Tim Kane

A Subtle Danger

 

The new Federal Reserve chair just had a stellar inaugural news conference, and kudos to her.  I said months ago that she was the “safer” choice, and I think President Obama deserves credit for appointing her.  With that said, there is a subtle danger in the language she is using to describe how the central bank now sees the economy and understands the limits of its power.

POLITICO describes the shift:

The Fed has previously said that the magic number for when it might begin to consider raising short-term interest rates is when unemployment hits 6.5 percent. But with that number within reach — it currently stands at 6.7 percent — Yellen and the Fed simply dropped using the target as an indicator, instead referring to more vague “labor market conditions.”

This is an error. What seems rather tiny is in fact an exponentially risky shift away from neutrality.

In terms of monetary policy, the national rate unemployment is the indicator that matters, not the alternative metrics like EPOP and LFPR that are, in my own words, more accurate assessments of how the people in the economy are experiencing the labor market.  Why the contradiction?

Because there are limits to what gunning an engine can do.

Monetary policy is one, giant lever in managing the macro economy. A good metaphor is the gas pedal on an automobile. You push harder, the car goes faster. But no matter how hard you push the gas pedal, the engine’s design will not change. In this metaphor, engine performance is the equivalent of fiscal policy. Business regulations that are rooted in the 1950s worldview will perform, metaphorically, like a car engine from the 1950s. And when fiscal policy degrades the engine’s quality – reduces the number of cylinders, cuts a few wires, uses cheaper gasoline, neglects maintenance on depreciating components – all things which slow the car down, there’s nothing monetary policy can do to fix those things. And here’s the point: it should not try to compensate.

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Joshua Rauh

 

Paul Krugman and Dean Baker took the Washington Post editorial page to task yesterday for stating that unfunded state and local pension liabilities amounted to $3.8 trillion. They accuse the page of misquoting a study in which the total was cited as only $1 trillion.

The WaPo editorial page did misquote the study, but that doesn’t change the fact that the $1 trillion is a completely mismeasured and fictional number. Unfunded state and local liabilities are around $4 trillion when the liabilities are correctly measured.

Since Professor Krugman’s post links to the study in question, by the Boston College Center for Retirement Research, I am sure he saw that the authors actually discuss these measurement issues at length. The Boston College authors even provide liability estimates under what they agree is a more appropriate methodology, and find that unfunded state and local liabilities are a multiple higher than the uncorrected $1 trillion.

Currently, standard practice measures the funding status of public pensions in the US under the laughable assumption that every dollar in the pension funds will earn compound returns of 7.75% or 8% per year. That’s the basis for the $1 trillion in unfunded liabilities.

But if a state or local government promises a risk-free pension, one that will be paid regardless of how the stock market performs, then that promise is like a government bond and should be measured accordingly. That’s the way pension promises are measured in most public or semi-public plans in countries like Canada and the Netherlands. In the Netherlands, for example, discount rates of 0-4% are used. Even US companies follow this basic principle that a pension is like a bond issued by the sponsor by treating their pension liabilities as corporate bonds for the purposes of their books.

Figure 5 of the study professor Krugman links to shows $3.8 trillion total liabilities at an 8% discount rate, but $6.2 trillion of total liabilities using a 4% discount rate. A 4% rate is much closer to long-term government yields, but still too high a rate given that the benefits are guaranteed and many of them are short-term. If unfunded liabilities are $1.0 trillion under an 8% rate, then they are $3.4 trillion unfunded under a 4% rate.

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Russ Roberts

 

Why has the current recovery from the Great Recession been so mediocre? Ed Leamer of UCLA points out that the last three recessions have all had mediocre recoveries of both output and employment. His explanation is that changes in the manufacturing sector have changed the pattern of layoffs, recalls and hiring during recessions and recoveries. The conversation concludes with a discussion of the forces driving the changes in the labor market and the implications for manufacturing.

1) Why the last three recessions all look different (1:44)
2) Employment growth for last eight recessions (4:12)
3) Why have the last three recessions been so different? (6:13)
4) The jobs cycle in manufacturing (8:52)
5) Excess capacity in construction has created a lag (10:33)
6) Manufacturing output versus manufacturing employment (11:14)
7) What’s the solution to the downturn? (12:20)

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Russ Roberts

By historical standards, the current recovery from the recession that began in 2007 has been disappointing. This is part 3 of a three-part series with John Taylor of Stanford University’s Hoover Institution and Department of Economics.

Taylor puts the recovery in historical perspective and explores possible explanations for why the recovery has been so mediocre.

In Part 1 of this discussion of the recovery, Taylor quantified how unusual this recovery is by historical standards. In Part 2, Taylor looked at a number of standard explanations for the sluggish recovery.

Here in part 3, Taylor argues that the slow pace of the recovery is due to poor policy decisions made by the Bush and Obama administrations that have increased the amount of uncertainty facing investors, consumers, and employers. Examples include the rising debt forecast, the fiscal cliff, expiring tax provisions, and quantitative easing. Taylor argues that the uncertainty surrounding these policies in the future along with increased regulation have held back the recovery.

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Editor

Over the next week, Advancing a Free Society will publish a series of pieces related to the Supreme Court’s decision in National Federation of Independent Businesses v. Sebelius. The Forum will cover the law, the medicine, the economics, and the politics surrounding this landmark ruling.

Below, renowned legal scholar and Hoover Senior Fellow Richard Epstein reviews the decision on the Medicaid expansion. According to Epstein, this decision is “welcome,” although not perfect, after the “unhappy performance” of Chief Justice Roberts on the individual mandate.

