The Point

Where Congress and the President Could Find a Few Trillion Dollars

August 20, 2015

This year’s presidential hopefuls all agree that America has serious problems, with each party blaming the other. As readers of this blog know, the Number One problem in my view is the end of strong income growth for a majority of American households since 2002. However the candidates define the problem, they all have answers (of sorts), ranging from sweeping tax cuts to major initiatives for training, higher education and infrastructure. None of them will say how to pay for their agendas; but as it happens, they’re all in luck: A new book by Swedish economists Dag Detter and Stefan Foster, titled immodestly, The Public Wealth of Nations, has found hundreds of billions of dollars, even trillions of dollars, hiding in plain sight.

It begins with two facts. Governments own more assets than all of their richest citizens put together; but unlike wealthy people, governments don’t manage their assets. The U.S. government owns more than one million buildings, vast networks of roads, military and space installations, public utilities and railroad facilities, and 25 percent of all the land in the country (including 43 percent of all forest land). No one in government even knows precisely what all of those assets are worth, because there is no standard or systematic accounting of public assets, much less professional management to enhance their value, like private assets.

Professionally managing a country’s public assets is an idea associated mainly with the national wealth funds created by Norway, Saudi Arabia and a few other countries that found themselves with more energy revenues than they could handle. The Swedish economists make a good case that the United States and other countries should apply this model to their physical assets.

Here’s what it could mean if we tried it. The Bureau of Economic Analysis estimates that the federal government’s non-financial assets are worth about 20 percent of GDP, or about $3.5 trillion today. (The physical assets of city and state governments, including their networks of schools, hospitals, prisons, roads, and so on, are worth some $10 trillion.) Detter and Foster reviewed the evidence and the literature, and conclude that the professional management of public assets can raise their returns by 3.5 percentage-points, which by any measure is a lot of money.

Let’s be conservative and say it would raise those returns in the United States by just 2 percentage-points. At that rate, the professional management of federal assets would generate an additional $70 billion per-year without raising a dollar in taxes or cutting a dollar in spending.  With a reasonably growing economy, 10 years of such professional asset management should produce more than $800 billion for the government and its taxpayers, and 20 years would produce $1.9 trillion.

And if the Swedes are right that professional management could raise those returns by 3.5 percentage points, it would generate more than $120 billion per year, $1.4 trillion over 10 years, and $3.3 trillion over 20 years. That would cover about 40 percent of the projected funding shortfall of Social Security.

There also are models on how to do it, since versions are in place today in the United Kingdom, Norway, Finland, Sweden, and Singapore. First, establish an independent enterprise with the authority to manage the government’s nonfinancial assets, overseen and operated by independent, publicly accountable directors and executives. The closest domestic model we have is the Federal Reserve, and like Janet Yellen and her deputy, senior executives and board members would be appointed by the president and confirmed by the Senate. The executives and board would hire platoons of professionals in every area, all outside the civil service, to competently manage our public wealth.

It could mean, for example, that the Postal Service might use its assets as deftly as UPS or Fedex, or at least close enough so that its productivity gains were half those of UPS and Fedex instead of less than 30 percent. Or consider the Bureau of Land Management (BLM), which oversees 260 million acres of federal lands. Those holdings include the “Green River formation” in Colorado, Utah and Wyoming, which happen to be the world’s largest known sources of shale oil and gas. Unlike the BLM, professional asset managers could lease some of those lands for shale production. And in another division, managers could weigh the case for moving various military facilities currently sited on some of the country’s most expensive land, like the barracks for dress Marines on Capitol Hill in Washington, D.C., and leasing such desirable facilities to commercial tenants.

Most people would fire their investment managers, if they didn’t know what their clients held and had done nothing for decades to increase their value. If we applied the same standards to federal assets, we could find the means to carry out the ambitious initiatives the country so badly needs.

