Feeds:
Posts
Comments

Archive for the ‘Economics’ Category

How fast will the US economy grow? When mainstream forecasters consult their crystal balls, they typically see real economic growth around 2 percent annually over the next decade. The Congressional Budget Office (CBO) and midpoint estimates of Federal Reserve officials and private forecasters cluster in that neighborhood.

When President Trump looks in his glowing orb, he sees a happier answer: 3 percent.

That percentage point difference is a big deal. Office of Management and Budget director Mick Mulvaney recently estimated the extra growth could add $16 trillion in economic activity over the next decade and almost $3 trillion in federal revenues.

But could our economy really grow that fast? Maybe, but we’d need to be both lucky and good. We’ve grown that fast before. But it’s harder now because of slower population growth and an aging workforce. And there are signs that productivity growth has slowed in recent years.

To illustrate the challenge, I’ve divvied up past and projected economic growth (measured as the annual growth rate in real gross domestic product) into three components: the growth rates of population, average working hours, and productivity.

d_marron_20170807

The link between population and growth is simple: more people means more workers generating output and more consumers buying it. Increased working hours have a similar effect: more hours mean more output and larger incomes. Hours go up when more people enter the labor force, when more workers find jobs, and when folks with jobs work more.

Productivity measures how much a worker produces in an hour. Productivity depends on worker skills, the amount and quality of capital they use, managerial and organizational capability, technology, regulatory policy, and other factors.

As the first column illustrates, the US economy averaged 3 percent annual growth over more than six decades. Healthy growth in population and productivity offset a slight decline in average hours. Of course, that six-decade average includes many ups and downs. The Great Recession and its aftermath dragged growth down to only 1.4 percent over the past decade. In the half century before, the United States grew faster than 3 percent.

Mainstream forecasters like the CBO and the Federal Reserve expect slower future growth along all three dimensions. People are having fewer children, and more adults are moving beyond their child-rearing years, so population growth has slowed. Our workforce is aging. Baby boomers are cutting back hours and retiring, and younger workers aren’t fully replacing them, so average working hours will decline. Productivity growth has slowed sharply in recent years, for reasons that are not completely clear. Productivity is notoriously difficult to forecast, but recent weakness has inspired many forecasters to expect only moderate growth in the years to come.

Proponents of President Trump’s economic agenda offer a rosier view. Four prominent Republican economic advisers—John F. Cogan, Glenn Hubbard, John B. Taylor, and Kevin Warsh—recently argued that policy, not just demographic forces, has brought down recent growth. They claim supply-side policy reforms—cutting tax rates, trimming regulation, and reducing unproductive spending—can bring it back up. They argue that encouraging investment, reinvigorating productivity growth, and drawing enough people into the labor force to offset the demographic drag would generate persistent 3 percent growth.

Many analysts doubt such supply-side efforts can get us to 3 percent growth (e.g., here, here, here, and here). Encouraging investment and bringing more people into the labor force could certainly help, but finding a full percentage point of extra growth from supply-side reforms seems like a stretch. Especially if you plan to do it without boosting population growth.

The most direct supply-side policy would be expanding immigration, especially among working-age adults (reducing our exceptional rates of incarceration could also boost the noninstitutional population). But the Trump administration’s antipathy to immigration, and that of some Republicans in Congress, pushes the other way. Cutting legal immigration in half over the next decade could easily take 0.2 percentage points off future growth (see this nifty interactive tool from ProPublica and Moody’s Analytics). Three percent growth would then be even more of a stretch.

Another group of economists believes that demand-side policies—higher spending and supportive monetary policy—could lift growth above mainstream forecasts.

One trio of economists took a critical look at past efforts to forecast potential GDP growth, a key driver of long-run growth forecasts. They conclude that forecasters, including those at the Federal Reserve and the CBO, have overreacted to temporary economic shocks, overstating potential growth when times are good and understating it when times are bad. We’ve recently had bad times, so forecasters might be underestimating potential GDP almost 10 percent. If so, policies that boost demand could push up growth substantially in coming years. (For a related argument, see here.)

So where does that leave us?

