Monday, March 18, 2013

Senator Warren On Productivity Growth Returns And The Minimum Wage: It Sure Didn't Go To The Worker

From "Elizabeth Warren: Minimum Wage Would Be $22 An Hour If It Had Kept Up With Productivity":

"'If we started in 1960 and we said that as productivity goes up, that is as workers are producing more, then the minimum wage is going to go up the same. And if that were the case then the minimum wage today would be about $22 an hour,' she said, speaking to Dr. Arindrajit Dube, a University of Massachusetts Amherst professor who has studied the economic impacts of minimum wage. 'So my question is Mr. Dube, with a minimum wage of $7.25 an hour, what happened to the other $14.75? It sure didn't go to the worker.' 
Dube went on to note that if minimum wage incomes had grown over that period at the same pace as it had for the top 1 percent of income earners, the minimum wage would actually be closer to $33 an hour than the current $7.25."

Senator Warren apparently wasn't actually arguing for a $22 / hour minimum wage but rather only something over $10 / hour. Still, it's quite an observation.

Saturday, March 16, 2013

Reminders From The 1970s and 1980s: Financial Crises Happen; The Latest Wasn't Unique Or Even Rare; It Was Just A Big One

To hear some talk, one would think our Financial Crisis of 2007-08 was a bizarre event that must have been caused by exceptional circumstances. In size, it may have been somewhat unusual. It came with quite a large market bubble from private institutions going hog-wild for leveraged investments. But we don't even have to go back nearly as far as the Great Depression to find similar -- if smaller -- troubles. The market does this sort of thing quite a bit. Really, we rarely go long without such crises.

Hyman Minsky describes several in "Stabilizing an Unstable Economy", such as:

"The sharp drop in output and the explosive rise in unemployment in the third quarter of 1974 and the first quarter of 1975 were accompanied by the failure of Franklin National Bank, the troubles of the REITs, and a spate of business bankruptcies. It looked as if the economy was on the verge of a great depression; as if the sky were about to fall. But the disaster failed to occur. The combination of a massive government deficit (augmented by a tax rebate) and the lender-of-last-resort interventions contained the recession and reversed the course of the economy. 
Aside from the details of who failed and the nature of the organizations involved, the 1981-82 recession conforms quite remarkably to that of 1974-75. Once again there was a sharp decline in income and output and a dramatic rise in unemployment; once again there was a massive increase in deficits (the extreme Keynesian side of Reaganomics), once again there were both quiet trauma and spectacular declines, and once again there was a spate of lender-of-last-resort interventions by the Federal Reserve. Once again, as the unemployment and bankruptcies situations were getting worse, some six months after a major lender-of-last-resort intervention there was a sharp turnaround in income and employment. Once again the sky did not fall."
The tools of deficit spending and lender-of-last-resort intervention aren't new, radical approaches. They're tried and true; they're traditional methods of kicking the economy back into gear. They've repeatedly shown success.

Unfortunately, our efforts this time were trimmed down by deficit-hawk opposition and not sufficiently scaled to achieve a serious kick start rather than just propping up the sky a bit. And now, with budget cuts, we're on track to the usual means by which recoveries have been sabotaged by fiscal conservatism.

Thursday, March 7, 2013

Government As The Homeowner, Revisited: To Scrap Or To Invest?

Consider a homeowner who owes a typical mortgage on a house and makes just enough to keep up with the bills and maybe every once in a while treat the family to something nice like a dinner out or a trip to the zoo.

Does it make sense for that homeowner to sell the car he uses to get to work in order to pay down the mortgage faster?

How about if he skips paying for the annual licensing for his field of employment (required for his career) to pay down the mortgage faster?

In order to pay down that mortgage faster, does it make sense for that homeowner to stop buying food for the kids, getting reasonable check-ups and other medical attention as needed, and keeping the house warm enough that the pipes won't freeze?

