Revamping our Workforce Development System: Recommendations for Improvement

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 ultimately 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.



American Freedom: it’s time to put a ring on it

Well, this is it. Any day now (possibly within just hours of this posting), the Supreme Court will finally determine the constitutional status of gay marriage nationwide; and in the process, will likely end up overturning the few remaining barriers to a new era of positive freedom for the United States. Though being deliberated on by just nine elderly justices, I’m confident their determination will reflect both the overwhelming tide of public opinion and the true meaning of liberty as intended by the Constitution. It is something that is inevitable; it is something that is unprecedented; and simultaneously, at the same time, it is something that is long, long overdue.

To many, this will be a bitter pill to swallow (surprise!) . I know, because at one point, that would’ve been my situation. Social conservatism is a very powerful force in this country. That’s not at all inherently a bad thing (I’d argue much of that sentiment is actually a force for much good), and many well-meaning, good people, people whom I love very much, hold very traditional, socially conservative values.  And they have a right to do so.  But the ideology and core beliefs that they espouse has a tendency (sometimes, but not always) to overrule independent thinking, or the ability to think of different possibilities and to adapt accordingly (although to be fair, that’s generally true for all ideologies).  The value system that structures “traditionalists'” world, in reaction to a non-traditional concept, tells them no, or that it’s wrong, and that no other reality can or ever should exist.  Whether it be for moral or religious or status quo reasons, preservation of “tradition” (as constructed) is key.  Anything else is a threat, and is labeled as wrong and undesirable accordingly.

I deeply understand all of this; again, like I said, I was at that point once.  But I strongly challenge all those who still hold “traditional” views to seriously rethink their positions; if not on every social issue (which is understandable), then at the very least on this issue of gay marriage.  Because the arguments for gay marriage are simply overwhelming on all angles – from a societal, economic, and moral standpoint.  Now, it should go without saying I won’t be able to address anywhere near the full amount of arguments both sides pose (nor do I really want to), and I’m certainly not an expert on anything.  But here are a few brief things that I think people who oppose gay marriage should consider (and yes, full disclosure, my opinion is injected into many of these arguments):

1)  First and foremost, having “unconventional” attractions is simply NOT a choice.  Too many people, too many studies, too many instances in the animal kingdom confirm this.  And I have no idea why someone would EVER choose (given rampant societal discrimination) to have “unconventional” attractions.  It’s a perfectly natural thing that just is.  If this cannot be swallowed, spend some time on it (especially if you want to even begin considering gay marriage pros/cons).  If second-hand sources don’t suit you, then please, go out and meet people who have these “unconventional” attractions (there are many such people – more than you’d think – and whether they identify as LGBTQ or not).  Your perspective will be transformed; perhaps not instantly, but inevitably, it will be.

2) America is (quite simply) built for freedom (including religious) and the pursuit of happiness.  If you object to gay marriage, you can freely say so, refuse to endorse it, say you think it is wrong, etc.  Those are all legitimate beliefs you are entitled to personally have.  But America’s promise is to allow all people to live their lives as they see fit to pursue happiness (as long as they are not harming anyone else).  If you object on religious grounds, that’s fine; but America is not about forcing people (via the government, of all institutions) to be confined to your beliefs, or for you to be forced to follow theirs.  Let’s not deny any group of people their right to pursue happiness; especially those who are not harming others or infringing upon anyone else’s rights.

3) Gay marriage does NOT harm anything, including the institution of marriage.  Quite the contrary; it bestows countless benefits from almost every angle imaginable.  To put it in a rambling, incoherent sort of way: economically, expanded marriage rights increases people’s financial security, decreasing expenditures on social assistance programs. This reduces the budget deficit, resulting in lower-than-status-quo-trajectory debt levels.  Psychologically/economically, expanded marriage rights boosts happiness/self esteem, leading to higher productivity and more economic growth. This allows for more tax revenues/less social expenditures, again resulting in a lower budget deficit and lower-than-status-quo-trajectory debt levels.  Socially, expanded marriage rights helps to save (not destroy) the institution of marriage, which is already crumbling due to 50% + divorce rates among “traditional” marriages.  Socially again, expanded marriage rights helps to reinvigorate the nuclear family (again, crumbling largely due to high divorce rates).  Again from a social standpoint, marriage is not an unchanging institution (it has changed countless times over centuries and millenia).  Thus, the expansion of marriage rights does not constitute an attack on marriage.   Socially/morally, expanded marriage rights allows for continued/easier discussion on the inherent humanity and entitlement to equality of LGBTQ people, providing progress towards further acceptance and integration (among other economic, psychological, social benefits, etc.).  Morally, it also represents a basic expansion of positive freedoms (freedoms to do something, not from something), which, especially in this case , is a very good thing.    And the list can go on and on and on.

Nothing I’m writing here is in any way revolutionary, or is something that hasn’t been said before. Really, all I’m doing is simply adding my voice to the voices of millions of my (far more courageous) fellow millennials in calling for full marriage equality within the United States, and providing a short list of supporting rationales. But I felt like I should at least go on record expressing said support, mere hours/days before a ruling, even if it ultimately does nothing to change the minds of naysayers.  Because right now, fifteen years into the 21st century, it is time for American freedom to start reaching its fullest extent possible – and for us to finally do the right thing, and put a ring on it. Those who have been denied the right to marry whom they love, simply because of who they are, surely deserve nothing less than that.


Not yet, Janet: America’s still not ready for a higher target rate

A common observation of my blog by readers is the fact that I don’t oftentimes take strong positions on the issues I discuss.  At first,  I took these comments with great pride, because being impartial and presenting multiple possibilities to a question is the defining hallmark of the economics profession.  President Harry Truman once remarked: “Give me a one-handed economist! All my economics say, ”On the one hand, on the other…”.  But, as the Truman quote suggests, this is not always a splendid thing.  People want precise answers and opinions; and although I do oftentimes think in ways that incorporates both sides of an argument, I am not without biases of my own.  So to mix it up a bit, I’m going to prominently infuse those biases into the posts I make.

