The Fiscal Cliff is the popular term given to the scheduled expiration of mostly tax increases and spending cuts that will take effect as certain laws expire this coming January. Expiring tax provisions include the Bush tax cuts, tax cuts enacted as stimulus measures such as the payroll tax holiday and a provision limiting the expansion of the Alternative Minimum Tax[1]. Spending provisions from the Budget Control Act (the debt ceiling deal) will reduce discretionary spending and extended emergency unemployment benefits will expire starting in 2013.
In the coming decade, the expiration of these policies will reduce budget deficits to around 1.4% of GDP per year and debt from 73% to 61% of GDP. Failure to let these provisions expire will result in debt increasing to 93% of GDP by 2022. In the long run growth will be lower if these provisions never expire.
However, in the short run, given the weak state of our economy[2], allowing every provision to expire at once will cause the economy to contract and unemployment to rise. The Congressional Budget Office (CBO) forecasts the fiscal cliff will knock growth down to 0.5% over the next year and increase unemployment to 9.1%. The annual growth of 0.5% breaks down to negative growth of 1.3% on an annualized basis[3] in the first half of the year before recovering to grow by 2.3% annualized by the second half. Put simply, with the fiscal cliff, the worst year of the recovery has yet to happen. I personally find the CBOs non-cliff growth forecast to be too optimistic. But the size of the hit is the same; the CBO provides what is most likely a very best case scenario.
Those who think congress could never be as reckless to let this come to past should think back to the deficit ceiling drama. But even if it’s avoided, we are already suffering due to the uncertainty. The CBO estimates that the uncertainty alone will reduce growth in the second half of the year by 0.5% annualized. J.P. Morgan reports that 61% of its clients say the fiscal cliff is affecting their hiring plans. Economists Sylvain Leduc and Zheng Liu of the Federal Reserve Bank of San Francisco estimate that uncertainty has already added 1% to the unemployment rate.
Given the reality of the situation, simply delaying all elements of the fiscal cliff would be better than letting it happen. But the tax policies should expire first, and for the wealthy first. Even if none of the spending cuts take place, discretionary spending (the spending that is appropriated annually as part of the budget process) will still finish the decade below its 40 year average. And our tax system needs simplifying reforms to raise revenues. But the undeniable truth is that our debt problem cannot be solved by tax increases and discretionary spending cuts alone. Mandatory spending, especially on health programs, such as Medicare, Medicaid, and Social Security, will sink us eventually. If we can’t reform those programs, the only outcomes of the fiscal cliff debate are to ruin our economy now, or delay the inevitable by a matter of years later.
November 4, 2012
November 2, 2012
October Jobs Report
It's the last jobs report before the election, 171,000 jobs were added in October. A number that is only good relative previous jobs reports and the pessimistic expectations of market watchers. If this stayed the level of job growth we would return to pre-crisis unemployment by 2018ish. But the figure is an improvement, and furthermore, the numbers for the previous two months have been adjusted upwards by a combined 84,000 jobs. The unemployment rate increased to 7.9% due to an increase in people actively looking for jobs, a good sign.
As an example of how large future revisions can be, when the August jobs report came out the BLS reported a paltry increase of 96,000 jobs. By this report that number had be revised to 192,000 jobs added.
As an example of how large future revisions can be, when the August jobs report came out the BLS reported a paltry increase of 96,000 jobs. By this report that number had be revised to 192,000 jobs added.
October 29, 2012
Legal Immigration
Some opponents of immigration attempt to hide behind an opposition to solely illegal immigration (the "wait your turn" argument). It makes them look civic, rather than xenophobic.
To supplement my previous post about the benefits of immigration, a nice flow chart of just how cumbersome and lengthy the legal immigration process is can be found here. Many people without direct family in the U.S.A. who would like to immigrate have no legal avenue, especially the poor and unskilled. See also, Franz Kafka's Before the Law.