Should the homeowner cut out all trips to the library for books for the kids so as to save on gas and send bigger mortgage payments? How about toys? Should the homeowner never buy a toy again until the mortgage is payed off, even if it's a just started 30 year mortgage and he has a newborn with no toys beyond a single teething ring?

Does any of that really, truly make sense?

How about investments? Should the homeowner stop contributing a modest sum to his retirement plan and an education savings plan for his kid? Even if both of those investments are expected to have a return higher than the interest on the mortgage?

And if the homeowner can reasonably expect to get significantly higher pay from investing in his career, what then? Let's imagine this homeowner could put $1,000 on his low interest home equity line and get training and certification that on average increases a certified individual's pay by $1,000 a year. Would it be more sensible, rational, and responsible for the homeowner to get this certification or to avoid taking on a little bit more debt?

Our government is this homeowner. Our debt is this manageable mortgage.

When we're at full employment -- unlike now -- there would be no certification we could expect to be a safe bet to increase our income steadily. But we're not there. Not even close.

When we're well below full employment on account of a consumer demand shortfall -- like now -- just about any additional spending we have the government do can typically be expected to add to commerce and help push us that little bit closer to full employment. That means higher revenues. And that's without even focusing it into the most useful spending, which we can and should do to get the most bang for the buck by spending on adding to infrastructure, R&D, and other investments known to build the most revenue.

It should already be an obvious choice. But unlike the homeowner, the government gets an additional win by investing that spending in increasing revenue. Since additional employment means less unemployment, medicaid, and other liabilities, the government reduces its costs by increasing its revenue. That's not just a win-win ... it's a no-brainer. It's stunningly obvious. We should be investing in raising our revenue by engaging some short term spending (preferably including long term investments in that short term spending).

Now if only the budget cutters in Congress could see that.

Tuesday, March 5, 2013

What Does The Sequester Mean? Unemployment.

What does the sequester mean? In a word, unemployment.

By most estimates, the sequester will reduce 2013 GDP growth from what would be somewhere around 3% to somewhere around 2%. That might not sound so bad. After all, it's still growth, right? One might think that if one is not familiar with Okun's Law. We need some growth in the economy to deal with growth in population, productivity, and other factors.

How much growth do we need to break even? Around 2.7%.* That's roughly the rate of economic growth we need just to keep a steady rate of unemployment. When we're not already at full employment -- and we certainly aren't likely to see full employment in 2013 -- any growth rate higher than what's needed to break even will translate to a reduction in unemployment. And should we drop to a growth rate below that break even point, then expect bad things to happen to the unemployment rate.

Remember what the common estimates were for GDP growth without the sequester? 3%. That would mean that if it weren't for the sequester, then we could expect a slight drop in the unemployment rate over 2013 due to just enough jobs being added to see some improvement.

And then there's the sequester. With estimates of the sequester slashing growth down to 2%, that means for 2013 we're likely to be below the break even point in growth. Rising unemployment looms on the horizon.

* Estimates vary, among other reasons because the current steady-state figure can vary a bit with various conditions, but 2.7% is in the rough ballpark.

Monday, March 4, 2013

Looking Forward To Recession? Thank A Deficit Hawk.

Budget cuts during a depression? Expect a recession. And for that recession, thank the obsession with deficits. Because apparently the recession of 1937-38 has been largely forgotten, at least among most Republicans and a few Democrats who join them in worrying about the deficit at what's clearly the wrong time. Trying to balance the budget during a depression is not just an error ... it's a classic error.
"The 1937 episode provides a cautionary tale. The urge to declare victory and get back to normal policy after an economic crisis is strong. That urge needs to be resisted until the economy is again approaching full employment. Financial crises, in particular, tend to leave scars that make financial institutions, households and firms behave differently. If the government withdraws support too early, a return to economic decline or even panic could follow." 
- Christina Romer in "The lessons of 1937" writing for The Economist
This infatuation with deficits and debt steered us wrong before. It looks like we're doomed to repeat the lessons of history that deficit hawks have failed to learn.