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Wednesday, March 19, 2014

‘Romneycare’ and the 29ers

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Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

Health reform in Massachusetts in 2006 did not cause many workers to have their work hours cut, but that is no comfort for those workers nationwide who will begin to experience this side effect of the federal Affordable Care Act.

Business executives have been saying that they have, or will be, cutting workers’ hours to avoid penalties levied by the Affordable Care Act. Because the penalties are applied only to full-time workers (defined by the law as working 30 hours a week or more), redefining a worker as a part-time - a “29er,” as they are sometimes called - might save the employer money and enhance profits.

But a skeptical listener might not interpret the executives’ statements literally. In any economy, there are businesses that struggle, and maybe it’s too easy to blame the unpopular new law for deeper business difficulties.

Massachusetts also had a health reform law - sometimes called “Romneycare” after Gov. Mitt Romney, who signed it - with some of the same elements as the Affordable Care Act, including penalties on employers that did not offer health coverage to their employees. Yet Massachusetts did not seem to experience a crisis of 29ers when Romneycare was implemented.

The Washington Examiner quoted an unidentified Department of Health and Human Services official as saying that the experience in Massachusetts suggests that “the health care law will improve the affordability and accessibility of health care without significantly affecting the labor market.” But a closer look  shows that the Massachusetts experience tells us little about the number of 29ers that will be created by the Affordable Care Act.

For one, the Romneycare employer mandate was not based on the number of full-time employees. It was based on the number of full-time-equivalent employees, which means that workers are counted according to the number of hours they work, not their full-time status.

For example, cutting all workers’ hours to 39 from 40 would have the same penalty consequence under Romneycare as would cutting 1/11th of workers’ hours to 29 from 40. In Massachusetts employers could choose how to cut employee hours (if at all) on the basis of business and personal considerations; the federal law would only give relief to the 29er approach.

Second, the Romneycare penalty was deductible from an employer’s business taxes; the Affordable Care Act’s penalties will not be deductible. A Massachusetts employer avoiding the health reform’s penalty would find that his avoidance increased his business tax liability a bit.

Finally, the Romneycare penalty was only about $300 per full-time equivalent employee, whereas the Affordable Care Act’s penalty is $2,000 and set to grow with the rate of health care inflation.

For now, it may be worth listening to what the business executives are saying.



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Live Blog: Yellen and the Fed

Janet L. Yellen, the Fed chairwoman, briefed the press on Wednesday.Brendan Smialowski/Agence France-Presse â€" Getty Images Janet L. Yellen, the Fed chairwoman, briefed the press on Wednesday.

Janet Yellen met the media Wednesday for the first time as Federal Reserve chairwoman, after the conclusion of her first meeting leading the central bank’s policy committee. Here is an account of the events as they unfolded.

Auto-Refresh: ON Turn ON Refresh Now Feed Twitter 3:42 P.M. No-Drama Yellen

No muss. No fuss. No drama.

That summarizes Ms. Yellen’s first press conference at the helm of the Federal Reserve. She seemed, as she generally does in public settings, well practiced and confident.

Her main task was to explain why the Fed dropped its prior guidance that it would consider raising interest rates when the unemployment rate hit 6.5 percent. The unemployment rate is currently 6.7 percent and might fall below that threshold in a manner of weeks or months. But the current consensus within the Fed is that rate increases will not start until next year. The Fed is going to feel its way forward, Ms. Yellen said, looking at a broader range of statistics.

The stock markets dropped when the Fed made its policy announcement, though they have since regained some of their lost ground. Ms. Yellen repeatedly said that the Fed believed the economy was strengthening, but believed that it needed to continue to hold down short-term interest rates and to continue its campaign of asset purchases â€" even as it dials them back.

Ms. Yellen did make one controversial statement. In its policy release, the Federal Open Market Committee said that it was likely to keep interest rates near zero “for a considerable time after the asset purchase program ends.” How long is a “considerable” amount of time? a reporter asked Ms. Yellen. She suggested something like six months.

The Fed is expected to complete its taper of asset purchases in the fall. That would mean that it would start increasing interest rates in the spring of 2015 â€" early, in the minds of many market participants. But Ms. Yellen will have plenty of opportunity to walk that statement back, if she wishes, and in this press conference repeatedly said that the Fed would be looking at a range of data when deciding when to raise rates.

â€" Annie Lowrey

3:36 P.M. The Important Economic Indicators

Ms. Yellen spoke at length about the indicators she follows to get a better sense of the strength of the labor market.

First up is the labor force participation rate: the proportion of working-age Americans who either have a job or are looking for one. That rate has been falling, in part because the weak economy has discouraged many adults from even looking for a job and in part because the population is aging.

“There are differing views within the committee” on how much of the falling rate is due to weakness and how much is due to the changing composition of the work force. “It’s hard to know definitively,” she said, adding that it was “something to watch closely.”

She also said that the participation rate might “flatten out for a time as discouraged workers start moving back into the labor market.”

Next up is the quits rate, which Ms. Yellen describes as “in many ways, a sign of the health of the economy.” That is because workers tend not to quit their jobs unless they believe another good gig is out there. The rising quits rate is a sign that workers are feeling more confident and the labor market is normalizing.

