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.

1024px-HRC_marriage_equality_sign.svg

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:

Source: “The Unemployment Rate at Full Employment: How Low Can You Go?” by Jared Bernstein and Dean Baker. http://economix.blogs.nytimes.com/2013/11/20/the-unemployment-rate-at-full-employment-how-low-can-you-go/?_r=1

Source:

Source: “The Unemployment Rate at Full Employment: How Low Can You Go?” by Jared Bernstein and Dean Baker. http://economix.blogs.nytimes.com/2013/11/20/the-unemployment-rate-at-full-employment-how-low-can-you-go/?_r=1

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.

Why Republicans Should Embrace Comprehensive Immigration Reform

The escalating child migrant crisis has once again brought our ailing immigration system back into the mainstream spotlight.  As usual, both sides revert back to their usual arguments.  Republicans take the migrant crisis as being a result of loose borders and lax executive enforcement, and many call for more deportation of both the child migrants and all illegal aliens within the United States.  In contrast, Democrats generally argue for making it easier and faster to become a citizen and to implement gradual amnesty. Though both sides have legitimate concerns and arguments, I (surprisingly) mostly side with Democrats on this issue, and I strongly believe that Republicans should reconsider their stance on immigration reform.  Here’s why:

  1. We need more immigrants, legal or illegal, and badly.  Contrary to the beliefs of many, virtually all types of immigrants – legal or illegal, skilled or unskilled, etc. – benefit the country economically (though legal immigrants are, of course, preferable to illegal immigrants).  Skilled immigrants make up a large proportion of  innovative business start-ups, while low-skilled immigrants lower prices for consumers & employers and take jobs that natives are less inclined to perform.  All groups add to national GDP, and (unlike in many European countries), they usually contribute more to overall tax revenues than they consume via social programs, helping to balance budgets at the federal, state, and local levels.  As such, there is a strong economic argument to expanding legal immigration and making legal naturalization avenues more efficient.  Macro-economically, more legal immigrants could serve as both a short and long-term economic stimulant to the moribound US economy, adding to short and long-term supply and demand.  Due to the retirement of the baby boomers, the US labor force will continue to contract in the coming decades, producing labor shortages that an influx of immigrants could help fill (and freeing up natives to perform other jobs, thus boosting job creation).  Additionally (and largely due to the aforementioned retirement of the baby boomers), America faces long-run fiscal challenges that more legal immigrants (with their contribution to higher GDP and higher tax revenues) could help to alleviate.  Considering that Republicans are broadly regarded as the “party of business” and of fiscal conservatism, Republicans should thus be embracing legal immigration.  Instead, though they pay lip service to legal immigration, their laser-like focus on illegal immigration and accelerating enforcement measures overshadows their support for legal immigration.  Ironically, an increasing of legal immigration via immigration reform would help to solve illegal immigration and the presence of large numbers of undocumented workers.
  2. Continued deportation of unauthorized immigrants is impractical and costly.  Currently, there are over 11 million unauthorized immigrants residing within the United States.  Many Republicans argue that deportation should be ramped up to deal with them.  I disagree.  First of all, despite the perception among many, deportation rates have stabilized at relatively high levels in recent years – rates have not fallen off a cliff, so it’s not like this strategy isn’t being actively pursued.  Second, can you imagine trying to deport all 11 million + immigrants from the US?  Deportation already costs the government quite a bit, with the Department of Homeland Security reportedly requesting approximately $230 million in budgetary authority for the deportation of undocumented immigrants just in fiscal year 2015.  That is for the current rate of about 400,000 people a year, which is, of course, partially offset by continued inflows of unauthorized immigrants.  Logistically, deportations of a larger scale would undoubtedly create massive strains on the system.  Additionally, the removal of 11 million people would be hugely destructive economically – lowering productivity, raising prices, and disrupting both the creation and operation of businesses, at a time when the US has yet to fully recover from the 2007-2009 recession.  Of course, we also cannot forget the costs of splitting up families, which imposes deep scars the social fabric of the nation.  If anything, deportation should be scaled down.
  3. Resources devoted to immigration enforcement are at historical highs – and further enforcement measures, like building a wall, will not stop illegal immigration.  As partially mentioned above, immigration enforcement (such as deportations) is hardly on decline.  Indeed, according to The Economist, border enforcement costs about $20 billion a year, which is more than all other federal law enforcement agencies combined.  Yet, despite all these costs, we clearly still have enforcement problems, and until we reform the immigration system, we always will.  Why?  The reason is simple: the economic incentives for people to immigrate to the United States are overwhelming.  Even for low-skilled immigrants, pay is usually several times greater in the United States than it is in their country of origin.  No matter how much the federal government devotes to border enforcement and trying to prevent people from immigrating (legally or not), people will keep trying to come here – and many will find ways to succeed.  Since these forces will not be disappearing anytime soon, it would be better to work with the force, not against.
  4. Current immigration policy is tantamount to anti-trade protectionism – the antithesis of Republican ideology.  Republicans, in accordance with their belief in free markets, tend to be much more supportive of free trade than liberal Democrats.  However, the current legal immigration system is based largely on a series of quotas.  According to Vox.com, on the employment side a maximum of 65,000 H1B visas (for high-skilled workers) and 66,000 H2B visas (for low-skilled workers) are issued by the federal government annually.  Both of these quotas are usually hit pretty quickly, indicating that employer demand in the US is far outstripping supply.  These quotas are artificially restricting the supply of workers, raising employment costs and decreasing growth prospects.  Additionally, the number of “green cards” supplied tends to be less than demanded, especially for people without US-based relatives or prospective employers.  These restrictions do not let the market to operate efficiently, which goes against Republican notions of free market capitalism.  Not to mention, these quotas help to drive the illegal immigration that everybody is so furious about.
  5. Current immigration proposals do not grant unconditional amnesty – nor should they.  Last time I checked, the current mainstream immigration reform bills passed by House committees in the summer of 2013 allowed unauthorized residents to gain citizenship only after meeting several conditions, including paying several fines and going through vigorous checks.  Republicans are right to be weary of the granting of unconditional amnesty – unauthorized immigrants did, after all, technically break the law, and the rule of law must be upheld for the republic to function properly.  However, the current bills (and any bill that is likely to be passed) will not let unauthorized immigrants  off the hook.  Now, many Republicans say that any form of amnesty, conditional or not, is both unfair (as others still had to wait to become naturalized) and undermines the rule of law.  I think the fines help to partially offset this, punishing those who broke the law.  Though it (understandably) seems unfair that immigrants would be able to gain a “special” route to citizenship this way, such a route is, on net, still much more practical than sending those residing here illegally “to the back of the immigration line”.  Doing so would be too costly economically, difficult logistically, and would overwhelm the already strained legal immigration system.
  6. Republicans could use immigration reform to their political advantage.  Everyone knows that Hispanic voters tend to lean Democratic, and that this persuasion is becoming increasingly costly for Republicans electorally.  As the Hispanic population continues to grow in influence, the political parties increasingly need their support in order to win elections.  Right now, Republican opposition to immigration reform and a perceived anti-immigrant ideology is hurting the party.  Embrace immigration reform, and the Republicans could vastly improve their political fortunes.