And what a perfect time to do so, because policymakers (particularly of the monetary kind) have some big decisions to make soon.  The context can be painted as the following: the American economy is finally operating close to (or much closer to) its productive capacity.  Official employment is almost “full” (with U3 at 5.5% in May), and wages are finally beginning to rise at a faster clip (nominal wages are up 2.3% year-over-year in May, the fastest since 09′).  But inflation remains very subdued, with year-over-year core PCE and CPI inflation rates still hovering between 1 and 2% (below the Fed’s 2% target).  The Fed, under the direction of chair Janet Yellen, has indicated (currently and historically) that it’s target for the Federal Funds rate (the key rate on overnight bank loans) will be raised once these thresholds are approached.  But there’s a few reasons why I think it needs to wait longer:

1) Historically, inflation hasn’t spiked when unemployment fell below its estimated “NAIRU” rate.  As noted elsewhere on this blog, as the U.S. economy reaches it’s productive capacity (equilibrium), this is likely to push up wages as employers compete more for a scarcer supply of workers. This helps to produce “wage-push” inflation; businesses hike prices to pay for higher wages (at least partially), and workers use their higher wages to push up aggregate demand in an economy already producing at capacity.  These capacity constraints also help to produce the “too much money chasing too few goods” explanation of inflation.  This means that, theoretically, we should see a rise in inflation very soon.

Except we probably won’t.  Why?  Due to historical experience and the readings of several other economic indicators, I don’t think the economy is actually near full capacity yet.  In other words, our estimates of the non-accelerating inflation rate of unemployment (NAIRU) are too high.  The experience of the 1990’s (as elaborated on by Jared Bernstein and Dean Baker) provides support for this view.  Near the end of the decade, unemployment plummeted – from 5.6% in 1995 all the way down to 4% by year 2000.  NAIRU estimates for the year 2000 were consistently higher than the actual unemployment rates achieved; starting at 5.4% in 1994, those estimates actually increased to 5.8% in 1996 before dropping back down to 5.2% by year 2000.  In other words, economists expected inflation to start accelerating once U3 unemployment reached and fell below these rates.  Yet, as the charts below demonstrate, inflation (especially PCE less food & energy) barely budged during the 1990s – and actual unemployment rates were far below NAIRU estimates!  Part of that was no doubt due to the late 90’s productivity spurt, but productivity is still growing at a decent (if not stellar) clip right now, meaning more output can be produced with a given (or less) amount of input.  As more output can be squeezed out of given inputs, there is less of a need to raise prices to maintain profitability.  If now is anything like the late 90’s, productivity growth can absorb wage growth/cost pressures for a while before businesses will have to raise prices to maintain profits.  In other words, unemployment could fall a ways further from its current 5.5% rate before we start to see inflationary pressures, which means that our current NAIRU estimates (around 5-5.5%) are too high.  This would make sense; I feel like, ever since the 1970s hyperinflation episode, policymakers have been overly cautious in making sure that policy tightening begins before inflation gets too high.  Thus the artificially high NAIRU estimates.


Source: “The Unemployment Rate at Full Employment: How Low Can You Go?” by Jared Bernstein and Dean Baker.


Source: “The Unemployment Rate at Full Employment: How Low Can You Go?” by Jared Bernstein and Dean Baker.

Additionally, there are the countless other indicators that suggest the economy is still being underutilized.  The more comprehensive U6 unemployment rate, which, as the BLS describes, measures “…total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force”, still stands at 10.8% in May 2015 (seasonally adjusted).  The employment-to-population ratio has also yet to recover from the recession, standing at 59.4% in May 2015 (down from a cyclical high of 63.4% back in December 2006).

2) It’d be good to have a long period of low unemployment after the disastrous labor market of the past few years.  As everyone (especially recent college graduates) knows, the job market hasn’t been stellar for a while; it’s only just getting back to “normal”.  U3 hit a 3-decade high of 10.0% as recently as late 2009, the U-6 measures were even higher, and worst of all, long-term unemployment as a share of the unemployed hit both a record high and stayed high for a record amount of time (see chart below).  Such high rates of unemployment for such long periods of time undoubtedly have helped destroy millions of household finances over the years while also threatening to create structural unemployment (as skills atrophy and people become less “employable”).  I think, like a yo-yo, such high and extended periods of unemployment should swing the opposite way: exceptionally low unemployment for an exceptionally long period of time.  This will aid households in naturally repairing their finances (which did appear to actually “improve” over the years, but it seems personal bankruptcy and/or exceptionally painful (destructive?) saving were the main reasons).  It will allow workers to practice their skills and boost their self-esteem (which can create a virtuous cycle of higher productivity).  Additionally, it can also help to generate wage pressures so wages can “catch up” the ground they lost (as in, the growth that would have occurred had the economy been operating at full capacity since 2007).  Some might argue that this could threaten profits too much; however, coming at the heels of several years of record profits and high volumes of cash reserves, I think employers would be able to healthy absorb wage hikes for a fairly long period of time before this became an issue.

3) Continued loose policy would help counteract an over-appreciation of the dollar.  The U.S. dollar has gained rapidly against a basket of currencies since last fall (up by a full 21% against the Euro since this time last year).  There are many reasons for its rapid rise – a collapse in oil prices, investor confidence in the strength of the U.S. economy, and – ironically enough – investor expectations of a target rate hike.  The concern is that either this appreciation continues or that its rapid rise has already done too much damage.  Stronger currencies make exports more expensive (by boosting the relative prices of exporters and decreasing their competitiveness) while simultaneously making it relatively cheaper to import.  Though the latter is good for consumers, the combination of lower exports and higher imports wreaks havoc on the trade balance (which, for America, is almost always in deficit), thereby lowering GDP growth.  Arguably one of the biggest forces restraining the dollar from rising much further is a continuation of loose monetary policy.  End it, and the dollar rise alone could stall a still rather mediocre recovery (by historical standards).  Along with the other reasons above, it’d be preferable to continue a low target rate at least until some of the other pressures are alleviated.