Finally, Ms. Yellen said she liked to look at measures of wage increases, currently “running at very low levels.”

Ms. Yellen said that â€" given the country’s productivity growth, inflation rates and other economic measures â€" wages should be growing 3 or 4 percent a year. (That would be “normal,” she said.) But wage growth is scant. “Not only is it depressed,” she said, “it is certainly not flashing an increase that might signal some tightening.” In other words, there is nothing in worker compensation to suggest that the Fed should take its foot off the accelerator.

â€" Annie Lowrey

3:40 P.M. Ukraine and the Mysterious Drop in Bond Holdings

Peter Barnes of Fox Business asked whether the crisis in Ukraine was affecting markets and the economy â€" and whether a recent decline in international holdings of Treasury bonds at the New York Fed was caused by Russia’s pulling its money out.

Ms. Yellen declined to comment on the unprecedented $105 billion decline in bonds held in custodial accounts at the New York Fed. The identity of the holders of those accounts is a closely kept secret, and only aggregate data, released weekly, gave evidence of the decline in holdings.

As for a broader risk to the United States economy from Ukraine, Ms. Yellen said that she and her colleagues at the Fed were “not seeing broader financial repercussions” at present but that they were monitoring the situation closely.

3:27 P.M. ‘Premature’ Research on Normalizing Job Market

The Times’s Binyamin Appelbaum asked Ms. Yellen what credence she might put in an emerging range of evidence that suggested that while there remained millions of Americans who had been unemployed for long periods of time, the market was rapidly becoming more normal for everyone else. That is, might the job market have returned largely to health if one takes the long-term jobless out of the equation?

That could matter a great deal for the Fed, because it could mean that wage inflation might show up even when the overall unemployment rate remains elevated, because long-term unemployed with dim prospects are exaggerating the overall jobless rate.

While Ms. Yellen said that the committee would examine that evidence, she said it would be “tremendously premature” to use that theory as a justification for changing policy at this point.

“I don’t think our committee would endorse the judgment of the research you cited,” she said. Implicitly, to embrace that line of research would suggest the Fed was washing its hands of the long-term jobless program, which Ms. Yellen appeared unwilling to do based on preliminary evidence.

â€" Neil Irwin

3:26 P.M. ‘Shacking Up’ 3:24 P.M. The View From the Back 3:20 P.M. Yellen’s First Mistake? 3:11 P.M. Clarifying Dovishness 3:09 P.M. Blaming the Weather

Blame the sluggish economy on the weather â€" but only in part.

Ms. Yellen said that “weather has played an important role in weakening economic activity” in the first three months of the year. But she stressed that while it is an “important factor, it’s not the only factor.”

The Fed might have gotten overly optimistic about the strength of the recovery before the bad weather hit, she said. Its assessments are “partly down due to weather and partly down because we probably overdid the optimism in January,” she said.

But she repeated her belief that the economy was picking up â€" and the weather might be part of that rebound, too. Businesses might have put off hiring new employees because of the snowstorms. Some households might have decided to wait to test-drive new cars until the cold let up. Now that it is warming back up, we might see a snapback in economic activity, Ms. Yellen said.

â€" Annie Lowrey

3:06 P.M. Those Blue Dots

Binyamin Appelbaum of The New York Times and Jon Hilsenrath of The Wall Street Journal noted that in Fed leaders’ projections of future interest rates, there was some upward drift in expectations compared with December. For example, in December a minority of officials expected a federal funds rate over 1 percent at the end of 2015, but that has shifted to a majority.

So what gives?

Ms. Yellen’s answer in short: Don’t read too much into a few dots. Referring to the chart that plots the interest rate expectations of her and her colleagues as a series of blue dots, she encouraged Fed watchers to place greater weight on the overall thrust of the Fed’s communications. People shouldn’t take small moves in the number of officials predicting rates a year or two out as gospel, she argued.

“I would simply warn you that these dots are going to move up and down over time a little bit this way or that,” she said, noting the expectations edged toward lower rates in December before reversing slightly in March. “I don’t think it’s appropriate to read very much into it.”

And, she added, “the end of 2016 is a long way out. Monetary policy will be evolved to reflect evolving conditions in the economy.”

â€" Neil Irwin

3:01 P.M. Looking at a Broader Range of Information

The Associated Press asks Ms. Yellen to give more insight into the committee’s decision to drop its guidance that it might start considering raising interest rates when the unemployment rate fell to 6.5 percent.

First off, Ms. Yellen defended the so-called Evans Rule. (The proposal by Charles Evans of the Chicago Fed, adopted by the Fed in December 2012, that the Fed would keep interest rates at or near zero until unemployment falls below 6.5 percent or inflation rises above 2.5 percent or if long-run inflation expectations get out of hand.) The committee did not drop the guidance from its statement “because we think it hasn’t been effective,” she said, arguing it has had a “useful impact” in shaping the expectations of market participants.

But as the unemployment rate moved closer and closer to 6.5 percent â€" it is currently 6.7 percent â€" it became obvious that the committee would need to clarify its intentions, she said: “Markets want to know, the public wants to understand, beyond that threshold, how will we decide what to do?”