October 26, 2012
Migration and its Benefits
Lower barriers to migration is by far the best policy option to increase economic growth, and reduce poverty. Yet there’s still debate and hypocrisy. How can a country, or person, who espouses the benefits of free markets be against the free flow of labor? It’s half the basic production function[1]. Anyway, if you click “read more” I intend to show that the evidence is overwhelmingly in support of freer migration. And opposition is only possible through ignorance, hypocrisy, or malice for the poor. Here are the basic conclusions showing freer migration, of both skilled and unskilled workers, is the single best policy option for the world economy.
1. Complete reduction of barriers would increase world GDP by between 67-147%. Even a small reduction in barriers would lead to welfare gains larger than the complete elimination of remaining barriers to goods and capital flows.
2. Migrants from the developing world themselves are the largest beneficiaries of migration. At the median, a migrant to the U.S. will experience a wage increase of around 4.11 times their pre-migration wage.
3. Immigration increases productivity and employment levels for all workers, including native workers.
4. No study has found large negative effects on GDP, wages, or government finances/service provision due to immigration.
5. Emigration from developing countries puts upward pressure on domestic wages, increases incentives for education, and leads to remittances. All of which make emigration a net benefit for poor countries.
1. Complete reduction of barriers would increase world GDP by between 67-147%. Even a small reduction in barriers would lead to welfare gains larger than the complete elimination of remaining barriers to goods and capital flows.
2. Migrants from the developing world themselves are the largest beneficiaries of migration. At the median, a migrant to the U.S. will experience a wage increase of around 4.11 times their pre-migration wage.
3. Immigration increases productivity and employment levels for all workers, including native workers.
4. No study has found large negative effects on GDP, wages, or government finances/service provision due to immigration.
5. Emigration from developing countries puts upward pressure on domestic wages, increases incentives for education, and leads to remittances. All of which make emigration a net benefit for poor countries.
October 22, 2012
October 11, 2012
October 5, 2012
September Jobs Report
There's some unusual news in the area of unemployment statistics. First, in late September, the BLS issued a preliminary revision to their March 2011 – March 2012 numbers; they underestimated job growth by about 20%. In a way this is news only a statistician could love, the effect of these job gains won't change because the measurement is more accurate. And it does make the apparent slowing down of the economy look more pronounced. But it's still good news that we weren't doing as poorly as thought. The figure below shows the gains since March starting from where the revision put the total increase in jobs ending March 2012.
The news for September in particular is complicated. The increase in total non-farm jobs was reported at 114,000. A lame number, not terrible but not any good either. The numbers would be terrible if the government was still shedding jobs, instead government employment is creeping up. On the good side the numbers for July and August were revised upwards by a total of 86,000 jobs.
Further complicating things is the fact that the unemployment rate dropped, from 8.1% to 7.8%, and not from people leaving the labor force. It is the first time the unemployment was below 8% since January 2009. The unemployment rate is calculated using a different survey, of households rather than businesses. The household survey shows an astonishing 873,000 more jobs than in August. The household survey numbers are volatile, and the two numbers often diverge, but over time are similar in aggregate. As Floyd Norris (Chief Financial Correspondent for the New York Times) points out,
“A year ago, the the establishment numbers were looking better than the household numbers. Now the reverse is true...Over the last 24 months, however, the two reports are virtually identical, showing an additional 3.6 million jobs and workers."
“A year ago, the the establishment numbers were looking better than the household numbers. Now the reverse is true...Over the last 24 months, however, the two reports are virtually identical, showing an additional 3.6 million jobs and workers."
I really don't have the expertise to shed any more light on the confusing batch of statistics today. But the take away message seems to be that the economy is and was doing better than we thought, but it's still slowing down.
October 4, 2012
Rating Politicians
I was drunk during the debate, just like in '08. It helps you pay much less attention to what's being said, but notice how it's being said. Mitt Romney said everything better; Obama seemed like he forgot he had the debate that night. Also the format was terrible.
Anyway, to help judge the candidates by what they actually say and do, The Economist has (un-scientifically but whatever) polled hundreds of professional economists in the United States.
Overall Obama seems to have a lead over Romney when it comes to economic policy. Though Romney is slightly favored by business economists. The results are typically much closer on the specifics, though Obama opens up wide leads on certain issues.