The 2016 Politics of Income Stagnation and Decline

August 13, 2015

America has a big incomes problem: The incomes of most Americans largely stopped growing around 2002.  Wide public resentment over that hard fact already dominates the 2016 debate.   On the Democratic side, income issues have been conflated with concerns about inequality, so every plan to cushion the impact on middle-class is financed by more taxes on the unworthy wealthy.  From the right, where the uber-wealthy, unworthy or otherwise, fund a flock of would-be presidents, income issues get mixed up with the dogma that most problems come from the corruption of liberal government and pollution of foreigners.  So, GOP plans for restoring rising incomes usually boil down to tax cuts, especially for the uber-wealthy, that tacitly blame the people who liberal government traditionally help, and threats to undocumented workers.

Both approaches have had only limited success.  Hillary Clinton understands that today’s inequality is the result, not the cause, of broad-based income stagnation and decline.  So, she can never outflank Bernie Sanders, who brings to their debate the fervent (if quirky) enthusiasm of a genuine socialist.   The GOP faces an even tougher challenge, since much of the party’s base blame their economic problems on a corrupt establishment that includes big business as well as big government, and the foreign labor they need or protect.   On this front, Jeb, Marco, Scott and even Ted and Rand will never outflank a self-assured¸ self-financed xenophobe like Donald Trump, or at least not until they can change the subject.

These half-baked responses are tailored for the base voters already fully engaged in the partisan wars.  They won’t be enough when the candidates have to address the majority of Americans, who care more about their jobs (and football teams) than about party posturing.   For the Democratic candidate, winning will depend on maximizing the support of women, minorities and young voters, while containing the disaffection of working class white men.  The Republican will face the opposite and tougher challenge – energize the support of working class white men while attracting more support from women, minorities and millennials.

My recent report from the Brookings Institution laid out some hard facts that will be in many voters’ minds.  Let’s consider households headed by people in their mid-to-late 30’s when each of the last five presidents took office.  Among such households that were headed by women, annual average income gains of 3.9 percent under Reagan and 5.8 percent under Clinton have been followed by much smaller progress, averaging 1.0 percent per-year under Bush and 2.0 percent per-year in Obama’s first term.

Most tellingly, consider households headed by people without college degrees, and which account for 70 percent of all households.  Among households headed by people in their mid-to-late ’30s when each president took office, and with only a high school diploma, their annual income gains averaged 2.6 percent under Reagan and 2.4 percent under Clinton.  But the comparable households under Bush experienced income losses averaging 0.3 percent per-year, followed by even greater losses averaging 1.8 percent per-year in Obama’s first term.

Similarly, households headed by Hispanics of comparable age when each president took office made annual income progress averaging 2.2 percent under Reagan and 3.1 percent under Clinton, which were followed by barely any gains at all, averaging 0.3 percent per-year under Bush and 0.1 percent per-year in Obama’s first term.

The country’s broad economic disappointment has energized the Tea Party and the Occupy movement, and it now animates the bases of both political parties.  The challenge for those who would be president is to bypass popular anger and partisan simplifications and present a serious agenda that can restore normal income progress.

How Greece Could Short-Circuit the U.S. Expansion

June 18, 2015

In chaos theory, the flutter of a butterfly’s wing can ultimately cause a typhoon halfway around the world. This week, Greece, a nation with a GDP smaller than the Philippines, became that butterfly – and its ongoing economic struggles could cause storms that would upend the financial stability of Europe and wreak serious collateral damage on our own economy.

Greece has flirted with sovereign debt default for more than three years. The latest talks for another bailout from the European Union and the IMF broke down this week, with Greek Prime Minister Alexis Tsipras calling the EU proposal “humiliating” and the IMF’s conduct “criminal.” Normally, the debt troubles of a country with an economy barely one percent the size of our own wouldn’t matter much to us.  But as a member of the EU and the Eurozone monetary union, Greece’s problems can reverberate deeply throughout Europe.  Global investors already are nervous that the EU and IMF may be unable to head off Greece’s looming insolvency.

If the worst happens, Greece’s default could trigger runs on government bond markets in other Eurozone countries seen at risk, including Italy and Spain.  Since Europe’s large financial institutions hold more than $1 trillion worth of those bonds, a Greek default could spark a financial meltdown rivalling even the 2008-2009 crisis.