The committee wants to give the public more information, “even though it is qualitative information,” she said, updating its guidance as the economy changes.

She said that the unemployment rate was not capturing the pain in the labor market; hundreds of thousands of working-age adults have given up on looking for a job, for instance, and if they were to start looking the rate would rise.

“It’s appropriate to look at many more things,” she said. “That’s why the committee now states that we’ll look at a broad range of information.”

â€" Annie Lowrey

2:51 P.M. Not Close to Full Employment 2:48 P.M. Growth Potential 2:47 P.M. A Shout-Out for U-6

In her opening comments, Ms. Yellen made particular note of one measure of the labor market that is showing particular evidence of improvement. It’s U-6, a broad measure of unemployment that includes, in addition to those who fit the traditional definition of the jobless (people who do not have a job but want one, and have searched for a job in the last month), people who want a job but have given up looking out of frustration with dim prospects, and people who have part-time jobs but would like full-time work.

This measure of unemployment has declined from a peak of over 17 percent in 2010 to 12.6 percent in February.

Ms. Yellen was using that improvement, it appeared, to assure that the Fed was looking at broad evidence for job market improvement, not just the conventional unemployment definition, also known as U-3.

â€" Neil Irwin

2:41 P.M. Pre-Set Courses 2:33 P.M. Fed Officials Have No Idea What Rates Should Be in 2016

Making predictions is hard â€" especially about the future.

That is evident in Fed leaders’ forecasts for what the appropriate short-term interest rate will be in 2016. That may only be two years away, but Fed leaders’ assessment of the appropriate level of the federal funds rate, its main policy target, range from 0.75 percent to 4.25 percent, according to a chart published alongside new projections.

As Bloomberg View’s Matthew C. Klein tweets:

â€" Neil Irwin

2:31 P.M. Markets React 2:29 P.M. Look for Rate Increases Next Year

A whopping 13 of 16 Fed leaders believed it would be appropriate to raise interest rates in 2015, according to new projections of the path of interest rates in the years ahead.

Only one thought it would make sense to increase rates in 2014, and two thought that 2016 was most likely to be the day for tighter money. (The officials are not listed by name in the projections, though some make their own views plain in speeches and interviews.)

That suggests the officials believe the economic recovery is sufficiently robust, and well entrenched, that it doesn’t make sense to push the day of tighter money still further. At the December meeting, three officials thought that it would make most sense to tighten policy in 2016, though it is unclear whether the change resulted from one official’s change of view or turnover in the committee membership.

â€" Neil Irwin

2:24 P.M. Will the Fed Ever Raise Rates?

Here’s a snap response from Peter Schiff, the chief executive of Euro Pacific Capital:

The Fed will keep manufacturing excuses as to why rates can’t be raised. Whether it’s a cold winter or a hot summer, a geopolitical crisis, or an unexpected sell-off in stocks or real estate, the Fed will always find a convenient excuse to postpone tightening. That’s because it has built an economy completely dependent on zero percent interest rates. Even the smallest rate shock could be enough to push us into recession. The Fed knows that, and it is hoping to keep the ugly truth hidden.

But 13 of 16 Fed officials expect that the central bank will raise interest rates in 2015 â€" just next year.

â€" Annie Lowrey

2:22 P.M. Predicting Faster Fall in Unemployment

There were only modest changes in Fed leaders’ forecasts for how the economy will evolve in the years ahead in new projections released Wednesday. The biggest tweak: They now believe the unemployment rate will fall faster than they did at their December meeting.

Fed officials expect the unemployment rate to be in the 6.1 to 6.3 percent range at the end of 2014, down from 6.3 to 6.6 percent as of December. They reduced their forecasts for unemployment at the end of 2015 and 2016 by similar amounts.

The officials’ forecasts for gross domestic product growth and inflation were almost identical to their December forecasts, as were their predictions of the longer-term potential growth rate.

â€" Neil Irwin

2:20 P.M. Dovish Dissent From Kocherlakota

There was a dissenter in the ranks at the Fed meeting, with the Minneapolis Fed president, Narayana Kocherlakota, opposing the committee’s decision to change its language around what economic conditions might prompt a tightening of policy.

Mr. Kocherlakota has emerged as one of the F.O.M.C.’s strongest voices expressing concern about high unemployment and low inflation.

It concerns the fifth paragraph of the statement, which replaced numerical thresholds for inflation and unemployment that might spark an increase in interest rates with more vague, qualitative guidance. Mr. Kocherlakota believed this “weakens the credibility of the Committee’s commitment to return inflation to the 2 percent target from below and fosters policy uncertainty that hinders economic activity.”

Mr. Kocherlakota agreed with the subsequent paragraph, however, in which the Fed said it will most likely keep interest rates low for some time, and his formal dissent offered no view of the main policy change to emerge from the meeting, of tapering bond purchases to $55 billion a month.

â€" Neil Irwin

2:19 P.M. Fed Says the Self-Sustaining Recovery Is Here

“There is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions.”