The best part of these polls however, is how the economists identify themselves politically. The largest group, at 50%, is independents, followed by Democrats, with 43%, and only 7% of economists polled are Republicans. This result is nearly identical to when the same polling was done four years ago. It warms my heart to know that half of economists are independents and only 7% Republicans.
October 2, 2012
October 1, 2012
September 13, 2012
QE3: The Fed Steps In
The Federal Reserve has decided to further stimulate the economy in a bold and unprecedented manner. The Fed announced, in a 12-1 decision, that it would “[purchase] agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate…in a context of price stability.” These purchases will continue so long as “the outlook for the labor market does not improve substantially.” And even if it does “[A] highly accommodative stance of monetary policy will remain appropriate for a considerable time.”
This action is very different from past Fed actions in that it’s theoretically unlimited in its commitment. In previous quantitative easing the Fed committed to specific dollar amounts. The new policy is limited only to $40 billion per month, for a length of time yet to be determined. The Fed buys bonds from banks with newly created money[1], this reduces the cost of lending, and thus of borrowing, which lowers the cost of consumption and investment. The focus on mortgage-backed securities will reduce the cost of mortgages in particular, stimulating housing demand. There are other channels through which QE stimulates the economy; however, if the banks aren’t willing to lend or individuals/businesses willing to borrow the stimulative effects will be lessened.
On the positive side, this action comes just days after the European Central Bank (ECB) made an unlimited commitment to buy bonds of European countries that are in a debt agreement with the EU/IMF. That the Europeans have made a similar commitment increases the simulative effects of Fed action. Economic policy works best when pursued in unison.
Some people are concerned about the inflationary effects of such policies. There are two basic possible outcomes: either it won’t work, in which case inflation won’t be an issue, or it will, in which case the Fed can withdraw the stimulus and reduce inflationary pressure (more details here and here). Inflation has been historically low and stable since before and especially after the recession. And the Fed doesn’t seem too concerned for now, stating, “If inflation goes above target, we take a balanced approach: bring inflation back to target over time but in a way that takes into account deviations of both [unemployment and inflation] from our target.” The Fed has a duel mandate to keep inflation and unemployment low. Currently inflation is below target and unemployment above target, so this policy is very consistent with the Fed’s mandate.
Now it’s up to the politicians, which isn’t as confidence inspiring. The Europeans need a political solution to escape their debt crisis; the ECB can only buy them time. The United States needs a political solution to the “fiscal cliff”, a detrimental combination of tax increases and spending cuts that will take effect in January. The Fed can only soften the blow slightly. Yet whatever happens, it is good to know that, like a good friend, “the Fed will be there to do what it can.”
This action is very different from past Fed actions in that it’s theoretically unlimited in its commitment. In previous quantitative easing the Fed committed to specific dollar amounts. The new policy is limited only to $40 billion per month, for a length of time yet to be determined. The Fed buys bonds from banks with newly created money[1], this reduces the cost of lending, and thus of borrowing, which lowers the cost of consumption and investment. The focus on mortgage-backed securities will reduce the cost of mortgages in particular, stimulating housing demand. There are other channels through which QE stimulates the economy; however, if the banks aren’t willing to lend or individuals/businesses willing to borrow the stimulative effects will be lessened.
On the positive side, this action comes just days after the European Central Bank (ECB) made an unlimited commitment to buy bonds of European countries that are in a debt agreement with the EU/IMF. That the Europeans have made a similar commitment increases the simulative effects of Fed action. Economic policy works best when pursued in unison.
Some people are concerned about the inflationary effects of such policies. There are two basic possible outcomes: either it won’t work, in which case inflation won’t be an issue, or it will, in which case the Fed can withdraw the stimulus and reduce inflationary pressure (more details here and here). Inflation has been historically low and stable since before and especially after the recession. And the Fed doesn’t seem too concerned for now, stating, “If inflation goes above target, we take a balanced approach: bring inflation back to target over time but in a way that takes into account deviations of both [unemployment and inflation] from our target.” The Fed has a duel mandate to keep inflation and unemployment low. Currently inflation is below target and unemployment above target, so this policy is very consistent with the Fed’s mandate.
