Friday, February 1, 2013

Working sucks even more than you thought it did

This is disturbing. Productivity growth (red line) is supposed to be the elixir that improves our standard of living, and yet while it's been steadily increasing ever since we've been measuring it, workers' share of the income it has generated (blue line) has been declining over the last 10 years - really, last 30, excluding a brief respite in the late 1990's.

Why has this been happening and what does it mean? We are getting better at what we do, but the gains are accruing more to the owners of capital than to labor. My liberal bent has me thinking about how since the 1980's capital owners have seen better tax treatment relative to labor "owners" (i.e., capital gains taxes were lowered disproportionately more so than personal income taxes), so in cases where people could choose, they would opt to receive capital gains rather than wage income, and thus push "labor share" down. Still, how much of our economy is able to make such a choice?

The bottom line is that the benefits of innovation are not as broadly shared as they used to be. This could be because an information-based service economy is generally less dependent on labor than a manufacturing-based economy. How many more people did Henry Ford need to help him realize his vision than Mark Zuckerberg had to hire for his? This would explain why politicians are so focused on manufacturing jobs, even though manufacturing comprises only about 10% of our economy. However, manufacturing is no panacea - the Bureau of Labor Statistics has an analysis showing that labor's share of manufacturing output is declining even faster than it is in the rest of the economy! Still, one bright spot there is that the expected sustainability of the recent 80% drop in domestic natural gas prices should bring back a significant amount of the more energy-intensive types of manufacturing.

To the extent this phenomenon has been a result of tax policy, we can be pleased that Obama has taken action to make capital income somewhat less favored than labor income (for example, between Obamacare and the fiscal cliff deal, Mitt Romey's and Warren Buffett's capital gains tax rates have gone up more than 50% while their income tax rates went up about 10%). But to the extent is phenomenon is about something else - and I do believe there's much more to the story than my favorite perpetrator of Reagan-Bush supply-side economic theory run amok - understanding and correcting it should be a central concern for policy makers who have the vision to see beyond the immediate debates of the day. On that, can we be hopeful that the recent GOP move to preemptively -if only temporarily- release the debt ceiling hostage is a sign that they recognize the electorate expects more than infantile fights over imaginary issues (can you tell I resent never getting to write a "mint the coin" screed)?

Saturday, December 22, 2012

Taking stock (and stocks)

I was looking over my posts from the past year and I'm pleased that my prediction record wasn't so bad. Unfortunately, however, it's looking like my worst call will end up being my most recent one - that the fiscal cliff would be averted. I still think it'll play out in a way favorable to Dem policy priorities, but after Boehner's debacle Thursday night, I'm not so confident a deal will be reached before 12/31, if only because it appears there's too many GOP Representatives who can't vote for anything that has the appearance of a tax increase. To that, I would note that timing is everything: while Obama's offer is a big tax hike relative to current policy, as of Jan. 1 a vote in its favor would actually be a vote to cut taxes. As b.s. as that sounds, the distinction may be important to Republican representatives who have gerrymandered themselves into ideological straitjackets.

The other prediction I wanted to mention was my argument this time last year for US stocks as a good long term investment. The market is up double digits since then, but what I really wanted to point out is that my most important argument, that relative income yields indicated that stocks were cheaper than bonds, is still true. So if the fiscal cliff noise causes some big market gyrations, long term investors could do worse than take advantage of the buying opportunity.

Finally, while it's useful to take stock of the past year, it's also worthwhile to zoom out further, because in so doing you may appreciate that despite the wall of worry our economy is climbing and the insanity of our political culture, and despite the occasional heartbreaking tragedy, the basic measures of humanity's progress are moving in the right direction and at a decent clip, too:

1. People are living longer than ever - even in North Korea!

2. The number of people living in extreme poverty has been cut in half since 1990 - the upside of a globalized economy?

3. The world is a far less violent place than it pretty much ever has been. 'nuff said!

I'm not saying we don't have big problems, just that while there's been a lot to fret over these past few years, in the grand scheme of things there's good cause for optimism.

Saturday, November 17, 2012

Fiscal cliff prediction: Dems will prevail

People are wondering what will happen as we approach the fiscal cliff. Neither side wants to go over it, but how can they come to an agreement? Political analysts debate the election outcome and who has what kind of mandate. The analysis gets murky, because both sides have arguments that the election ratified their position - Obama won, but GOP retained the House.