That is the Fed announcing that a self-sustaining recovery is here. Unemployment remains elevated. The recovery is still slow by historical standards. There is slack, waste and pain across the economy. But the recovery, the Fed thinks, has finally gathered some steam â€" meaning that the Fed can start to ease off on its extraordinary campaign of support for borrowing, lending and economic activity in general. In January, in contrast, the Fed said it “continues to see the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy.”

The Fed opens its statement by noting that economic activity “slowed during the winter months,” though it thinks that “adverse weather conditions” are partially at fault. Indicators remain “mixed” on the labor market, it said, and the unemployment rate remains “elevated.”

â€" Annie Lowrey

2:15 P.M. Numerical Thresholds Go Out the Window

Fed officials changed their communication about when they might raise interest rates to reflect what everybody already knew: that the old guidance that they would consider rate increases when the unemployment rate fell to 6.5 percent had become irrelevant.

That guidance, put in place in December 2012 and affirmed in every policy meeting since then, has proved misleading because the unemployment rate has fallen more rapidly than Fed officials had supposed, in large part because of people leaving the labor force at a rapid rate. The unemployment rate was 6.7 percent in February and could easily hit the 6.5 percent threshold in March or April. Yet the Fed is still most likely a long way from raising interest rates, wanting to see broader evidence of economic improvement first.

Reflecting that reality, the F.O.M.C. scrapped language with levels of unemployment and inflation that might start the debate around rate increases (6.5 percent and 2.5 percent, respectively), and added more vague, qualitative language. In deciding how long to keep rates near zero, “the Committee will assess progress â€" both realized and expected â€" toward its objectives of maximum employment and 2 percent inflation,” the statement said. “This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.”

â€" Neil Irwin

2:08 P.M. F.O.M.C. News Release

The Federal Open Market Committee released this statement:

Press Release
Release Date: March 19, 2014
For immediate release

Information received since the Federal Open Market Committee met in January indicates that growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate, however, remains elevated. Household spending and business fixed investment continued to advance, while the recovery in the housing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually, moving toward those the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.

The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in April, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $25 billion per month rather than $30 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $30 billion per month rather than $35 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Comittee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.

The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to ¼ percent target range for the federal funds rate, the Committee will assess progress â€" both realized and expected â€" toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal and provided that longer-term inflation expectations remain well anchored.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

With the unemployment rate nearing 6½ percent, the Committee has updated its forward guidance. The change in the Committee’s guidance does not indicate any change in the Committee’s policy intentions as set forth in its recent statements.

Voting for the F.O.M.C. monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Richard W. Fisher; Sandra Pianalto; Charles I. Plosser; Jerome H. Powell; Jeremy C. Stein; and Daniel K. Tarullo.

Voting against the action was Narayana Kocherlakota, who supported the sixth paragraph, but believed the fifth paragraph weakens the credibility of the Committee’s commitment to return inflation to the 2 percent target from below and fosters policy uncertainty that hinders economic activity.

â€" Neil Irwin

1:33 P.M. Waiting for the Announcement

Fireworks â€" and policy changes â€" are likely to be few. The Federal Open Market Committee will most likely elect to continue slowing the pace of its injections of new money into the economy, with the pace of bond buying set to slow to $55 billion a month (from the current $65 billion and from $85 billion a month last year).

Officials have signaled they are likely to continue slowing the rate of bond purchases by $10 billion a month at each meeting this year, assuming the economy continues growing in line with their forecasts.

One open question is how the Yellen-led committee will adjust its communications to signal when the Fed will increase interest rates. Since late 2012, the Fed has signaled that it expects to consider rate increases when the unemployment rate falls below 6.5 percent, but joblessness has fallen faster than they expected and now stands at 6.7 percent. The central bank may reshape that language to get away from such precise indicators to guide their future policy.



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More Fed Officials Say 2016 Is Year for Rate Increase

The Federal Reserve isn’t going to tell us when it expects to start raising interest rates. It isn’t going to draw a line in the sands of economic data - a minimum unemployment rate, a minimum rate of inflation. It’s done with all of that.

But the Fed is preserving another window on its plans. Since 2012, it has published the expectations of its senior officials about the year of the first Fed funds rate increase. It is scheduled to publish the latest batch of forecasts on Wednesday afternoon.

And those forecasts are likely to carry the same message as the latest round of changes in the Fed’s policy statement: Settle in. This is going to take a little explaining.

This chart from BNP Paribas shows the evolution of the forecasts. (There are 19 seats on the Federal Open Market Committee, but there have been vacancies at some meetings, so the chart gives percentages rather than counting heads.)

A majority of Fed officials has bet on 2015 since September 2012 â€" the month when the Fed changed its policy statement to read, “Exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.”

When the Fed replaced that guidance just a few months later with an economic target - 6.5 percent unemployment - Ben S. Bernanke, who was then the chairman, was at pains to emphasize the timetable had not changed. And the dots did not move.

Lately, however, the number of Fed officials betting on 2016 has been rising, and it seems likely to rise again on Wednesday. Charles Evans, the president of the Federal Reserve Bank of Chicago, walked into the 2016 camp earlier this month.

The BNP chart reflects that move; other analysts say a larger shift is possible.