This crisis has unfolded in fits and starts for a long time, and the EU and the European Central Bank (ECB) have spent hundreds of billions of Euros trying to support those bond markets and strengthen the banking system. No one knows if it will be enough to stave off the worst-case scenario. But if a genuine crisis unfolds over the next month or so, everyone does know that European voters will never accept another bank bailout. And if Europe’s economy falls into a tailspin, the ECB will have little room to support and stabilize it by cutting interest rates.

Greece’s default also would trigger its exit from the EU and the Eurozone. No country has ever done so before, so no one knows precisely what would happen next. Inevitably, the consequences would be destructive. To begin, if Greece has to abandon the Euro and revive the drachma, its economy would come to a halt.  The government could not pay its employees or vendors, or issue pension checks; and untold thousands of Euro-based contracts today across Greece and between Greek and foreign concerns would have to be renegotiated.  So, on top of an unfolding financial crisis, the balance sheets of those foreign firms would suffer further, and a rapidly-deepening recession would spread across much of Europe.

These prospects explain why President Obama made the Greek crisis a top priority in his talks at the recent G-7 summit. The EU is America’s largest trading partner; and perilous times there would quickly affect U.S. jobs and investment – and those costs would increase as the fast-falling value of the Euro would drive up the foreign prices of U.S. exports. Even more serious, our financial institutions and multinational companies have thousands of deals involving European banks.

In a crisis, that becomes bad news for U.S. stocks: If cascading events threaten the solvency of those banks, many of those deals will become problematic, depressing the value of our own banks and companies.  The results here at home could be a credit crunch, falling employment, and a new recession – and this time, the Federal Reserve could do little to help.

The United States needs a prosperous Europe for not only the obvious economic reasons, but also as our geopolitical partner from the Middle East to the Korean peninsula and the South China Sea. A weakened Europe, consumed by recession and facing the possible unraveling of a half-century of economic union and political collaboration, won’t be there for us the next time a U.S. president needs support to advance American and Western interests and influence.

What are the odds?  A scenario in which everyone loses usually inspires steps to head off the terrible reckoning.  Yet, events in coming weeks may demonstrate how domestic politics in Greece and across much of Europe put the two sides at such cross purposes that everyone will needlessly suffer. At this point, calming this butterfly’s wings will require uncommon statesmanship and a real willingness by leaders in Greece, the EU and Washington to take measures that will cost them popular support.  So far, we’ve managed to side-step a serious crisis, and we could see another deal that papers over the problems for a while.  But if Greece and the EU do run out of options this time, your retirement accounts could lose a third of their value over the next year.

What Happens to Your Healthcare When Catastrophes Strike?

April 28, 2015

Hospitals, clinics, pharmaceutical distributors, and other parts of American healthcare face a quandary: When natural or manmade disasters make their services most vital, the infrastructure they depend on may collapse. Superstorm Sandy highlighted the danger of power outages to patient care. Today, the United States is at increasing risk of blackouts lasting much longer and covering a wider area, from cyberattacks, earthquakes and other events. These “black sky” events will disrupt electricity not only to hospitals and other facilities, but also to the water and wastewater systems that are just as critical to public health.

Last week, I considered these issues in an address to the Healthcare and Public Health Sector Joint Meeting, of the Critical Infrastructure Partnership Advisory Council (CIPAC). Here’s the gist of what I said:

First, it’s time to scale emergency power facilities and plans for long, widespread outages. During the Sandy blackout, the failure of the emergency power generators at the Langone Medical Center, as well as nursing homes and other facilities, highlighted the desperate need for secure, reliable emergency power systems. A growing number of healthcare facilities are installing generators and storing fuel on-site to serve their loads for 44 or 72 hours.

But in a genuine black sky event, emergency power systems will have to do for even longer periods. First, many emergency generators will burn out. Hospitals, nursing homes and other facilities should follow the guidelines of the U.S. Army Corps of Engineers on emergency power and expedite the installation of long-term backup generators for extended events or ensure that they can be rapidly installed when disaster strikes.