Now it’s up to the politicians, which isn’t as confidence inspiring. The Europeans need a political solution to escape their debt crisis; the ECB can only buy them time. The United States needs a political solution to the “fiscal cliff”, a detrimental combination of tax increases and spending cuts that will take effect in January. The Fed can only soften the blow slightly. Yet whatever happens, it is good to know that, like a good friend, “the Fed will be there to do what it can.”
September 7, 2012
August Jobs Report
The economy added 96,000 jobs in August. A lower number than last month was expected, by me at least for no other reason than it fits the pattern (see last report). But it seems that the continuing/worsening crisis in Europe and the slow down of Emerging Economies (most notably China) has taken its toll in slowing down US job growth even more.
Worse, the number of people looking for work declined as well, bringing the Unemployment Rate down to 8.1%. Previous month's numbers were revised downward a total of 41,000, as indicated by the red line (which shows figures from before the last revision).
Worse, the number of people looking for work declined as well, bringing the Unemployment Rate down to 8.1%. Previous month's numbers were revised downward a total of 41,000, as indicated by the red line (which shows figures from before the last revision).
August 29, 2012
Economist Quotes
''I am often considered almost not a part of the profession of Establishment economists. I am even referred to as a sociologist. And by that economists usually do not mean anything flattering."
August 11, 2012
Credibility
The only way for the Dow to reach 36,000 in the time the authors gave (closer to 36,000 than 10,000 by 2010) would be if the economy was about to experience explosive growth or a massive bubble the developed world has, still, never seen. The Dow currently stands between 13,000 - 14,000[2]. The book was written in 1999; the authors were arguing that stocks were cheap at precisely the time they were overvalued due to the dot-com bubble.
A common measure of stock valuation is the Price to Earnings (P/E) ratio. It is the price of a share over the annual earnings one would receive from owning the share[3]. A high P/E ratio means either profits will increase in the future or there is a bubble. As the graph below shows, the long run average P/E ratio is around 16.
At the end of 1999 the P/E ratio for the S&P 500 was around 30, for the Dow it was around 27. On top of that record setting overvaluation the authors thought stocks could only go up.
I bring this up because one of the authors, Kevin Hassett, is now a Romney adviser, and recently criticized the Tax Policy Center (TPC) for explaining[4] that Romney’s tax plan would result in a higher tax burden for the poor and middle class, and a much lower tax burden for the rich. For some reason, I just don't trust him to be correct.
August 3, 2012
July Jobs Report
Better than last month but not good pretty much sums it up. 163,000 non-farm jobs were added in July. Previous months were little revised and the labor force shrank slightly. It's further evidence that this is just what the pace of recovery will be; the jobs market has produced these results for three years now.
It is almost uncanny how repetitive the process has been. Encouraging job growth over the winter followed by months of disappointingly low numbers, followed by a upward blip in late summer before diminishing until winter. This is the late summer blip, last year it came in August, the year before in September. It's slightly good news in that following months shouldn't be as disappointing as previous months, until next spring.
What this means for policy is that nothing will change there either. Policy has remained essentially unchanged since the recovery started. In fact, job growth is slightly higher. Since February 2010 job growth has averaged around 138,000 per month, while in the past year it has averaged 153,000 per month. This certainly means that the Fed won't act, if conditions aren't changing their policies won't change. But the Fed does expect growth to pick up next year, not that their forecasts have been all that accurate. Generally speaking that puts the unemployment rate reaching 2008 levels in 2016.
It is almost uncanny how repetitive the process has been. Encouraging job growth over the winter followed by months of disappointingly low numbers, followed by a upward blip in late summer before diminishing until winter. This is the late summer blip, last year it came in August, the year before in September. It's slightly good news in that following months shouldn't be as disappointing as previous months, until next spring.
What this means for policy is that nothing will change there either. Policy has remained essentially unchanged since the recovery started. In fact, job growth is slightly higher. Since February 2010 job growth has averaged around 138,000 per month, while in the past year it has averaged 153,000 per month. This certainly means that the Fed won't act, if conditions aren't changing their policies won't change. But the Fed does expect growth to pick up next year, not that their forecasts have been all that accurate. Generally speaking that puts the unemployment rate reaching 2008 levels in 2016.
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