“We believe that Chair Yellen is probably one of the 2016 dots,” Sven Jari Stehn, a Goldman Sachs economist, wrote in a recent analysis. “If that is true, other participants, especially the governors, might decide to shift in her direction.”

The Fed is dismantling its stimulus campaign - arguably it has been retreating for almost a year now, since Mr. Bernanke roiled financial markets last summer - but the slow drift of the forecast is a reminder that it is moving very slowly.

The Fed may reinforce that message on Wednesday by emphasizing in its statement that even when it does start to raise rates, that too will happen very slowly.

Finally, it’s worth looking at one other part of the forecast. Fed officials are also asked to predict the long-run level of interest rates - basically, to define normal. Before the recession, normal was about 4 percent. But in recent forecasts, a growing number of officials - four in September, six in December - have predicted that interest rates will not return all the way to 4 percent. They’re basically saying this recovery won’t just take a very long time, but that it will remain incomplete.



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Tuesday, March 18, 2014

Q&A: A Development Expert on Narrowing Inequality

Branko Milanovic has been studying income inequality around the world for a long time.

Professor Milanovic, now at the City University of New York’s Graduate Center, was for many years a development expert at the World Bank. In his 2011 book, “The Haves and the Have-Nots,” he noted how inequality between countries was much larger than within them. Sixty percent of a person’s income is determined by where a person was born.

Global development may be changing that, however: While income inequality soared in the United States and other countries over the last two decades, the disparity of income between countries declined. Measured worldwide, income inequality appears to be slightly lower than it was 20 years ago.

My Economic Scene column this week discusses these findings. Following is a transcript of an email interview with Mr. Milanovic last week, lightly edited for length and clarity.

Q.

It is probably a safe bet that most people around the world â€" certainly most Americans â€" believe that income inequality is rising inexorably. Your work, however, suggests that this is not the case. At the global level, incomes are becoming more equal. How can this be?

A.

Inequality calculated among all individuals in the world, as if they were part of one single nation, has been edging slightly downward over the past 10 to 15 years, mostly thanks to very high growth rates in China and India. These relatively poor giants (particularly India) have pulled quite a lot of people out of poverty and into something that can be called “the global middle class.”

That is the key factor behind the decline of global inequality: The distance between their incomes and the rather stagnant incomes of the middle class in rich countries has diminished. Yet global inequality is still extremely high by the standards of any single country. It is, for example, significantly higher than inequality in South Africa, which is the most unequal country in the world.

Q.

How are these dynamics related? Must poverty reduction in China, India and other poor countries come at the expense of stagnating middle-class incomes in the United States and other rich countries?

A.

I am not sure this must have happened, but this is what seems to have happened. The more active global participation of Asian countries pitted their workers in direct competition with the much better paid workers in rich countries, whose productivity may not have been high enough to make up for their higher wages.

This seems to have led to rising incomes for workers in “resurgent” Asia and stagnation of middle-class incomes in the United States and elsewhere in the West. We cannot “prove” causality between these developments simply because the processes are too complicated, but this is what the facts seem to suggest.

Q.

The worldwide decline of inequality has a perplexing pattern: Even as it has declined between countries, it has increased within most countries. You detect everywhere a concentration of income at the very top. Is this a necessary feature of globalization? Must we get used to permanently higher levels of national inequality?

A.

The rise of inequalities within nations is a notable feature of this globalization, often driven by large income gains concentrated among the top 10 percent, or 5 percent or even more narrowly 1 percent of the population.

Roughly speaking, globalization has produced two main winners: the very rich people everywhere and poor and middle-income people in Asia. The latter are not of interest, or even visible, to the people in Latin America or Europe or the United States. They see that their own 1 percenters have become much richer.

This dynamic may persist, at least in the short run, for two reasons. First, there is another wave of poor countries following China, which may continue putting pressure on Western wages. Second, reducing inequality through higher taxation on capital or corporate profits may not be possible because of capital’s high cross-border mobility. If global processes continue as before and Western countries cannot do much nationally, I do not see much chance for a change in the inequality that we have now.

Q.

Despite these patterns, you find that â€" at least until the financial crisis â€" there were no absolute losers: People at all points in the global income distribution experienced income gains, on average. If global inequality declined and everybody’s income rose, shouldn’t we think of globalization as an unquestionably good thing?

A.

Globalization is certainly a good thing, and global income data do show it: People at any point of the global income distribution are better off today than they were a quarter-century ago.

From a global perspective, it is not a problem that the income gains are greater for the relatively poor Chinese and Indians than for the relatively rich Americans. We are normally in favor of such pro-poor changes when they happen within a single country.

The political problem arises because the gains have been distributed unevenly across countries â€" some have gained much, while others not at all â€" and across income groups within countries. Since our political life is organized at the level of nation-states, not globally, this creates political problems.

Q.

Wasn’t the classical argument for globalization that it would help the poorer countries catch up to the rich? Didn’t we get what we wanted?

A.

Yes, we did broadly get what we wanted. We should not forget, though, that there are large parts of Africa where average incomes have not budged at all in the past 20 years. In a dozen African countries, per capita incomes are at 1960s levels.