4) Even if it did threaten to raise inflation a bit above current targets, this wouldn’t necessarily be a bad thing.  Look, too much inflation is bad.  Everyone knows that rising prices squeeze family budgets and distorts economic decision making (shifting future demand into the present to avoid higher future prices, leading to a negative feedback loop of higher inflation).  It’s literally a hidden (or not-so-hidden) tax that eats up the purchasing power of savings and investments.  But a little bit of inflation is not a bad thing.  Stable, fairly low inflation can actually benefit an economy.  It makes wages less sticky by placing pressure on employers to raise them (so employees can maintain cost-of-living).  By lowering the purchasing power of dollars spent on repaying fixed-amount burdens, it also reduces the real debt of indebted consumers who, after becoming extremely over-leveraged during the 2000s, could still use some relief so they can resume healthy (but moderate) spending.  This reduction in real debt burdens also goes for the federal government (whose $18 trillion tab, while manageable in a $17 trillion economy, could still use some relief).  Inflation a bit above the current target of 2% (say, 3 or 4%) would still be manageable; and in my opinion, is absolutely worth it if low unemployment can be attained.  Now, this does present a credibility problem for the Fed; it’s consistently stated that 2% target figure, and if inflation were to rise higher than that, then it could spook investors and lead to concerns that the Fed will not contain it (and that another Weimar Republic-style meltdown is on its way).  So perhaps the Fed should inform investors of a new, slightly higher target rate, while making it clear that absolutely no higher rates will ever be tolerated.  It might help to remind economic agents that these targets didn’t even exist as recently as 40 years ago, so it’s hardly like they’ve remained consistent.

5) A recession can still be handled by both fiscal and monetary policy, even if rates start out at zero.  So what if the Fed can’t lower nominal rates any further?  They have Q.E. and a general unlimited capacity to purchase securities, emergency lending capabilities, operation twist, forward guidance, etc., etc.  And there are tens of thousands of governments in the United States that theoretically have the capability to engage in expansionary fiscal policy (though the Federal government, with its unique status of having no balanced operating budget requirement, will probably remain the most potent public sector actor).  If you raised rates now and caused a recession, you probably still wouldn’t be able to cut them that far anyway (since they probably won’t reach that high before equilibrium is breached).

6) Savings rates were plummeting anyway…and the boost to equities is (arguably) still good.  Due to a myriad of factors (wage stagnation, cultural shifts, a global savings glut, etc.), Americans no longer save the way they used to.  Indeed, in 2005, the savings rate went negative for the first time since the Great Depression, and in recent years has only climbed back up to around 5%.  Too many trends outside of the Fed’s control will continue to keep downward pressure on savings rates.  And there’s no guarantee that a rise in the effective Fed Funds rate would necessarily translate into higher interest rates for savers (in savings accounts, C.D.’s, etc.)  Additionally, the effect of the Fed continue to purchase securities to maintain a low effective Fed Funds rate is to lower the yield (and boost the price) of bonds/securities, making equities relatively more attractive (for their higher returns).  This has allowed the stock market to soar, bolstering the “wealth effect” for households (prompting them to spend more) and increasing the returns to retirement accounts tied to the equity markets.  And we can’t forget the impact of low rates making long-term borrowing (e.g. for mortgages) easier, translating into higher house prices (and thus greatly boosting the wealth-effect for the middle class).

Overall, then, the argument against raising rates now is clear.  Now granted, the target rate will have to be raised eventually (probably within the next year or so) – these positive effects will not last forever, and there is a risk of overshooting targets and objectives if rates stay low too long.  But it’s time to break from the past policy hyper-conservatism and boldly declare a new approach; today’s challenging economic environment requires nothing less.

The Endurance and Transformation of American Poverty

For the first time in several years, the September 2014 Census Bureau report on the state of poverty and income within the United States contained encouraging news: incomes were up (slightly), and the poverty rate was down (from 15.0% in 2012 to 14.5% in 2013). It appears that, 5 years since the resumption of economic growth following the Great Recession, growth is finally translating into improvements in basic social indicators. With the output gap (between real observed GDP and potential GDP) now down to around 4% (from a peak of just over 7% of GDP), and with U3 unemployment beginning to approach its estimated natural rate of around 4.5-5.5% (it reached 5.9% in September 2014), the relative bargaining power of workers is slowly but surely improving, allowing for upward pressure on wages and income to materialize.  Despite these improvements, however, poverty as defined by the government’s federal poverty rate remains at multi-generational highs, and is likely to remain elevated for several years to come.

Output Gap

Resources are not being used to their full potential in the US economy

Poverty rate

Poverty rate remains at multi-generational highs

US Unemployment rate nearing estimated "natural rate"

US Unemployment rate nearing estimated “natural rate”


This is depressing, but it fails to tell anywhere near the whole story.  First, we must come to terms with the fact that the actual existence of poverty is all relative, dependent on the constructed definition of the observer.  Since there will almost always be disparities in income (assuming the absence of a genuine proletarian revolution), then there will always be a class of peopled who are “in poverty”, even if their real incomes and living standards would historically have qualified them as middle class or higher.  As such, we can never really eliminate “poverty”, in the sense that that definition is relative and always transforming as absolute conditions shift.    Secondly, the poverty statistics we currently use are woefully simplistic.  Our main poverty metric is calculated based upon the food budget of a typical family using thresholds from 1955 – when the share of income dedicated to food was very different than it is today.  Furthermore, the current poverty thresholds and definitions also do not take into account many forms of governmental assistance (food stamps, Medicaid, etc.) in its calculation that would significantly reduce the number of people listed in poverty.  Perhaps most importantly, though, improvements in product quality and the introduction of new goods & services have zero impact on poverty statistics.  This is important – for though the overall discretionary purchasing power of people is being squeezed (as necessities like healthcare, education, etc. rise in cost), many consumer goods & services are not only far more affordable than they used to be but there is now a greater variety of goods with new qualities and capabilities.  Even as overall discretionary purchasing power is stagnating, quality and variety continue to rise, to the benefit of all consumers.  The stats don’t reflect any of this, hinting that the actual poverty rate might be overstated and that American well-being has continued to improve over time.