Second, the distribution of emergency fuel also constitutes an Achilles heel for healthcare during disasters. Too many hospitals and other facilities depend on a small number of suppliers who would be overwhelmed in a disaster by clients across numerous critical sectors. And in the wake of earthquakes, sophisticated cyberattacks on energy systems, and other black sky events, the pipelines, bridges and roads essential to deliver emergency fuel will be severely disrupted.

No state, regional or nationwide plans exist today to ensure that hospitals and other critical systems can and will receive fuel in such a badly disrupted environment. We need to develop those plans now.

The 2016 Elections Will Be All about Incomes

March 23, 2015

The key issue in next year’s elections is already clear: Recent Census Bureau data show that after two decades of strong, steady and reliable income growth by American households of virtually every type – the 1980s and 1990s — as many as two-thirds of households suffered steadily declining incomes as they aged from 2002 to 2013. Yes, the incomes of the more fortunate third of the country continued to rise, but at less than half of the rate of their counterparts in the 1990s and 1980s. These are the top-line results from a new study of mine that Brookings released earlier this month; and this is the first essay in a series reviewing my findings — and what policymakers can do about it.

The study tracks the income paths of many different types of households, as the heads of those households aged from their mid-20s to their late-50s. Since politics and policy matter, I also tracked the incomes of households of various ages through each of the last five presidencies. (And since the economy’s course in every president’s first year is set by his predecessor, we begin each president’s accounting in year-two of his first term.) For example, let’s consider households headed by people in the late-30s and early-40s at the beginning of each president’s term. Their incomes rose, after inflation, by an average of 2.8 percent per-year as they aged through Ronald Reagan’s presidency (1982-1989); and under Bill Clinton (1994-2001), the comparable age-cohort has gains averaging 2.5 percent per-year through his two terms. But the gains by that age group plummeted to 0.3 percent per-year under George W. Bush (2002-2009) and rose only slightly, to 0.6 percent per-year, through Barack Obama’s first term (2010-2013).

It’s no mystery why so many Americans still revere Reagan and Clinton. Under their presidencies, every type of household shared in broad income progress — whether those households were headed by men or women; by whites, African-Americans, or Hispanics; or by those with college educations or those without degrees. It’s also no mystery why so few Americans revere Bush-2 or Obama, since under their presidencies, those steady income gains shrank sharply or, more often, turned into substantial income losses. For example, let’s look at households headed by high school graduates, who throughout this period account for about half of all Americans. Under Reagan, households headed by high school grads in their late-30s and early-40s when he took office had steady income gains averaging 2.6 percent per-year; and under Clinton, the comparable group registered steady income gains averaging 2.4 percent per-year as they aged through his terms. Yet, under Bush-2, households headed by high school graduates of comparable ages saw their incomes fall steadily by about 0.3 percent per-year; and under Obama, their losses accelerated to 1.8 percent per-year.

The results also reveal a distinctive life-cycle to the income growth of most of us. Across every group, people achieve their largest percentage-gains in income in their mid-20s to mid-30s; their income growth slows in their late-30s to mid-40s, and then it plateaus for most people in their late-40s and early-50s. With this in mind, let’s turn to the income paths of younger households headed by young African-Americans under each president. Households headed by blacks in their late-20s and early-30s when Reagan took office saw income gains averaging 3.8 percent per-year as they aged through his two terms, and the income growth of comparable households under Clinton was even stronger, averaging 7.3 percent per-year. Yet, under Bush-2, the income gains of households headed by relatively young African-Americans slowed sharply to 1.8 percent per-year; and under Obama, the same group’s gains averaged just 0.1 percent per-year.

If income stagnation and decline are central issues in the 2106 elections, what could the next president and Congress do about it? The necessary policy shifts fall into two categories. The first category covers those economic policies which both Reagan and Clinton followed, and which Bush-2 and Obama effectively abandoned. The second category involves responses to the structural changes in the economy that have blunted broad, normal income gains.

Here, I’ll sketch the outlines of the first category, which touch on three basic elements of a mainstream economic program. First, both Reagan and Clinton supported substantial increases in long-term public investments, especially in education and infrastructure. Second, both Reaganomics and Clintonomics addressed growing budget deficits through substantial revenue increases and some spending reforms – from the very beginning in Clinton’s case, and more belatedly under Reagan. The combination supported strong rates of business investment and healthy increases in productivity, and both in turn helped to life people’s incomes.