To give you just the two examples of the countries very much in the news today: Ukraine’s peak income ever was in 1989, before the breakup of the Soviet Union; Venezuela achieved its peak in 1977.

Globalization did not deliver everywhere. But it delivered in a very important way by helping the huge masses of people in Asia. In the past, it was often thought an impossible task to lift out of poverty millions and millions of people in China and India. This has clearly been proven wrong.

Q.

There are vastly varying levels of inequality within rich countries. Income concentration has grown much faster in the United States than, say, in France or Sweden. This would suggest that national policies make a difference. What would be your advice to rich countries concerned about globalization’s impact on income distribution?

A.

National policies obviously do make a difference. The increase in inequality was not nearly as strong in continental Europe as it was in the English-speaking countries, although they have all been exposed to more or less the same forces. The structure of their labor force and their wealth levels are similar, yet economic policies did differ.

It could be argued, as it was some time ago by Dani Rodrik, that it would be in the self-interest of the winners of globalization to accept greater redistribution through higher minimum wages, publicly funded education and larger social transfers. This could prevent the backlash against globalization coming from those who lose out or do not partake in the gains.

These measures would not only help avert the discontent that could derail globalization. Over the long haul, they would also help economic competitiveness. But people think that such measures could damage the economy in the short term. Hence, you have the usual conflict between what is good right now and what is good over a longer period of time.

Q.

How do you see these dynamics affecting economic policies around the globe? Growing income inequality appears to be sapping political support for globalization in the developed world. Should we expect an inward turn to protectionism?

Pro-redistribution measures should help avoid such a turn of events. Although I do not think that we shall go back to the destructive policies of the 1930s, I think that one can detect beginnings of such a backlash in the anti-immigration policies sweeping Europe right now.

Q.

The dynamics you sketch out suggest the emergence both of a large global middle class and a very powerful global elite of 1 percenters. How would this affect the world’s political systems? Should we expect political power to be captured by the globalized rich? Or is this a recipe for global populism, as the middle class in each country rises against globalization?

A.

The contrast is between a globalized economy that largely determines our employment and income level, and political systems that remain national. This contrast was not nearly as strong before the 1980s, when national economies were not as interdependent and capital could not flow easily across the borders. Then, countries could more or less design the economic policies that suited them. Today this is no longer the case.

The danger is that these dynamics could lead to populism â€" a sort of a Luddite reaction against globalization â€" or to plutocratic rule. We can already see some hints of the latter. Rule of the rich would ensure the continuation of globalization, but it would deprive political democracy of any meaning. If I wanted to be somewhat melodramatic, I would have said that the challenge is to navigate between the Scylla of populism, which would do away with globalization, and the Charybdis of plutocracy. Our defining challenge is how to maintain both globalization and meaningful national democratic systems.



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Congress and the Fed Need to Think Inside the Same Box

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities in Washington and a former chief economist to Vice President Joseph R. Biden Jr.

Though there are sadly many choices, one of the most troubling economic missteps in recent years has been fiscal and monetary policies working at cross-purposes.  Far too often, the economic weather report has been one of monetary tailwinds met by fiscal headwinds.

One simple way to show this, as in the figure below (pay no attention to the annotation for now), is just to compare the movements in the federal funds rate â€" the interest rate that the Federal Reserve lowers when it wants to stimulate growth and raises when it wants to slow growth â€" and the deficit as a share of gross domestic product, a measure of fiscal stimulus.  During the worst of the Great Recession, fiscal and monetary stimulus pushed in the same direction. But starting in 2010, the administration and Congress pivoted to deficit reduction while the Fed kept stimulating the economy through announcing that they were holding rates at zero and adding quantitative easing.

In other words, for numerous years, monetary stimulus has been offset by budget austerity.

It is not a coincidence that those years have been a slow slog out of the downturn, with low growth and sluggish job creation.  When the private sector economy is weak, fiscal and monetary stimulus are highly complementary. Monetary policy sets the table but fiscal stimulus brings customers in to eat.  The Fed lowers the cost of borrowing, but absent consumer and investor demand, not enough people will take advantage of the Fed-induced rate reductions.  Policy ends up “pushing on a string,” as John Maynard Keynes put it.

Back when these cross-currents got underway, I made the box below to represent the simple matrix of policy makers’ choices.  In Boxes 1 and 4, Congress and the Fed are pushing in the same direction, toward growth or contraction, but in Boxes 2 and 3, they are working at cross-purposes.  As the first figure points out, from 2007 through ’09, we were well ensconced in Box 1, with monetary and fiscal stimulus both in growth mode. Since then we’ve been in Box 3.  That’s better than Box 4, which is where many critics of stimulus of any sort would have us be.  But Box 3 is a demonstrably bad box to be stuck in, as the tepid recovery has revealed.

What’s the point of reviewing all of this?  Because there is another recession out there, and we should learn from our mistakes. With that in mind, allow me to suggest a number of policies that can help keep us in Box 1 when that is where we need to be.  I’m going to focus on fiscal policy because a) the Fed is and should remain independent of the policies I’m about to suggest, and b) they have been and will continue to be more reliable in this regard.

Also, I’m going to need you to suspend political disbelief for a moment.