Earlier today, Hoover research fellow Bill Whalen provided his assessment of what this generally unexpected Supreme Court decision means for the presidential campaigns and, perhaps, Election Day.

Follow The Hoover Forum on the Supreme Court’s health care ruling by subscribing to the Advancing a Free Society RSS feed or subscribing to the new Hoover Daily Report.

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Editor

Data Matters: The 1986 Tax Reforms

This week’s installment of Data Matters features data presented by Tammy Frisby, a research fellow at the Hoover Institution who also teaches in the political science department and public policy program at Stanford.

This week on Capitol Hill, there was renewed attention to the looming Taxmaggedon (or Taxmageddon; take your pick), which involves, among other pending tax code changes, the scheduled expiration of lower tax rates on income, dividends, and capital gains, and the end of the extended payroll tax holiday. There is now more public talk from senators and members of Congress about using the threat of Taxmaggedon in January 2013 to build a legislative coalition for a sweeping tax overhaul that would preempt the economic and political damage that Taxmaggedon would wreak.

For all the uncertainty about what will come of this talk, this is a safe bet: the next six-and-a-half months will be filled with comparisons to the last major tax code reforms in 1986.

Tammy Frisby has shared with us a pair of tables, which she used as a starting point for her own ongoing research on the politics of tax reform. These tables present the major changes made to the tax code with the 1986 tax reform law. The tables compare major provisions in the individual and corporate tax codes before the reforms and as passed in the 1986 law. The middle data two columns in each table show the proposed changes by two main administration plans (“Treasury I” and the plan out of the Reagan White House). Compare these plans to the final law to see where administration reformers hit political obstacles.

As we point out in the tables’ titles – the 1986 tax overhaul created a cleaner – but not a clean – tax code. Tax reformers in 2012 face prodigious challenges to reach even the success of the Reagan-era reforms, challenges that are no less daunting than Taxmaggedon.

Click on the images to enlarge.


Tammy Frisby is a regular contributor to Advancing a Free Society. You can read her analysis of policy making and elections here. She also provides analysis of the 2012 election in audio and video podcasts that are part of Hoover’s 2012 In Perspective series.

With Data Matters, we highlight data relevant to public policy that Hoover fellows are using in their research. We feature original data, data from another source that Hoover fellows are presenting in a new way, or data that fellows find helpful in shaping their own thinking. Visit the Data Matters archive here.

Sign up for the Advancing a Free Society RSS feed to follow our data stream.

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Editor

Here is the second installment in our new series Data Matters.

Following last week’s inaugural post of data from John Cogan, this week Edward Lazear, a Hoover Senior Fellow, Stanford Professor of Economics, and former Chairman of the Council of Economic Advisers, offers us a comparative assessment of U.S. economic growth since the summer of 2009. The chart shows average GDP growth in the G-7 countries, including the Q1 2012 preliminary figures.

Since we began to emerge from the economic wreckage of the Financial Crisis, the U.S. has experienced stronger economic growth than France, Italy, Japan, and the U.K. But economic growth in Germany and Canada has outstripped growth in the U.S. The pattern in the data is materially the same if we move our end point back to Q4 2011.

Click on the image below to enlarge.

The potential for a stronger economic recovery demonstrated by two of our peers supports a reassessment of the U.S. government’s response to the Financial Crisis and economic policy actions over the last three years.

With Data Matters, we highlight data relevant to public policy that Hoover fellows are using in their research. We feature original data, data from another source that Hoover fellows are presenting in a new way, or data that fellows find helpful in shaping their own thinking.

Sign up for the Advancing a Free Society RSS feed to follow our data stream.

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Editor

Today, we add a new weekly feature to Advancing a Free Society. Each week, we will highlight data relevant to public policy that Hoover fellows are using in their research.

Our inaugural data post is a graph generated by John F. Cogan, the Leonard and Shirley Ely Senior Fellow at the Hoover Institution and a professor in the Public Policy Program at Stanford University. The graph shows federal government outlays as a percent of GDP from 1994 to 2022. The graph presents historical outlays and the striking contrast between two different future scenarios: one that follows the Obama administration’s budget and the other that follows the budget path that would be created under Paul Ryan’s plan.

Click on the image below to enlarge.

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Terry Anderson

The Sport of Kings

I am planning a trip to Spain to archery hunt for Spanish ibex, a magnificent wild goat. The hunt will cost several thousand dollars, not counting the money for airfare, hotels, and food. I’m wondering, however, if I should still go or cancel the trip and follow the lead of Spain’s King Juan Carlos by recanting my sin of hunting.

King Juan Carlos recently went on safari to Botswana where he allegedly hunted elephant. While there he broke his hip and returned home for treatment. Spanish newspapers reported the story including a picture from a previous hunt showing the king standing in front of a dead elephant with a rifle.

The story sparked outrage from citizens who feel the king abdicated his responsibility by enjoying himself on safari while his subjects suffered under the Spain’s worsening financial crisis. Socialist Party leader, Tomas Gomez, said the king should choose between his “public responsibilities or an abdication.”

In response the king appeared on television as he left a Madrid hospital saying, “I’m very sorry, I made a mistake. It won’t happen again.”

The outrage goes beyond the economy to the environment. The king is the honorary president of the Spanish branch of WWF, one of the world’s largest environmental groups. Because of his hunting escapade, members have gathered 65,000 signatures on a petition calling for Juan Carlos to resign his honorary presidency.

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