Well, every crystal ball (and glowing orb) is cloudy. We should all be humble about our ability to forecast the economy over the next decade. Scarred by the Great Recession and its aftermath, forecasters may be inadvertently lowballing potential growth. Good luck and good supply- and demand-side policies might deliver more robust growth than they anticipate. But those scars remind us we can’t always count on good policy, and luck sometimes runs bad.

We can hope that luck and good policy lift growth to 3 percent. But it’s prudent to plan for 2 percent, and pray we don’t fall to 1 percent.

Read Full Post »

How big is the underground sex economy in the United States and how does it work? The Urban Institute is out with a big study today that offers some answers. Here’s a brief summary of the full study (see also the accompanying feature).

Our study focused on eight US cities— Atlanta, Dallas, Denver, Kansas City, Miami, Seattle, San Diego, and Washington, DC. Across cities, the 2007 underground sex economy’s worth was estimated between $39.9 and $290 million. While almost all types of commercial sex venues—massage parlors, brothels, escort services, and street- and internet-based prostitution—existed in each city, regional and demographic differences influenced their markets.

Pimps and traffickers interviewed for the study took home between $5,000 and $32,833 a week. These actors form a notoriously difficult population to reach because of the criminal nature of their work. Our study presents data from interviews with 73 individuals charged and convicted for crimes including compelling prostitution, human trafficking and engaging in a business relationship with sex workers.

Pimps claimed inaccuracy in media portrayals. Most pimps believed that the media portrayals exaggerated violence. Some even saw the term “pimp” as derogatory, despite admitting to occasional use of physical abuse for punishment. Although pimps may have underreported the use of physical violence, they did cite frequent use of psychological coercion to maintain control over their employees.

Pimps manipulate women into sex work. From discouraging “having sex for free” to feigning romantic interest, pimps used a variety of tactics to recruit and retain employees. Some even credited their entry into pimping with a natural capacity for manipulation. Rarely, however, were pimps the sole influence for an individual’s entry into the sex trade.

Women, family, and friends facilitate entry into sex work. Female sex workers sometimes solicited protection from friends and acquaintances, eventually asking them to act as pimps. Some pimps and sex workers had family members or friends who exposed them to the sex trade at a young age, normalizing their decision to participate. Their involvement in the underground commercial sex economy, then extends the network of those co-engaged in the market even further.

Unexpected parties benefit from the commercial sex economy.  Pimps, brothels, and escort services often employed drivers, secretaries, nannies, and other non-sex workers to keep operations running smoothly. Hotel managers and law enforcement agents sometimes helped offenders evade prosecution in exchange for money or services. Law enforcement in one city reported that erotic Asian massage parlors would purchase the names of licensed acupuncturists to fake legitimacy. Even feuding gang members occasionally joined forces in the sex trade, prioritizing profit over turf wars. The most valuable network in the underground sex economy, however, may be the Internet.

The Internet is changing the limitations of the trade. Prostitution is decreasing on the street, but thriving online. Pimps and sex workers advertise on social media and sites like Craigslist.com and Backpage.com to attract customers and new employees, and to gauge business opportunities in other cities. An increasing online presence makes it both easier for law enforcement to track activity in the underground sex economy and for an offender to promote and provide access to the trade.

Child pornography is escalating. Explicit content of younger victims is becoming increasingly available and graphic. Online child pornography communities frequently trade content for free and reinforce behavior. Offenders often consider their participation a “victimless crime.”

The underground sex economy is perceived as low risk. Pimps, traffickers, and child pornography offenders believed that their crimes were low-risk despite some fears of prosecution. Those who got caught for child pornography generally had low technological know-how, and multiple pimp offenders expressed that “no one actually gets locked up for pimping,” despite their own incarcerations.

Policy and practice changes can help combat trafficking and prostitution.

  • Cross-train drug, sex, and weapons trade investigators to better understand circuits and overlaps.

  • Continue using federal and local partnerships to disrupt travel circuits and identify pimps.

  • Offer law enforcement trainings for both victim and offender interview techniques, including identifying signs of psychological manipulation.