Of course, this is in no way diminishing the hardships that those labeled at or near poverty experience within this country.  Indeed, we still are not considering all the variables that impact American poverty.  While consumer goods & services become cheaper and better qualities & characteristics are developed, this comes at the cost of the termination of employment in many sectors, such as low-end manufacturing and various low-skill professions.  Theoretically, these workers could be retrained to perform more higher value-added tasks; in reality, the United States lags in post-secondary completion rates and overall educational quality (mostly at the primary level), making such transitions more difficult.  Additionally, the United States is not particularly generous in offering temporary assistance to those who are unemployed due to market forces (consider the example of the Trade Adjustment Assistance program).  Ironically, this skills shortage in the American labor force and the structural unemployment that results makes it more difficult for consumers to purchase these higher-quality lower-priced goods and services, leading to large imbalances and counteracting many of the benefits of these improved and emerging consumer options.

So, to sum up:

1) Poverty will always exist as long as there are disparities in income (desirable, to a point) and it is (like everything) a human construct.  This does not mean it stays the same; rather, it evolves as overall conditions evolve

2) American poverty metrics are far from giving any rational sense of the true state of poverty in America

3) There are indications that poverty is both less and more widespread than is thought, with positive and negative influences counteracting one another

Certainly, lowering the prevalence of absolute “poverty” would be desirable for society, and not just for the obvious benefit of those so labeled as “the impoverished”.  Greater inclusiveness and higher earnings power boosts the overall macro-economy (consumption, productivity, etc.) and helps to promote social cohesiveness.  But first, we have to acknowledge that not only are the current measurements of poverty severely flawed and in desperate need of an update, but we must accept that we will never completely eliminate relative “poverty”.  As long as it is a relative concept that is allowed to vary as conditions change, it will always be said to exist, even if it vastly different from what it was in earlier periods.  The fight against poverty is therefore a continuous process whose end goal is the indefinite improvement in the living standards.  To say we can ever “win” the War on Poverty is, I think, misleading; because to say we can ever win implies that there is a set limit to how much living standards can ever rise.  Once we accept these points, we can proceed to rethink our goals and proceed to make genuine progress in improving American well-being.


The Imperative of Tax Reform in a Distracted World

Taxes. Nobody likes them, nobody wants them, and they’re only considered good when they’re going one direction: down. But they are fundamentally necessary for any society to function. In fact, if levied at moderate rates and the revenues they generate are properly spent, taxes are key for societal prosperity.

In America’s case, taxes are generally somewhat lower, especially at the federal level, compared to other developed countries . This is not to say that Americans don’t pay a significant amount of tax. Being a country with a sizeable tax burden and one that is relatively low tax are not mutually exclusive concepts. Still, at the federal level, marginal income tax rates and top rates are generally lower than those prevailing in Europe, and a Federal sales tax simply does not exist (also unlike Europe). When factoring in state and local taxes, levels are equalized a bit more, but burdens still are generally lower in America.


Americans’ average tax burdens generally lower than peer countries

However, looking at rates and the revenue bite is only a part of the burden story. As is often said, America’s federal tax code is, quite simply, horrendous. In addition to the normal complexities of a progressive system (e.g. different rates for different brackets at various stages of income generation), the tax code is stuffed with various deductions, exemptions, credits, and loopholes that impose a not-so-insignificant burden on all Americans.  In the aggregate, this complexity is in itself a massive tax (or set of taxes). Precious time and real dollars must be spent to navigate and understand the code, resources that could be used for far more productive uses. The real tragedy of all this complexity is that it ultimately benefits no one in the end. The government does not generate revenue from complexity (indeed, it loses revenue from the loopholes and from reduced economic activity). Society as a whole wastes resources that could otherwise generate positive returns to try and minimize their burdens. The result is the potential for slower growth and lower living standards than would have been the case.

In this way, the net economic burden of America’s federal tax code could actually be on par with (or even exceed) the burden experienced in European countries (especially when including state and local codes). It is naturally rather difficult to put a value on this non-revenue burden, though most estimates place it at at least a few hundred billion dollars annually for the country as a whole.

Since personal income taxes represent a sizeable portion of the federal tax code (and its various complexities), many proposed “solutions” to the federal tax code burden (assuming it is labeled as a problem) focus on restructuring the federal income tax. One of the most popular proposals is replacing the current structure with a flat personal income tax.


The Income Tax is the single largest source of Federal Tax Revenue

There are many laudable benefits to a flat tax. For one, it would be much easier for each taxpayer to calculate his or her “effective tax rate”. With a progressive income tax, rates change as income progresses. For (hypothetical) example, each dollar of taxable income within the $1 to $9,999 range would have a rate applied to each dollar, say, 10%. However, dollars within the $10, 000 through $19,999 bracket would have a different rate, say 15%, applied to each dollar. Naturally then, this makes calculating the effective tax rate (the total amount of tax as a percentage of total income) rather difficult. With a flat tax, however, there are no brackets – for all taxable income, the same rate is applied to each dollar. This makes the flat tax rate and effective tax rate essentially equal (assuming no credits, deductions, exemptions, or loopholes). In this way, unlike the current income tax structure, an individual can know with much greater certainty how much of their income will be withheld.  The need to outsource tax liability calculations to a firm is reduced, if not eliminated, freeing up resources and largely destroying a major source of federal lobbying efforts.