Contrast that with Bush-2, who not only cut federal support for education and modern infrastructure. Bush also enacted outsized tax cuts to deal with a mild recession and the first entitlement (prescription drugs for seniors) ever passed without a dedicated revenue source; and on top of all this, he prosecuted two wars with no provisions to pay for either. Obama had to take on Bush’s fiscal legacy, compounded by the 2008-2009 economic collapse. He properly proposed a large stimulus, including some public investments; but he soon had to accept premature austerity, including cuts in public investments. It now appears that unless the next president changes course, much of Obama’s progress on the deficit will prove to be temporary.

The third element is politically touchy, but the economic benefits are clear: Both Clinton and Reagan successfully pushed measures that liberalized trade and foreign direct investment. There was the first free trade pact with a developing economy (NAFTA, proposed by Reagan, negotiated under Bush-1, and enacted under Clinton), the historic Uruguay round that created the World Trade Organization (initiated under Reagan, negotiated under Bush-1 and Clinton, and enacted under Clinton), the U.S. accession to the Asian-Pacific Economic Cooperation (APEC) group under Bush-1 and Clinton, and the 1999 U.S. trade pact with China under Clinton. These measures cost some Americans their jobs; but they created even more jobs by helping U.S. businesses tap into foreign demand, especially in fast-growing developing nations. These measures also have intensified competition, which normally leads to changes that produce innovation and higher productivity. Yet, for all of their obvious benefits, multilateral trade talks under Bush-2 and Obama have failed to produce any new agreement, although Obama continues to press for new accords with the European Union and 11 Pacific Rim nations, including Japan.

In the next installment in this series, we’ll look at what happened to the incomes of households headed by women and by older age cohorts without college degrees, and review some measures to end-run some of the adverse effects of globalization on broad income progress.


Income growth and decline under recent U.S. presidents and the new challenge to restore broad economic prosperity

March 5, 2015

The condition of most American households, and of the country as a whole, is set largely by people’s income – both the levels, and the income progress that people make as they age from their 20’s to their 30’s, 40’s and 50’s. For generations, most Americans have believed that if they work hard, they’ll have real opportunities to earn steadily rising incomes. Such broad based upward mobility is one of the reasons that Americans have been generally optimistic and willing to extend opportunity to successive minority groups. But is that the way America really works? One common view argues that wages have stagnated and most Americans have made, at best, modest income progress since the 1970s. This view is based on a time series of a single statistic, “aggregate median household income.” In fact, the true picture is more complex.

Today, the Brookings Institution issues a new report which I worked on for the past year. Using new Census Bureau data, I analyze household incomes by age cohort – say, people age 25 in 1980 or in 1990 –and then follow those age cohorts as they age. The results revise what we thought we knew about incomes. The data show that broad, strong income gains were hallmarks of the 19809s and 1990s. Moreover, the steady progress of the Reagan and Clinton years covered just about everybody — households headed by men and by women; by whites, blacks and Hispanics; and by those with college degrees, high school diplomas, and no degrees at all. This broad upward mobility, however, simply stopped under Bush and has not recovered under Obama. Moreover, this dramatic turnaround, including declining incomes from 2002 to 2013 for a majority of American households, affects every demographic group.

I’ll be writing more about what’s really happened to income, why, and what we can do about in coming weeks and months. If you want to read the report for yourself, click here

The Peculiar Economics of Falling Oil Prices

December 8, 2014

The sharp fall in worldwide oil prices is a silver lining with a silver lining, even if the linings are a bit tarnished. The price of the world’s most widely-used commodity has fallen sharply over the last five months, from a spot market price of $115 per-barrel in late June to $77 last week. For consumers everywhere, that means major savings that will mainly go to purchase other goods and services; and those boosts in demand should spur more business investment. So, if low prices hold for another six months, analysts figure that growth in most oil-consuming and oil-importing countries could be one-half to a full percentage-point higher than forecast, including here in the U.S. and in the EU, China and Japan.  It’s a blow to the big oil-producing and oil-exporting nations; but the global economy will come out ahead. After all, the U.S., EU, China and Japan account for more than 65 percent of worldwide GDP, while the top ten oil exporting countries, led by Saudi Arabia and Russia, make up just over six percent.