Some people look to game theory for clues on how this might play out. I've read several analyses that liken the situation to a game of chicken. Think of "Rebel Without a Cause," where the two teens are driving cars straight for a cliff, and the first one to "chicken out" is the loser. This is obviously not a great game to find yourself playing, because it's very possible that not losing could also mean not surviving.

But thinking of the fiscal cliff negotiation as a game of chicken is dead wrong, because a necessary precondition of the chicken game is that shooting off the cliff is an equally undesirable outcome for each player, and that's not the case with the fiscal cliff.

The way I see it, there are 5 basic consequences of our going over the fiscal cliff, each with varying degrees of alignment to the parties' policy objectives:

1. Analysts say the cliff will cause a recession: no one wants this to happen.
2. Tax rates of rich people will rise: Good for Dems, bad for GOP.
3. Tax rates of regular people will rise: no one wants this to happen.
4. Defense spending will be slashed: Good for Dems, bad for GOP.
5. Non-defense discretionary spending will be slashed: Bad for Dems, Good for GOP.

So, no one wants #1 and #3 to happen, but Dems want to see #2 and #4, while GOP only gains from #5. In my admittedly simplistic scoring, Dems win, 2-1.

The great game theorist John Nash provided a very simple means for predicting the outcome of a negotiation, which boils down to this: whoever has less to lose from a breakdown in talks will wring the most from their opponent. From a policy perspective, it's clear that the Democrats have the least to lose from going off the cliff and therefore the most likely outcome is that the two sides will reach an agreement to avert the cliff and the terms of the agreement will favor the Dems, though probably not without at least some compromise along the way.

Of course, just because the Dems have the upper hand doesn't mean they won't misplay it somehow. Many liberals feel like Obama has a poor track record in negotiating with Republicans. I have the exact opposite view, as evidenced by the simple fact that those earlier negotiations have led us to this scenario where the rules are so clearly tilted in his favor. Game, set, and match.

Thursday, October 11, 2012

Open the gates

Conservative economist Casey Mulligan points out on the New York Times econ blog that many worried labor market analysts overlook the impact of the retirement of the baby boomers on our labor force. All things being equal, the percentage of our population that hold jobs will decline as the Woodstock generation tunes out. To that, I say:

It is surprising that all these eyes on the employment situation don't see the rather obvious, and it's equally surprising that many who do don't extend the thought to consider the implications, namely the profound drag on growth a graying population represents. Fewer taxpayers covering the needs of more retirees.  

This to me is the central argument for liberalizing immigration. Simply put, our economy acts in some ways like a gigantic Ponzi scheme and we're at a point where we need some new investors to cover the folks cashing out. We also need to figure out how make our economy less Ponzi-like (e.g., improve the efficiency of our healthcare spending), but the least painful way to avoid the real fiscal cliff we all should be worried about is to import more younger people.

Wednesday, September 12, 2012

A comment on the new fuel efficiency standards

Dear Mr. Porter,

I appreciate the interesting article in today's Times in which you challenge the efficacy of the new fuel efficiency standards, but I have to take issue with the outdated argument that a domestic gas tax would more efficiently reduce consumption. Unfortunately, the Times does not allow for reader comments on Economic Scene articles, so I am sending this directly to you instead [and apparently posting it to my blog]. The crux of the counterargument is that since oil is now a truly global market, any reduction in US consumption caused by local factors (such as a domestic tax) would be offset by increased foreign consumption brought on by a lower global price (caused by lower US demand due to the higher domestic price).

At this point the only oil tax that would actually reduce consumption would have to be applied globally. Nevertheless, conservationists can look forward to the tax-like effect of what is likely to be a long-running trend of upward price pressure exerted by the rapidly growing middle class in Brazil, China, India and other emerging markets. In this context and contrary to the thrust of your article, raising domestic fuel efficiency standards (which in regulating the world's 2nd largest car market will likely improve standards globally) is perhaps the only effective unilateral action available to the Obama administration.

Yours truly,
Jake Tamarkin

p.s. For more on the effect of local oil taxes on global consumption, please see my blog post on a related article by the esteemed William Nordhaus: