The Key to Boosting the Economy: Investment in Infrastructure

Lawrence Summers advocates “substantially increased public infrastructure investment … Stated boldly: Public infrastructure investments can pay for themselves….What is crucial everywhere is the recognition that in a time of economic shortfall and inadequate public investment, there is a free lunch to be had — a way that government can strengthen the economy and its own financial position.”

William Galston, writing in the Wall Street Journal points out that “the Great Recession accelerated the decline: The majority of the jobs that unemployed workers have found thus far pay significantly less than the ones they lost during the crash.”

“Government can mitigate these trends but cannot halt them….In the longer run, wealthy democracies will have to invest more in basic research that boosts innovation and education that raises skills while tearing down barriers to business formation and entrepreneurially minded immigrants.”

“But that is the work of a generation. We need a plan to get from here to there. The workers that technology is forcing down the income ladder must be enabled to sustain their families and offer opportunity for their children. Like it or not, this will be a core function of government in coming decades.”

Don’t Panic About a Little Inflation

Michael Strain, writing in the Washington Post contends that, on balance, a little inflation is better than a lot of unemployment.

One “line of thought, now that the unemployment rate is below 6 percent and may continue to fall, the Fed needs to raise interest rates sooner and faster than is typically expected.”

“Ultimately, though, the Fed should be patient. It shouldn’t rush to raise interest rates despite the relatively low and falling unemployment rate.”

“A little inflation above the Fed’s preferred rate isn’t the end of the world — it’s a manageable problem, and may even be desirable. Letting millions of workers sit on the sidelines of the labor market is a bigger problem.”

“The fundamental logic of monetary policy is the same as it’s been for years now: Prices aren’t rising as rapidly as the Fed would like them to, and the labor market isn’t using workers to their fullest extent. The Fed is still missing on both sides of its ‘ dual mandate.’ Prudence thus dictates a patient return to normal monetary policy. And the unemployment rate falling below 6 percent shouldn’t fundamentally change anything.”

What Happened to Pay Raises?

David Leonhardt argues that we are experiencing “the great wage slowdown of the 21st century.”

“The typical American family makes less than the typical family did 15 years ago, a statement that hadn’t previously been true since the Great Depression. Even as the unemployment rate has fallen in the last few years, wage growth has remained mediocre. Last week’s jobs report offered the latest evidence: The jobless rate fell below 6 percent, yet hourly pay has risen just 2 percent over the last year, not much faster than inflation.”

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“Both energy and education have been problems. The cost of energy, after temporarily falling in the 1990s, returned to its post-1970s norm in recent years and acted like a tax on the rest of the economy. Education, meanwhile, is the lifeblood of economic growth, allowing people to do entirely new tasks (cure a disease, invent the Internet) or to do old ones with less time and expense. Yet educational attainment has slowed so much that the United States has lost its once-enormous global lead.”

Where’s the Inflation?

Matt O’Brien writes that the inflation hawks appear to have learned nothing from their mistakes.

“The slightly-less-aware faction thinks that the inflation monster has already come out from under their beds. ‘There’s plenty of inflation,’ perennial goldbug Jim Grant says, ‘not at the checkout line, necessarily, but on Wall Street.'”

“Then there’s the more bashful group that concedes they haven’t been right yet, but thinks they will be. Former inflation truther Niall Ferguson says their spectacularly bad prediction wasn’t one per se, and that ‘there is in fact still a risk of currency debasement and inflation.'”

“And former McCain economic adviser Douglas Holtz-Eakin protests that … ‘they are going to go above 2 percent.'”

“Above 2 percent inflation. Scary stuff.”

“It’s too late, though, for the inflation hawks to save any credibility they might have. Their insistence that they’re right in defiance of all facts has debased that.”

A Return to Voodoo Economics?

Paul Krugman sees a resurgence in Ronald Reagan’s “’supply side’ doctrine.” Or, as George H.W. Bush termed it, “voodoo economic policy.”

“So why is this happening now? It’s not because voodoo economics has become any more credible.”

“First, voodoo economics has dominated the conservative movement for so long that it has become an inward-looking cult, whose members know what they know and are impervious to contrary evidence … Today someone like Senator Rand Paul can say: ‘When is the last time in our country we created millions of jobs? It was under Ronald Reagan.’ Clinton who?”

“Second … for years people like Mr. Ryan have posed as champions of fiscal discipline even while advocating huge tax cuts for wealthy individuals and corporations. They have also called for savage cuts in aid to the poor, but these have never been big enough to offset the revenue loss. So how can they make things add up?”

“Well, for years they have relied on magic asterisks — claims that they will make up for lost revenue by closing loopholes and slashing spending, details to follow. But this dodge has been losing effectiveness as the years go by and the specifics keep not coming. Inevitably, then, they’re feeling the pull of that old black magic — and if they take the Senate, they’ll be able to infuse voodoo into supposedly neutral analysis.”


Should Democrats Get Credit for the Economy?

Megan Thee-Brenan in the New York Times: “Even as Americans are feeling better about the economy, they decline to credit the president with its improvement. The Times/CBS News poll found 53 percent of Americans disapproved of Mr. Obama’s handling of the economy, and his overall job approval rating was under water, with 40 percent approving and 50 percent disapproving.”

E. J. Dionne offers some explanation: “Obama and Democrats trying to survive this fall face two problems in getting voters to sing a joyous song.”

“The first is that the very improvement in the economy means that it is a less central concern to voters than it was when Obama took office — or in 2010.”

“Yet voters who are still concerned about the economy tend to be focused not on its successes but on what it is failing to do for them … The unemployment rate is way down, but it’s still not low enough to create rapid and widespread wage growth. Many of the forces that have been driving up inequality since the 1980s are still with us.”

Working Capital Review: The U.S. has more manufacturing jobs than you think

The Wage Growth Puzzle

Justin Wolfers: The latest round of labor market data released Friday add to an emerging puzzle whose resolution will be central to the future of the recovery.”

Normally, a drop in unemployment (in this case, to 5.9%) “would lead to faster wage growth.”

“Yet average hourly wages in the private sector were roughly flat in September (they fell by a penny), and they’ve grown at a rate of only around 2 percent over the past year.”

“The recent data have made a sharp departure from the usual textbook analysis in which a tighter labor market leads to faster wage growth, and subsequent cost pressures feed through to higher inflation.”

“Perhaps the unemployment rate is giving us a false signal, and there are millions more workers waiting to return to the labor market than suggested by the official statistics. That is, the jobless will return when the jobs return. Or perhaps the natural rate is really much lower than most economists estimate.”

Another explanation is Americans’ perception of the economy:

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Working Capital Review: The U.S. has more manufacturing jobs than you think

Hiding Profits Overseas

Patricia Cohen: “Jason Furman, the chairman of the president’s Council of Economic Advisers, recently offered some eye-popping numbers to underscore just how much revenue the United States loses when American corporations shift part of their operations abroad to avoid paying taxes at home.”

“In some cases, the profits reported by an American-controlled corporation far exceeded the total economic output of the country or locality where it was situated.”

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Furman said the current system is unfair “because it means that businesses in the United States that can’t or won’t move their profits overseas are forced to shoulder more of the tax burden.”

Will Ryan’s Poverty Plan Work? Take a Look at Nebraska

Governing: Rep. Paul Ryan’s plan to combat poverty “would consolidate federal assistance plans into block grants for the states, and every poor person would get a dedicated social worker to help create a personal plan to get out of poverty … While the Republican congressman’s speech was short on financial details, the idea received praise from both the left and right.”

“Those who are interested in the feasibility of such a policy ought to take a look at Nebraska, which tried this exact strategy for a decade. What Nebraska found was that the approach seemed to work — but it was incredibly expensive.”

“For some participants, the results were extraordinary. Among the hardest-to-employ population, those people with multiple barriers to employment, 46 percent of the program participants were able to get jobs.”

“But the program also cost a lot of money, some $7,400 a year per person. And the jobs participants found were fairly low-paying positions.”

“For clients who didn’t face multiple barriers to success … the program didn’t seem to make any difference at all.”

“Nebraska shuttered the program in 2006 … Nebraska’s experience suggests that Ryan’s social-worker approach to tackling poverty could be extremely effective … but only if Congress is willing to invest heavily in the plan.”

Lawrence Summers Does an About Face

Binyamin Appelbaum: “Lawrence Summers, the former chief economic adviser to President Obama, said on Tuesday that the Treasury Department had undermined the Federal Reserve’s stimulus campaign and that doing so was a large and expensive mistake.”

“In a paper presented Tuesday at the Brookings Institution, Mr. Summers and three co-authors argued that the crosswinds had reduced the Fed’s impact by about a third, slowing growth and leaving more Americans jobless.”