Second, in my view, a flat tax conceivably has something for everyone to like. It is simple, transparent, and does not penalize people who generate more income, which is especially important to conservatives . They see it as being neutral and as a means to boost individual productivity, efficiency, savings, and investment. However, a flat tax still makes people with higher income pay more in absolute amounts. The difference is that the proportion of income that goes to taxes is the same for everyone. For a simplistic example, let’s say there are two individuals A and B. Say A has a taxable income of $100 and B has a taxable income of $1000. If a flat rate of 10% is applied, A will pay $10 in tax while B will pay $100. B, being higher income, still pays more than A in taxes. But the proportion payed is the same for both A and B. This seems fair and attractive to both ends of the American political spectrum.

Third, the elimination of brackets and all of the other complexities riddling the current code would likely boost public confidence in the government and would reduce the feeling that a person is being unfairly taxed at arbitrary rates within arbitrary brackets.  This increased confidence might boost tax collection and faith in political institutions, which has been severely lacking in recent years.

Of course, the flat tax has many drawbacks. One of the most important concerns raised by critics of the flat tax is that it lacks the counter-cyclical elements of progressive income taxes.  For example: during a recession, incomes generally fall.  Falling incomes will place individuals in lower top tax brackets (meaning they have to “progress” through less brackets).  This means a lower effective tax rate – in essence, the structure of a progressive tax code means that it provides an effective tax cut during recessions or periods of slow economic activity.  In other words, it acts as an automatic stabilizer.  This is not so for flat taxes – the rate is always the same, regardless of changes in income.  The only route for effective tax cuts in a flat-tax world is via discretionary fiscal policy – actual legislative action – to reduce the applied rate.  This runs into the problems of policy lags – recognition lags, implementation lags, and impact lags.  It takes time for policymakers to identify economic conditions and the need for change, more time to actually make and implement a policy change, and even more time for an implemented change to have an affect – by which point, the policy change may be inappropriate for the macroeconomic environment.  If policymakers ever move towards a flat tax one day, they may have to consider a revamp of federal automatic stabilization systems for smoothing out the business cycle – and if not, the onus of economic stabilization will continue shifting towards monetary policy.

A second and virtually identical concern is the lack of progressiveness of flat taxes.  The US income tax code is currently considered among the most progressive in the developed world.  However, overall progressiveness in America’s redistribution systems is rather low, as many other federal, state, and local taxes are regressive, and “social assistance” programs, regardless of their impact of work incentives, are fairly skimpy by rich country standards.  Make the income tax code flat, and you remove a major source of progressiveness in America’s redistribution systems and would almost certainly increase after-tax income inequality.  Depending on your views regarding redistribution and income inequality, this could be either a good thing or a bad thing.

Regardless of whether a flat tax is pursued or not, it is (quietly) agreed by both the American Left and the American Right that the tax code needs radical simplification.  Right now, though, the imperative of tax reform has been pushed to the side to make way for a focus on ISIS, poverty reduction, immigration, and healthcare issues (to name a few), and ironically, the complexities that tax reform would attempt to solve helps to further ensure that such reform never takes place.  It is overcoming this entrenched policy stagnation that is the great task of our times.

On America’s “Great Stagnation”

This posting will briefly discuss the historically weak growth since the end of the 2007-2009 “Great Recession” (though a greater period of time, reaching into the 2000’s or “aughts” or even further back, can also be included in the definition).  It argues that, though we may have reason to be alarmed at slower long-run economic growth, by many measures living standards have improved at a rapid rate, and will continue to do so into the foreseeable future.

Since the end of the last business cycle trough in June 2009, countless observers have noted – and lamented – the historically anemic growth rate of America’s economy.  In the 19 quarters since the beginning of the recovery, GDP growth has averaged around 2% annually – well below the 4% average for recoveries after 1960, and barely enough to generate the jobs needed to absorb entries into the labor market.  Indeed, in the first quarter of 2014, the economy logged (at a seasonally adjusted annual rate) of  -1%; in other words, it registered an actual contraction, the first quarter since 2011 to do so.  Although the particular severity of Q1’s stagnation  is likely temporary, it nonetheless does well to highlight the unique sluggishness that has characterized this recovery since the beginning.  Also highlighting the recovery’s weakness is the economy’s failure to quickly return to potential output, reflected in the continued existence of a large output gap (see charts 1& 2).

Real vs. Potential



It is true that economic growth remains far from normal – especially considering the depth of the preceding recession, which usually are followed by sharp “bounceback” recoveries (as pent-up consumer & investor demand is unleashed).

However, there are a couple of things to keep in mind:

1) This was not a “normal” recession.  Normally, recessions are sparked by mild shocks in aggregate demand or aggregate supply, oftentimes instigated by a contractionary monetary policy.  This time, however, there was an extreme shock to aggregate demand as a plummet in housing prices pushed down household consumption (the “wealth” effect) and the deterioration in the balance sheets of financial institutions caused a freeze in credit markets.  “Balance-sheet” recessions like these are typically severe, and have long-lasting effects.  Growth tends to be much weaker in decade following financial crises than normal recessions as households and institutions “deleverage” their debts to repair their balance sheets.  Since the United States had not, until now, experienced a true financial crisis since the Great Depression, this sluggish recovery can be considered historically unique.