As the Fed’s monetary policies are guided by inflation and unemployment targets, so should fiscal policy.  Automatic stabilizers (like unemployment insurance and food stamp extensions), state fiscal relief, infrastructure spending, subsidized employment: fiscal support for these should all be keyed off of indicators such as the unemployment rate or the gap between actual and potential G.D.P.  With such rules in place, we could avoid the uncertainty-generating and economically destructive partisan fights that have broken out every time a program has expired in recent years.  And as these measures return to normal, these stimuli would automatically shut down, avoiding inefficient spending and unnecessary budget pressures.

If that one is pretty straightforward, this next one is a bit outside the box. (Actually, it’s very much inside Box 1.)

Dedicate the money the Fed earns to stimulus, until remittances return to normal levels.  When the Fed expands its balance sheet, as is often the case in downturns (though not nearly to the extent that it has in this last one), the interest it earns on its holdings are turned over to the Treasury and used for deficit reduction. Instead, when the indicators noted above are flashing red, those remittances should be automatically dedicated not to deficit reduction but to fiscal stimulus.

This has at least two aspects to recommend it. First, it seals policy in Box 1, automatically tying monetary stimulus to fiscal stimulus.  Second, as the Fed winds down its monetary policy, fiscal stimulus follows suit.  From 2009 through 2013, the Fed remitted $350 billion to the Treasury. With a multiplier of 1.5, conventional estimates suggest that is another, much-needed five million jobs.  To be clear, however, as I noted, this quantitative easing-driven amount is far above past remittances.

O.K., you can switch your political disbelief back on. I’m well aware that there is not a lot of traction for these types of ideas, despite the fact that the general principle â€" the Fed and the Congress should be in Box 1 in recessions (and weak recoveries from them) â€" is textbook macro.

All that tells you is that we have between now and the next downturn to relearn these lessons.



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Monday, March 17, 2014

Where to Find Nuggets of Data in the Budget

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Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform â€" Why We Need It and What It Will Take.”

If you really want to know what a particular government agency is doing, how it spends its money, how many employees it has or what it has accomplished in the past or seeks to accomplish in the future, you must read the appendix to the federal budget. That information doesn’t exist anywhere else.

The president’s budget used to be a big deal. Analysts, including me, anxiously awaited its publication, usually a week after the State of the Union address, and newspapers like The New York Times devoted hundreds of column inches to reporting its contents.

No more. The president’s budget has been “dead on arrival” for years, and the White House now treats it more as a chore to be done and gotten out of the way than the showcase of its legislative program.

Yet while the president’s budgetary proposals no longer carry the weight they once did, it would be a mistake to assume that the process of producing the budget is wasted or lacks substance. For example, the appendix to the budget lists every single line item in the federal budget and is the essential starting point for all appropriations.

Another extremely useful budget document is the historical tables. These are critical for putting budget data into context. It is particularly helpful to have budget categories such as military spending, nondefense discretionary spending, mandatory spending and entitlements laid out consistently over time for analysis.

Too much budget commentary, especially on the right, just lumps all spending together as equally worthless and deserving of across-the-board cuts or abolition.

But my favorite budget document is something called the Analytical Perspectives. It wasn’t published until March 10, a week after the formal budget was presented. That is where I find many of the tables and analyses that are most useful to me in understanding how the government operates and what its real fiscal problems are.

Given the interest in the budget deficit, one useful place to start is on Page 21, where it is separated into its “cyclical” and “structural” components. The former results from temporarily slow growth; the latter is what would remain even after the economy returns to some semblance of “full employment” (5.4 percent).

In this table, the nonaccelerating rate of inflation †In this table, the nonaccelerating rate of inflation â€" the level of unemployment in an economy that does not contribute to inflation â€" is assumed to be 5.4 percent.

Generally speaking, economists do not worry about the cyclical portion of the deficit but rather about the structural component. The budget shows that at least for the foreseeable future, both are declining to manageable levels.

Another useful table, on Page 16, shows the extent to which higher interest rates, slower economic growth and inflation affect budget projections. (All data are symmetrical in either direction.) Conservatives in particular always say that growth is the cure for all that ails us. And indeed the data show that projecting 1 percent higher economic growth every year from 2014 to 2024 would shave almost $4 trillion off projected deficits. The problem, of course, is that conservatives always want to cut taxes to achieve growth, which never materialized in the 2000s, leaving only bigger deficits.

On Page 47 is foreign ownership of the federal debt. In 1965, almost all federal debt was owed to ourselves, to American citizens. At the end of 2013, foreigners owned almost half the $12 trillion public debt outstanding. Many people worry that allowing this percentage to rise will give other countries that own large amounts of Treasury securities, such as China, the ability to exercise power over us. However, the greater their holdings, the greater their financial incentive to maintain our ability to continue making interest and debt repayments as well.

On Page 304 is a table on federal investment. Many conservatives and libertarians routinely talk as if all government spending goes down a rathole. In fact, much spending is for long-term investments that clearly yield benefits to society that we would all suffer without. This includes research and development in medical and other technology, physical capital in public infrastructure, and education and training. This year the federal government will spend almost $500 billion on such activities.