Considering all of the outstanding issues on the federal policy radar, it is understandable that immigration reform might not top the policy agenda at the moment.  But until Washington is ready to devote its full attention to the issue, Republicans should seriously consider revising their views on the subject.  Too much is at stake for them not to do so.

Our 5-Year-Old Recovery: A Belated Birthday Wish

So much has been happening lately that it’s hard to know what is most deserving to talk about. Outside the US, the biggest news is that the middle east is further accelerating its long post-Arab Spring slide, with Iraq plunging back into civil war and tensions between Israel and Palestine yet again escalating.  Here at home, meanwhile, the Supreme Court has ruled against the Obama Administration on issues ranging from mandated contraception vs. religious freedom to “recess” presidential appointments.

Perhaps the strangest news, however, is that the current business cycle expansion (the economic recovery” turned 5 years old in June.  This comes at the heels of revelations that just a month prior, we finally reached pre-recession levels of total employment (really no achievement at all, since growth in the potential labor force thoughout all this time still leaves a massive jobs gap.  Not only is it unprecedented that the 5th birthday of the recovery comes only one month after a return to pre-recession employment levels, but it’s also unprecedented that such a large output gap remains at a point where we’re likely closer to the next recession than the end of the last one.   At 61 months, it is now past the average of 58 months for all post-war recoveries.

Now that the party has died down, its time to face some ugly truths.  First of all, longevity does not imply good health.  Despite repeated predictions, this recovery has proven to be neither broad-based nor robust, and unfortunately, its running out of time to ever show sustained periods of health.  From indicators ranging from GDP growth to income growth to productivity growth (etc, etc), there has been sub-par performance.  There are many plausible reasons why (both supply and demand-side explanations), which have been discussed to the point of exhaustion.  I’ll re-list the main ones anyway:

  • contractionary fiscal policy
  • inadvertently contractionary monetary policy? (see Vox.com explanation)
  • lingering effects of private debt deleveraging on consumer spending
  • lack of public investment in physical & nonphysical capital
  • High energy costs
  • Business uncertainty (due to regulations, policy ambiguity, shaky macroeconomic environment, etc.)
  • High or complex taxes, especially corporate taxes

Considering that this year is shaping up to be another economic disappointment recovery-wise, and the recovery’s rapid aging, we now face the troubling prospect of entering the next recession far from having truly recovered from the last one.  By recovered, I mean not just a complete closing of the output gap.  My definition also includes labor market healing, such as a reversal of skills erosion and a return to full employment, as well as meaningful gains in median income and wealth.  Since it is increasingly likely that none of this will happen, would a small recession now be far more painful than usual?  And what will we do policy-wise?  Monetary policy is, at least in terms of fed funds targeting, is as loose as it can get, and its doubtful the federal government will be willing to pursue aggressive fiscal stimulus like they did in 2008 and 2009.

Although it is good news that the recovery is 5, and I wish it a belated happy birthday, its longevity should not make us complacent about past, present, or future performance.  Overall, past performance has been weak, present performance is weak, and it is likely that, in the near future, only more pain will appear.  It’s a rather sad, but realistic, outlook.

The clock is ticking…

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

 

bivens-figure2

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.

2.1.1-GDP-gap-OPT

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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).

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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.

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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 statisticbrain.com, 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.