2) Growth and potential growth have been slowing for decades.  When one looks at real GDP and potential GDP over long periods of time (see chart), it becomes clear that long-term growth has been slowing for decades.  Especially recently, after each subsequent recession the recoveries have been weaker than the one preceding them.  Although it only shows data through 2011, the second chart below clearly demonstrates this pattern.


screen shot 2013-01-30 at 10.48.29 am

3) As the population continues to age and retire, sluggish growth is only to be expected – unless productivity growth accelerates.  An economy essentially grows for two reasons: the population/labor force is increasing and/or labor productivity (ouput/hour or, more generally, the amount of output with a set of given inputs) grows.  The latter is especially important in helping to boost living standards, as more efficient production allows for more income to be distributed and for goods and services to be produced at lower costs.  Historically, especially during the “golden age of capitalism” from the 1940s-1970s, the economy has benefited from both labor force growth and productivity growth.  Beginning in the 70s, however, the 2nd factor – productivity growth – began a to register a marked slowdown, even as the labor force continued to expand (especially with an increase in the participation of women).  The reasons for this slowdown are unclear.  Was US inflation distorting incentives and resource allocation?  Were technological waves delivering less of an impact as earlier technological waves?  And are these changes driven more by changes in the accumulation of capital stock or total factor productivity (TFP)?  Regardless, this slowdown in productivity has continued to the present day, interrupted only by a brief revival in the late 90s and early 2000s (see neat chart below that I made using data from the Bureau of Labor Statistics; as a note, the data represents quarterly % changes at annualized rates, and labor productivity is defined as output/hour).


All of this points to a couple of things.  Comparing this recovery to past ones should be used with a grain of salt, because

a) it follows a historically unique financial crisis, unlike other recoveries, and thus can be expected to be slow in the short-term

b) the growth trajectory has long been slowing, making many recoveries naturally more sluggish than those that preceded them, suggesting that, even without the financial crisis, stagnation could have been expected anyway

While some parts of this decline in long-term growth appear natural (such as a decline in labor force participation due to ageing populations), other parts – such as the productivity element – may or may not be.  This is because productivity growth can arguably be more strongly influenced by deliberate policy/non-policy actions than labor force participation can (at least when considering that most older baby boomers will have to retire at some point soon). Should the public and/or private sectors, for instance, be investing more in public and private capital?  Maybe.  But the urgency of that question depends on how much that sluggishness is translating into a stagnation in actual living standards.

Certainly, there are good arguments that American living standards have shown signs of stagnation as of late (and not just following the 2007-2009 recession).  For instance, as the chart below demonstrates, median household income (the income level of the theoretical household in the exact center of a data set of all household incomes) has registered virtually no net growth since the late 1980s.


Other trends are worrying as well.  Poverty rates as defined by the Census Bureau have made almost no net progress since the 1970s, and the prevalence of health insurance and retirement plans (think defined-benefit pensions) have evaporated (at least until recently).  Combined with a worrying increase in health care costs and tertiary education tuition, and the typical American household has indeed seemingly experienced a “stagnation” for a fairly long period of time.

However, despite all of this negative “evidence”, I personally would still contend that living standards have still registered marvelous improvements, and will continue to do so.  First of all, GDP & productivity growth figures do not account for a crucial aspect of capitalism that is often under-appreciated: a long-run rapid improvement in product quality and capability.  While such figures may capture value-added in the production process, they cannot completely account for improvements in product capability and the additional satisfaction these new capabilities give to consumers.  For example, think about cars.  Economic statistics may reflect the total output of cars, the efficiency of their production, etc, but they oftentimes may completely ignore how much the typical car has changed.  For example, many cars are now equipped with sensory technology that makes driving smoother and more comfortable.  Anti-lock brakes, air conditioning, and even GPS systems, all once reserved for those with the most cash, are now becoming increasingly widespread and standardized with the industry, improving the driving experience of millions of consumers.

Additionally, I think too much emphasis is placed on incomes when it is often ignored how dramatically consumer costs have actually fallen in many industries.  For example, according to, the average price/MB of RAM has decreased from approximately $411 million in 1957 to less than six-thousandths of a dollar in 2013.  This has greatly increased the purchasing power of the typical consumer, and has been replicated in many other sectors of the economy.

While it is true that some very important industries that impact the middle class – namely healthcare and education – have shown rising costs, which is a concern that should be addressed, even here this largely reflects increases in quality.  New (albeit costly) technology and healthcare procedures, for example, have given consumers innovative and state-of-the-art choices.  These technologies and procedures have greatly increased the quality of life of people, something the statistics cannot ever fully reflect.

Overall, while I do think America has entered a “Great Stagnation” (not just in the short-run but over the past couple of decades) in terms of economic growth, I do not think this fact should be assumed to be entirely a bad thing.  Indeed, I think it is somewhat misleading – despite slower growth, many elements of living standards (which I only briefly touched upon) continue to make rapid progress, even if many other components of such standards have stalled (e.g. household income, health insurance coverage, etc.)  While it is certainly no excuse for complacency – we would do well to figure out ways to sustainably boost long-run growth – it is reason to think twice about repeated observations of a supposed “decline” in American affluence and its middle class.  The trends are a bit more complex than that.

Wage Hikes & Labor Strikes: A Winning Macroeconomic Scenario?

While checking the daily news late last week, the first thing to catch my eye was a CNNMoney article reporting that fast-food workers were again striking across the United States for a $15-an-hour minimum wage.  It appears that, while waiting for any forthcoming legislative changes that might never materialize (and probably won’t at the federal level, at least not soon), workers are choosing to walk off their jobs in order to pressure their employers to give them a higher wage. Currently, the Federal Minimum Wage is $7.25 an hour, where it as been for since July 24th, 2009 (although states and localities also set their own minimum wages, so the actual minimum in a given location may vary).  Workers argue that it is a matter of workers’ rights to a “decent” wage, to help them care for their families, etc.  Although I honestly do sympathize with the difficulties many lower-income people in this country face, I am not so sure that attempting to force their employers to raise the rates will ultimately benefit them and the country as a whole (although bargaining is certainly more preferable than one-size-fits all legislative mandates and price floors).

