down: federal to state to local. The problem with this central planning structure is that rules and regulations at the very top are complemented by further rules and mandates as you go down the pipeline. The result is a myriad of service mandates and reporting requirements that can make effective service provision challenging at the lowest levels of operation. There are countless examples. For example, Wisconsin’s Department of Workforce Development (DWD) requires that clients have up-to-date assessments, which it defines as assessments taken with the past 6 months. This means that, for training or supportive services, clients would have to undergo 3-4 hours of additional testing if their assessments were 6 months 1 day out of date. This has been a consistent dilemma for service providers. Solutions:at higher levels of government, regulations and unfunded mandates should be limited, and regulations should be informed by reoccurring interviews with actors at the lowest level. Additionally, an easy, streamlined feedback system that flows from the bottom up, along with specialized, independent regulatory review divisions within each agency with the power to make changes could be of use.
Problem 3: Caseloads are too large for effective service provision.While not every program in the workforce system has “caseloads”, and while each program is different, the general observation by myself and others is that caseloads per case worker remain much too large for the latter to be effective. At least in WIOA, a caseworker is supposed to be the main point of contact for a client, helping to direct the client to resources and continually work with them to steer them into self-sufficient employment. This requires regular follow-up in order to be effective, especially for vulnerable clients, something which is difficult if not impossible with larger case loads. Solutions:more program resources should be used to hire new case managers to bring down average caseloads, and more funding at the federal and state levels should be appropriated specifically for this purpose. Managers at sub-contracting agencies should also be continually monitoring the caseloads of each worker, and re-distributing cases between workers as needed.
Problem 4: Overemphasis on work requirements, work search, and rapid work placement, regardless of appropriateness or fit.For the past few decades, American social assistance and workforce development programs have increasingly emphasized work requirements and rapid attachment to work, with many mandating such. While rapid attachment to work can absolutely be a good thing, and is the ultimate goal, these mandates have had unintended consequences. For example, take the unemployment insurance system. Here, workers are required to submit at least 4 work searches per week as a condition of receiving assistance, and are forbidden from denying any employment offer, regardless of the fit for the candidate. This is very inefficient economically. Another example is with the WIOA program. With a constant emphasis on employment, if an individual were to be placed in any sort of short-term employment where they are deemed economically “self sufficient” (using a state-designed “self sufficiency calculator”), they are automatically denied assistance for training, even if this employment is for temporary income-maintenance, doesn’t really pay enough for actual “self-sufficiency”, and isn’t the ultimate employment objective of the participant. This potentially prevents them from learning new skills in an in-demand sector, and short-changes the effectiveness of the program. Solutions:while solutions would vary based on the program, overall I think the “work at any cost” mentality needs a reboot. While employment is indeed oftentimes the best provider of human capital, and while rapid employment placement can boost long-term earnings prospects, it isn’t always the most effective up-front solution. Flexibility is needed.
Problem 5: Too many actors that impede progress of service provision.This problem seems to be especially acute in Wisconsin, where, in order for a service to be provided, approvals have to go through multiple layers and agencies, taking far too much time (and, oftentimes, to the point that the problem to be solved becomes irrelevant). For example, in WIOA, in order for funding for a training to be provided, a voucher would have to be created by a subcontracting agency, submitted to the local Workforce Development Board, within which it could go through multiple departments for internal review. Similarly, in order for an exited case to be re-added to a case load, a request would have to be made by the subcontracting agency to the local workforce development board, who would then have to approve it at the local level, who would then have to forward the request to the state, which would then have to ultimately approve the request and manually add it back on the statewide case management system. It’s insanity. Solutions:First, I think there should be fewer layers of agencies; perhaps just the state and local organizations. Second, while I do think states should have general guidelines and performance metrics to hold contractors accountable to, I’m generally in favor of dispensing a set amount of funds to contractors and leaving it up to them to use the funds as they see it to achieve performance metrics (similar to how charter schools operate). Now, I do think there should be random audits and some moderate reporting requirements, to hold organizations accountable. Charter schools have definitely taught us the necessity of this. That said, this structure would give service providers the freedom to innovate to produce better outcomes. With the current system, there are just too many guidelines and requirements to allow much room for innovation.
Problem 6: Sluggish approval process of up-to-date, workforce-relevant training providers.This is perhaps the most frustrating issue I’ve repeatedly encountered as a case manager: the list of “state-approved” training programs in Wisconsin is horrifically out of date, and the process for adding a new training program is a bureaucratic nightmare. In order for a program to be added to this list, the provider has to submit an application to a local workforce development board. Once they approve it, it is then submitted to the state for review and approval. This can take months, if not longer. Worse yet, there is no established process for re-review of older training programs and providers. Solutions:First, if states are to continue using lists for state-approved programs, there needs to be a system of continual review, and staff dedicated to this endeavor. Additionally, the onus should be put on the training providers to regularly renew their applications; and if a set amount of time has passed (say, a few years) without this attempt, they should be automatically dropped from the list. Second, there should be fewer agencies having to review applications, to streamline approval. But perhaps the best solution is related to the solution for Problem 5: let individual service providers independently determine which programs they will fund (using funds provided to them by the state), and hold them accountable for employment results. This would bypass the need for an application and the bureaucracy and delays inherent in the current process, and would likely allow for funding for more up-to-date training.
Problem 7: Outdated technology and continued over-reliance on paper.Presently in Wisconsin’s WIOA program (at least in Milwaukee County), in order for an individual to be approved into the program, they must first fill out a lengthy, paper-based registration packet. After another lengthy process of entering data from the paper packets, copies of the packets must be made, organized in a physical folder, and the original sent via courier to the local workforce development board for manual approval. This can take 5-10 business days, oftentimes longer. This is craziness. Solutions:funds should be allocated to hire IT/programming specialists who can create up-to-date electronic registration applications and case management tools across the workforce development system. Additionally, encourage private providers to invest in their own up-to-date technology and be creative with solutions.
This list of observed problems and potential solutions is certainly not exhaustive, but it does give a broad overview of the main issues facing states and a potential platform for further discussion of solutions. Many if not most of these problems will undoubtedly take years to resolve, if they are resolved at all, largely due to the sheer number of actors and special interests involved. Hopefully, however, the initiative can be taken to revamp the system so as to achieve measurable gains in the vitality of America’s workforce.
Pragmatic Inquirer 