  • Increase awareness among school officials and the general public about the realities of sex trafficking to deter victimization and entry.

  • Consistently enforce the laws for offenders to diminish low-risk perception.

  • Impose more fines for ad host websites.

Read Full Post »

In a lengthy piece on “The Future of Jobs“, the Economist cites some estimates of the risk that IT will eliminate jobs over the next 20 years:

Bring on the Personal Trainers - Economist

So Keynes was right: Economists should aspire to be like dentists.

P.S. Actual Keynes quote: “If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid.”

Read Full Post »

Because macroeconomists have messed it up for every one else , says Noah Smith at The Week:

To put it mildly, economists have fallen out of favor with the public since 2008. First they failed to predict the crisis, or even to acknowledge that such crises were possible. Then they failed to agree on a solution to the recession, leaving us floundering. No wonder there has been a steady flow of anti-economics articles (for example, this, this, and this). The rakes and pitchforks are out, and the mob is ready to assault the mansion of these social-science Frankensteins.

But before you start throwing the torches, there is something I must tell you: The people you are mad at are only a small fraction of the economics profession. When people in the media say “economists,” what they usually mean is “macroeconomists.” Macroeconomists are the economists whose job is to study business cycles — booms and busts, unemployment, etc. “Macro,” as we know it in the profession, is sort of the glamor division of econ — everyone wants to know whether the economy is going to do well or poorly. Macro was what Keynes wrote about, as did Milton Friedman and Friedrich Hayek.

The problem is that it’s hard to get any usable results from macroeconomics. You can’t put the macroeconomy in a laboratory and test it. You can’t go back and run history again. You can try to compare different countries, but there are so many differences that it’s hard to know which one matters. Because it’s so hard to test out their theories, macroeconomists usually end up arguing back and forth and never reaching agreement.

Meanwhile, there are many other branches of economics, doing many vital things.

What are those vital things? Some economists find ways to improve social policies that help the unemployed, disabled, and other vulnerable populations. Others design auctions for Google. Some evaluate development polices for Kenya. Others help start-ups. And on and on. Love it or hate it, their work should be judged on its own merits, not lumped in with the very different world of macroeconomics.

Read Full Post »

Raghuram Rajan, soon to be India’s chief central banker, has an excellent piece today dissecting “The Paranoid Style in Economics” and counseling humility for folks engaged in economic policy. A short excerpt:

All of this implies that economic policymakers require an enormous dose of humility, openness to various alternatives (including the possibility that they might be wrong), and a willingness to experiment. This does not mean that our economic knowledge cannot guide us, only that what works in theory – or worked in the past or elsewhere – should be prescribed with an appropriate degree of self-doubt.

But, for economists who actively engage the public, it is hard to influence hearts and minds by qualifying one’s analysis and hedging one’s prescriptions. Better to assert one’s knowledge unequivocally, especially if past academic honors certify one’s claims of expertise. This is not an entirely bad approach if it results in sharper public debate.

The dark side of such certitude, however, is the way it influences how these economists engage contrary opinions. How do you convince your passionate followers if other, equally credentialed, economists take the opposite view? All too often, the path to easy influence is to impugn the other side’s motives and methods, rather than recognizing and challenging an opposing argument’s points.

The whole piece is worth a read.

Read Full Post »

Economists often ignore politics when analyzing policy issues or view politics as a problem to overcome rather than as fundamental. When evaluating a carbon tax, for example, I try to tote up its potential environmental benefits, its hit to consumers and producers, what happens to the revenues, etc. I might also ponder what policy tweaks could facilitate a political coalition willing to enact such a tax. But I don’t typically worry about how a carbon tax would change the balance of power among coal, oil, nuclear, natural gas, and nuclear interests or between energy consumers and producers.

In the latest Journal of Economic Perspectives, Daron Acemoglu and James Robinson argue that this approach is short sighted, sometimes dangerously so. They argue that economic policy analysts should evaluate how policy decisions might change the future balance of political power and, thereby, the efficiency and fairness of future economic decisions:

There is a broad—even if not always explicitly articulated—consensus amongst economists that, if possible, public policy should always seek ways of reducing or removing market failures and policy distortions. In this essay, we have argued that this conclusion is often incorrect because it ignores politics. In fact, the extant political equilibrium may crucially depend on the presence of the market failure. Economic reforms implemented without an understanding of their political consequences, rather than promoting economic efficiency, can significantly reduce it.

Our argument is related to but different from the classical second-best caveat of Lancaster and Lipsey (1956) for two reasons. First, it is not the interaction of several market failures but the implications of current policy reforms on future political equilibria that are at the heart of our argument. Second, though much work still remains to be done in clarifying the linkages between economic policies and future political equilibria, our approach does not simply point out that any economic reform might adversely affect future political equilibria. Rather, building on basic political economy insights, it highlights that one should be particularly careful about the political impacts of economic reforms that change the distribution of income or rents in society in a direction benefiting already powerful groups. In such cases, well-intentioned economic policies might tilt the balance of political power even further in favor of dominant groups, creating significant adverse consequences for future political equilibria.

Our argument is that economic policy should not just focus on removing market failures and correcting distortions but, particularly when it will affect the distribution of income and rents in society in a direction that further strengthens already dominant groups, its implications for future political equilibria should be factored in. It thus calls for a different framework, explicitly based in political economy, for the analysis of economic policy. Much of the conceptual, theoretical, and empirical foundations of such a framework remain areas for future work.

They offer several examples, including the allocation of natural resource rights (an Australian approach promoted democracy, while one in Sierra Leone did not) and financial and banking regulation / deregulation in the United States.

Well worth a read.

Read Full Post »

Case Western Law Professor Jonathan Adler just released an interesting paper setting out a conservative case for environmental protection. Here’s his abstract:

The existing environmental regulatory architecture, largely erected in the 1970s, is outdated and ill-suited to address contemporary environmental concerns. Any debate on the future of environmental protection, if it is to be meaningful, must span the political spectrum. Yet there is little engagement in the substance of environmental policy from the political right. Conservatives have largely failed to consider how the nation’s environmental goals may be best achieved. Perhaps as a consequence, the general premises underlying existing environmental laws have gone unchallenged and few meaningful reforms have proposed, let alone adopted. This essay, prepared for the Duke Law School conference on “Conservative Visions of Our Environmental Future,” represents a small effort to fill this void. Specifically, this essay briefly outlines a conservative alternative to the conventional environmental paradigm. After surveying contemporary conservative approaches to environmental policies, it briefly sketches some problems with the conventional environmental paradigm, particularly its emphasis on prescriptive regulation and the centralization of regulatory authority in the hands of the federal government. The essay then concludes with a summary of several environmental principles that could provide the basis for a conservative alternative to conventional environmental policies.

One example of what he thinks ought to be a conservative approach to resource protection: property rights in fisheries (footnotes omitted):

The benefits of property rights at promoting both economic efficiency and environmental stewardship can be seen in the context of fisheries. For decades, fishery economists have argued that the creation of property rights in ocean fisheries, such as through the recognition of “catch-shares,” would eliminate the tragedy of the commons and avoid the pathologies of traditional fishery regulation. The imposition of limits on entry, gear, total catches, or fishing seasons has not proven particularly effective. Property-based management systems, on the other hand, have been shown to increase the efficiency and sustainability of the fisheries by aligning the interests of fishers with the underlying resource. A recent study in Science, for example, looked at over 11,000 fisheries over a fifty-year period and found clear evidence that the adoption of property-based management regimes prevents fishery collapse. Other research has confirmed both the economic and ecological benefits of property-based fishery management. The recognition of property rights in marine resources can also make it easier to adopt additional conservation measures. For instance, the adoption of catch-shares can reduce the incremental burden from the imposition of by-catch limits or the creation of marine reserves. A shift to catch-shares would have fiscal benefits as well. Yet in recent years, the greatest opposition to the adoption of such property-based management regimes has not come from progressive environmentalist groups, but from Republicans in Congress.

He also endorses a carbon tax, which combines responsibility (the polluter pays principle) with a move toward consumption taxation.

Read Full Post »

Older Posts »