Chapter 13 discusses a curious budget concept that even many experts are unaware of â€" offsetting receipts. These are federal revenues not counted as revenues, but as negative spending. The impact on the deficit is the same, but total spending and revenues are lower than they really are. A well-known example of an offsetting receipt is Medicare Part B premiums.

Chapter 14 reviews tax expenditures, which in many ways are indistinguishable from ordinary spending, although conservatives maintain that there is an absolutely fundamental philosophical difference between a tax giveaway and a spending giveaway. People can read and judge for themselves.

Lastly, I would call attention to the data in Chapter 5, which examines miscellaneous indicators of the nation’s social development. Table 5-1 is a compendium of data showing how we have changed as a society over the last 50 years or so. For example, the percentage of the population that has ever been married has fallen to 68.6 percent from 78 percent; average family size has fallen to 3.1 people from 3.7; single-parent households have risen to 9.1 percent from 4.4 percent; the high school graduation rate has risen to 88.4 percent from 58.1 percent, and college graduates have risen to a third of the population from 11 percent.

Once in a while, it is interesting to step back and try to look at the budget and society in a broader perspective. For those with an interest, the Analytical Perspectives volume of the budget is an offbeat source.



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Friday, March 14, 2014

People Think We’re in a Recession. Don’t Blame Them.

The United States economy emerged from recession in June 2009 and has been growing for nearly five years. Yet this week, an NBC News/Wall Street Journal poll of American adults found that 57 percent still think the economy is in recession.

It’s not hard to see why. People don’t take this as a technical economic research question; they take it to mean, “Is the economy good?” And for much of America, despite years of modest gross domestic product growth and strong stock market gains, the economy isn’t good.

Two trends are responsible. The labor market is still slack, meaning millions who would like to work can’t, and those who do work have limited ability to demand higher wages.

Last year, Emanuel Saez â€" an economist from the University of California, Berkeley â€" made headlines with the finding that 95 percent of income gains from 2009 to 2012 accrued to the top 1 percent of earners. But this finding was not about the rich doing well; their incomes are actually growing a little more slowly than in the last two economic expansions.

Instead, it reflects the failure of most of America to recover at all, with real market incomes for the 99 percent rising just 0.1 percent a year. Higher corporate profits and higher stock prices have not translated into meaningfully higher wages.

The other trend is a long-term one: For four decades, even in stronger economic times, wage gains have not kept pace with economic growth. Wages and salaries peaked at more than 51 percent of the economy in the late 1960s; they fell to 45 percent by the start of the last recession in 2007 and have since fallen to 42 percent.

Wage and salary as a share of GDP. Gray bars indicate recessions.Federal Reserve Bank of St. Louis Wage and salary as a share of GDP. Gray bars indicate recessions.

When the economy does grow, that growth disproportionately accrues to the owners of capital instead of to wage earners; and in the last few years, weak growth and abundant labor have made that pattern even stronger than normal.

Of course, if you poll people, they won’t describe that situation to you exactly. They might say, “My sister can’t find a job, and I haven’t gotten a raise in three years.” Or they might tell you, incorrectly but understandably, that we’re in a recession.

Our main economic policy debates still focus around what policies will improve overall economic growth, instead of the problem of growth not adequately translating into improvements in employment and wages. This is especially true among Republicans, but it also creeps into the Democratic perspective on the economy.

Republicans call for lower taxes, fewer transfer payments and less regulation. In some cases, they focus on the need to reduce the public debt or to tighten monetary policy. Regardless of whether these policies would bolster G.D.P. growth, they have little to do with tightening the labor market after a recession or with increasing the share of G.D.P. that goes to wages and salaries.

Democrats are much more focused on the wage and employment problems. The Obama administration has expanded transfer programs that raise families’ real incomes even if their wages don’t rise, and it has called for a rise in the minimum wage. But as Kevin Drum points out, these policies mostly benefit the poor, and they provide little help for middle-income families whose incomes have also stagnated.

On Monday, Jason Furman, chairman of the White House Council of Economic Advisers, held a briefing about the Economic Report of the President, which features a chart showing how productivity has pulled away from wages since the 1970s. I asked him what policies, other than raising the minimum wage, the president sees as useful for raising the share of G.D.P. that goes to wages.

To my surprise, Mr. Furman responded with a list of education and human capital policies, including expanded prekindergarten, improved access to higher education, holding colleges accountable for quality and better apprenticeship programs. He also promoted policies to raise overall growth, like corporate tax reform.
These policies might promote wage growth over the long run (or, in the case of prekindergarten, the very long run). But they are not policies specifically aimed at tightening the labor market.

The one period of really robust wage growth in the last 40 years was the late 1990s, when the labor market was tight and workers could effectively demand higher wages in exchange for their labor. Fiscal and monetary policies that aim to recreate that situation might finally get Americans to stop saying we’re in a recession. Yet that’s not the focus of the conversation in Washington.

This article is a preview of The Upshot, a New York Times site dedicated to demystifying politics, economics and other subjects. It will make its debut on nytimes.com this spring. To learn more, follow David Leonhardt on Facebook and Twitter. You can also follow Josh Barro, a reporter for The Upshot, on Twitter.



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