First, the usual classical liberal argument: forcing employers to raise wages could deter them from further hiring (even if worker productivity is sufficient for employers to absorb higher rates with little impact).  Even if fast food chains can technically “afford” to pay current workers more without firing anybody, the added cost of hiring could disincentivize them from doing so (or could even incentivize layoffs).  The workers that remain might benefit, but at the expense of others who are “shut out” (e.g. unemployed).  Macroeconomically, too, the costs could largely cancel out the benefits: any extra consumer demand resulting from workers receiving a higher wage would be offset by less demand from newly unemployed people (or people who otherwise would have found a job).  The effect could  be similar to the theorized outcome of above-equilibrium minimum wage hikes: higher unemployment, slower hiring, and a less flexible labor force (see first chart below).



Second, if wages are bargained “too high”, this could create a dependency scenario where people continue to work in the fast food industry without any incentive to pursue higher value-added careers that require more complex skills, depriving the economy of skilled workers and limiting future potential output.  For living standards to continue rising in the long run, workers must be able to specialize in new and innovative industries, many of which never existed before.  Low wage jobs exist (or, in my opinion, should exist) merely as a stepping stone up the economic ladder; indeed, I think the low wages themselves act as a necessary disincentive from people becoming dependent upon them.

Lastly, as harsh as it sounds (and as The Economist has previously pointed out), many of the low-skilled jobs being performed by fast food workers are probably replaceable via automation and new technology.  I believe the only things holding back big fast food chains from replacing their workers with automation are:

1) a recognition of consumers’ desire for human interaction for a quality fast-food experience

2) a desire to avoid being cast as unsympathetic to the plight of fast food workers, which could hurt the corporate image if mass layoffs are announced

3) the use of some workers as an established way of doing business

What’s a policymaker to do, then?  If we really want to help workers, I think we should be aggressively training them to perform emerging higher value-added jobs (computer engineering, programming, supply-chain management, etc).  The problem is, student loans provided by the private sector are often too costly/unobtainable for low-skilled workers (as there is much more risk involved).  At the same time, having the government (or state governments) further subsidize student loans for post-secondary education might further inflate college tuition unless new measures are enacted to ensure college competitiveness to hold costs down.  The government could fund alternative forms of education (job training like apprenticeships), which are unfortunately still quite scarce in the United States.  However, as the financial crisis and countless other crises have demonstrated,  it must be ensured that beneficiaries have some skin in the game for the programs to succeed.  It must also be recognized that even with such programs, not everyone can become a high-skilled worker.  Does this mean we will have a permanent class of unemployed or underemployed people?  Maybe, though I tend to be rather optimistic: historically, the economy has tended to create unforeseen opportunities for everyone, though the transitions are often rough.

Whatever the many governments within the United States decide to do policy-wise, the question of what corporations should do in the face of striking workers and demands for wage increases must be addressed soon.  Already, several McDonalds workers have been arrested this week after protesting for a $15-an-hour wage.  Further strikes and arrests could be economically disruptive at a time of historically weak economic growth.  The question is, will companies cave in to worker demands, or continue to hold their own?  The answer could end up reshaping the norms and trends of American wages for years to come.



State of the Union Reactions, Part 2

I was talking last time (Part 1) about my immediate reactions to the State of the Union Address, particularly from a political lense.  Now I’d like to focus on the major problems the President wishes to tackle and the strength of his domestic policy recommendations, in order as they come up in the address (though, because of the length of the address, I won’t be hitting every point).

Obama is right to place heavy emphasis on equality of opportunity.  Unlike the concept of income inequality, an opportunity agenda is something that has broad support across the political spectrum and is a shared value nation-wide.  One of his best recommendations is an overhaul of the tax code, whose loopholes cause precious time and resources to be diverted away from productive activities as individuals and companies seek to minimize their burdens.  Running at an estimated cost of at least $250 billion/year in lost economic output and at least $1 trillion/year in lost revenues, the tax code is an abomination.  This lost output translates into lost job opportunities and slower job creation.  If the President fails to reform it (e.g. by cutting loopholes and lowering marginal rates), it will assume the title of Obamination.  His proposal to use some of the savings to help rebuild the nation’s infrastructure is also not a bad proposition, as the American Society of Civil Engineer’s 2013 Infrastructure Report Card estimates that America would need to allocate an extra $1.6 Trillion just to upgrade our infrastructure to a state of “good repair”.  If we continue to fail to maintain the nation’s physical capital, our competitiveness will deteriorate and the sluggishness in productivity growth that has been the norm since the 70’s will drag on.  Additionally, his idea of further connecting businesses and universities via regional hubs is also laudable.  Universities are a critical source of research and discovery; connecting them with businesses can help transform those ideas and discoveries into useful, productivity-enhancing goods and services.  All of these ideas will bolster American opportunity.

From there, his message starts to deteriorate a bit.  He mentions that his administration has made more loans to small businesses than any other, and wants to do still more.  Is this really a good thing?  State-directed lending (à la China) has had mixed results both in the past and present.  Although sometimes successful, loans tend to be politically driven and may not exhibit much, if any, return on investment.  As such, they tend to distort the market and allocate resources inefficiently, propping up businesses, ideas, and methods that aren’t economically viable in the long-run.

The address then turns back to embracing the market with his sound advocation of patent-reform and the ongoing natural gas/fracking boom.  Indeed, both are important issues; litigation has gotten out of control in many parts of the country, adding needless transactions burdens on thousands of businesses; a sounder process that reduces frivolous litigation would be welcome.  Streamlining the permitting process and reducing red tape for natural gas is also a long-needed reform; it’s good that the administration is finally realizing that fossil fuels still hold massive potential in both creating jobs and lowering American energy costs (which have dramatically increased our competitiveness relative to other developed nations, such as those in Europe).  At the same time, his mentioning of reducing fossil fuel subsidies is good as it produces problems similar to the problems small business loans produce.  Republicans would be smart to firmly stand with the President on this issue and work to get rid of the subsidies once and for all.  Corporate welfare almost never works – we have far better uses for our money.