“Mr. Summers is not the first person to suggest this is a little crazy, but two things set him apart: The administration began the policy in question while he was still its top economic official. Moreover, since leaving the administration, he has campaigned loudly for the government to issue even more long-term debt, to support increased spending on roads, airports and other crumbling infrastructure.”

It’s estimated that “the Fed’s campaign reduced long-term rates by 1.37 percentage points, but that the Treasury’s debt policies put back 0.48 of those points.”

“Representatives of the Fed and Treasury, on a subsequent panel, rejected both the findings of the Harvard paper and the proposal for more coordination.”

Although Summers didn’t object to the apparent contradiction at the time, he now calls his opponents “’central bank independence freaks’ and said it was ‘at the edge of absurd’ to suggest that debt management coordination would substantially erode the Fed’s independence.”

Don’t Panic: Home Price Growth Has Slowed

Dina ElBoghdady, writing for the Washington Post, argues that the slowdown in growth of home prices should not be cause for alarm.

“The fact that home price gains are moderating is equally good news for the housing market, which is struggling to fully recover. The high prices are pushing potential buyers out of the market and hurting home sales, which remain below historic norms. Many economists agree that the double digit price gains posted in recent years were unsustainable, and the pullback that’s taken place in the last few months is a welcome development.”

“Prices climbed only 6.7 percent in July from the previous year, the smallest year-over-year gain since November 2012, according to the Standard & Poor’s/Case-Shiller index of the nation’s 20 largest metropolitan areas … As of July, average home prices across the country are back to their 2004 level.”

“Michael Gapen, a senior U.S. economist at Barclays, said that price gains need to slow and fall more in line with growth in take-home pay.”

Are Liberals Job Destroyers?

Paul Krugman comments on the connection between party affiliation and employment, using Bloomberg’s map showing state job gains and losses since the pre-recession peak.

“Actually, there’s not much correlation either way — both the best and the worst performers are red states. This is the same thing you learn when you look at the biggest states.”

“But the right is, of course, claiming that you have to follow their policies to succeed — that you mustn’t tax the rich or help the poor because that would destroy job growth. Unfortunately for them, the only way to get that result is to invent your own facts.”

U.S. Job Creation Index Reaches a New High

Gallup‘s U.S. Job Creation Index “reached a six-year high of +30 in September. This is up from twin readings of +28 in July and August.”

“Among Gallup’s economic indicators, job creation has offered some of the most promising signals in 2014. And though it has generally been on the rise since 2010, it has had a steeper incline this year than in any of the previous years since Gallup started tracking the index in 2008.”

“U.S. workers are clearly sensing a greater level of hiring, but so far this hasn’t altered the American public’s view of the health of the nation’s economy, with the Gallup Economic Confidence Index staying remarkably flat near -16 in 2014.”

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‘Old Energy’ Utilities See Rising Threat from Solar

Brad Plumer: “If you ask the people who run America’s electric utilities what keeps them up at night, a surprising number will say solar power. Specifically, rooftop solar.”

“Solar power provides just 0.4 percent of electricity in the United States — a minuscule amount.”

“But utilities see things differently. As solar technology gets dramatically cheaper, tens of thousands of Americans are putting photovoltaic panels up on their roofs, generating their own power. At the same time, 43 states and Washington DC have ‘net metering’ laws that allow solar-powered households to sell their excess electricity back to the grid at retail prices.”

“That’s a genuine problem for utilities. All these solar households are now buying less and less electricity, but the utilities still have to manage the costs of connecting them to the grid. Indeed, a new study from Lawrence Berkeley National Laboratory argues that, without policy changes, this trend could soon put utilities in dire financial straits. If rooftop solar were to grab 10 percent of the market over the next decade, utility earnings could decline as much as 41 percent.”

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Reuters:  “Although U.S. utilities have yet to feel a financial sting from solar’s rise, they are leery of a future in which the burden of maintaining their delivery systems is spread among a smaller number of customers.”

“Last year, Arizona became the first U.S. state to introduce a solar tax after the state regulator let its main utility … charge 70 cents per kilowatt, or about $5 per month for most households, to those on the grid who use solar … several other states are considering similar proposals, or have pledged to reform electricity rates to address the rise of distributed generation.”

“‘Distributed generation could be the end of utilities as we know them today,’ U.S. investment research firm Morningstar said earlier this year. ‘Utilities’ centralized network monopolies break down when customers become self-sufficient competitors.'”