After talking about the usual climate change mantra, he then shifts to immigration.  Personally, my views contain a mix of both Republican and Democratic thinking.  I agree with the Republicans that “blanket amnesty” would have some serious harmful effects on the country.  Specifically, I think granting illegal immigrants citizenship status who broke the law without penalty would undermine the rule of law, something that has already been undermined during this administration (think federal drug enforcement).  Not only that, it isn’t really fair to those who took the time and effort to come here illegally.  At the same time, Democrats are right in that deporting millions of illegal immigrants isn’t practical (or smart policy) either.  Not only is it extremely costly in fiscal terms, but it is damaging economically.  Like it or not, immigrants add to our GDP, lower costs for businesses and allow other citizens to specialize in higher value-added jobs.  Deporting them would raise costs, disrupt economic activity and ultimately slow growth.  Additionally, many illegal immigrants now have children – the so-called “Dreamers” – who came to this country through no fault of their own.  Deporting them or, worse, splitting up families via deportation is emotionally traumatizing and morally questionable.  As such, I think the best solution is to grant them citizenship status only after a) thorough background checks have been conducted b) high penalties (for breaking the law) have been applied, including perhaps putting them at the end of the line behind other immigrants that are attempting to get naturalized status.  Also good would be to streamline the naturalization system in a way that maintains our national security.  The President didn’t lay out the terms of his desired reform package in his address, though I’m sure that whatever he supports will contain lots of needed naturalization and far too little penalization.

The President then moves on to the importance of education, especially pre-K education.  It is true that early childhood education can improve cognitive development and boost achievement in a child’s academic career (and even later on in life), and is something the country needs to consider to bolster its human capital and even total factor productivity (the level of efficiency in turning capital and labor into economic output).  However, his advocation of “invest(ing) in new partnerships with states and communities across the country” to boost pre-K education should be approached with caution.  I believe that states and localities know best how to create competitive, high-quality educational programs.  Getting the federal government involved, even if it is “just” via funding, might not be a good idea.  Federal involvement can hinder local innovation and can make localities far too reliant on federal aid (something that can make states puppets of whatever the federal government wants – think Medicaid).  Increasing federal involvement since the 1970s, especially since the creation of the Department of Education by the Carter Administration hasn’t noticeably boosted educational access or progress; indeed, since the 1970s, progress on indicators ranging from reading and math proficiency to graduation rates have stagnated.  Let the states and localities do it on their own; no federal involvement is necessary.

Obama’s policy proposals then turn outright populist with his insistence that Congress raise the minimum wage, and lended support to Senator Tom Harkin and Representative George Miller’s proposal to raise the federal minimum from $7.25/hour to $10.10/hour.  On net, I think this is a very bad idea.  Let’s start with the usual neoclassical argument: assuming that the current minimum wage right now is at the “equilibrium” wage (which likely is not true), a raise in the price floor would lower business demand for labor while simultaneously increasing the supply of people willing to work.  This creates a labor surplus that would translate into unemployment.  Indeed, a Congressional Budget Office estimate of the proposal’s effect on employment projected that enacting the Harkin/Miller bill would reduce employment on net, with its central estimate at about a 500,000 decrease in employed workers.  Then we hear the counterargument by left-leaning economists, such as those at the Economic Policy Institute.  They argue that an increase in the minimum wage could actually increase economic growth and job creation, counteracting any job losses.  This would be due to the “multiplier” effect of raising the wage of millions of low-income citizens, whose marginal propensity to consume (according to Keynesian theory and many studies) is high.  In other words, the newfound income these people would have would be spent almost immediately, increasing aggregate demand and generating economic activity.  That is a possibility I suppose. However, we must remember that the equilibrium wage is vastly different across the nation – different states have different price levels and levels of competitiveness; for some, raising the minimum wage could theoretically increase job creation; in others, however, raising the minimum would place it far above the current equilibrium, increasing unemployment.  As The Economist has noted, places like Puerto Rico are already suffering from high labor costs due to the current minimum wage, and economists in general have long recognized the high minimum wages of many European countries as contributing to their high long-term unemployment rates.  In places like these, the costs of further increases would far outweigh the economic “benefits”.  Additionally (as The Economist also mentioned), let’s face it: many of the jobs minimum wage workers currently perform could easily and efficiently be done by technology and automation.  I believe that the only reason many of these jobs still exist is due to cultural norms, which have a tendency to get in the way of rational economic thinking.  Raising the minimum wage could accelerate the shift towards these technologies substituting for low & medium-skilled workers, hurting them in the short term.  No matter what, the minimum wage is a command-and-control solution to tackling the problem of poverty and low-wage work that will cause more harm than good.  Other ideas (such as an increase in the earned income tax credit that the President mentioned) that reward workers without distorting the market and disincentivizing them from working (or employers from hiring) are needed.  Additionally, wages are partially a result of overall cultural norms – change the norms, and perhaps we can change the wage. 

The last big thing I wanted to address from Obama’s speech is a commendable proposal, the MyRA.  Partially due to record-low interest rates, savings rates for Americans are at an all-time low.  This is very worrying.  Savings are crucial for a good retirement (which Social Security was originally meant to compliment, not substitute) and for consumption smoothing (look up the Modgliani life cycle hypothesis).   A lack of them can put further liabilities and pressures on entitlements.  Additionally, savings help the economy to grow by boosting available financial capital for investment.  Without them, long-term economic growth is put into jeopardy.  Helping workers to put away reliable savings, especially at a time when defined-benefit pensions are dissapearing in favor of less stable 401Ks is potentially a good idea for governmental involvement.  My only caveat: should it be federal?

Overall, the speech was good, with a mixture of good and bad proposals.  The nation now needs to prioritize and, when that is done, begin to have thorough debates on these critical issues.  Forget midterms; this is among the administration’s last good chances to finally leave a positive mark on American history.