The hitch for this rosy scenario is that much of the revenues that OPEC countries now won’t see would have gone into financial and direct investments in the U.S. and EU. That means that new investments in American and European stocks and bonds could be reduced by some $300 billion per-year. The upshot may be slightly higher interest rates and slightly lower equity prices, which would dampen the growth benefits of lower oil prices.

The lower prices are driven mainly by supply and demand, but market expectations and some strategic maneuvering by Saudi Arabia play a role, too. Yes, worldwide oil supplies are up with rising production from U.S. and Canadian tar sands and shale deposits, and Libya’s fields are fully back online. Moreover, these supply effects are amplified by softness in demand for oil, coming from economic stagnation in much of Europe and Japan, China’s slower growth, and our own increasing use of natural gas. Oil prices also are influenced, however, by the prices that buyers and sellers expect to prevail months or years from now. Last week, when the “spot price” of crude oil was about $77 per-barrel, the price for oil to be delivered next month was almost $10 lower. In fact, the world’s big oil traders see crude prices continuing to decline not simply into 2015, but for a long time: The price for oil to be delivered in mid-2016 is less than $72 per-barrel and, according to these futures prices, not expected to reach even $80 per-barrel until 2023.

Don’t count on a decade of cheap oil. Yes, technological advances have brought down the cost of extracting oil from tar sands, shale and deep water deposits, as well as the cost of producing and transporting natural gas. But the economics of these new energy sources work best at prices higher than those prevailing today. A long period of low oil prices would slow the growth of supply from those sources — and so, drive oil prices back up. The Saudis are counting on it.  They’ve refrained from cutting their own production, which could restore higher prices, in hopes that another year of low prices will slow down investments in all those alternatives sources.

The truth is, oil prices will rise again whether the Saudis’ tactic works or not. While the outlook for much stronger growth remains slim for Japan and much of Europe, an extended spell of lower energy prices will support higher growth here, in China, and across many of the non-oil producing countries in Asia, Latin America and Africa. Stronger growth and energy demand will bring on line more alternative sources of energy — as long as oil prices are high enough for the alternatives to be competitive.

This is an old story. Oil prices fell, and as sharply as they did this year, in 1985 and 1986, in 1997 and 1998, and in the aftermath of the 2008 – 2009 financial upheavals. Each time, oil prices marched up again after one, two, or at most three-to-four years. Of course, that volatility also makes some people billionaires. To join them, what you’ll need is patience and a hedge fund’s access to credit. With that, all you do is go out and purchase a few billion dollars in contracts to take delivery of crude in 2018 or 2020 at today’s futures prices, and then dump the contracts when oil prices once again head north of $100 per-barrel.

The Economic Foundations of this Year’s Mid-Term Elections

November 19, 2014

The usual explanations for the Democrats’ drubbing in this year’s mid-term elections have focused mainly on the lopsided number of Democrats up for reelection, especially in red states; low turnout among important parts of the Obama coalition; and the President’s depressed popularity. But there’s also one very basic and underlying issue that played an important part; not only in this year’s GOP wave, but also in the Democratic landslides in 2006 and 2008, the last GOP wave in 2010, and the Democratic sweep in 2012. What has happened to the incomes of middle-class Americans?

In a forthcoming report from the Brookings Institution, I trace the income paths of several “age-cohorts” of Americans as they aged over the last 35 years. For a long time, the direction of that path was given: Average Americans could and did improve their economic lot simply by working hard, year after year. Certainly, that’s precisely what happened in the 1980s and 1990s. Using new Census Bureau data, we can now track the median income of age-cohorts as they grow older — for example, the incomes of those age 25 in 1980 when they turn 35 in 1990 and 45 in 2000. Those data tell us, for example, that the median real income of households headed by people ages 25-to-29 in 1982 rose from $44,785 in that year to $60,927 in 1992 and $76,427 in 2002 — income gains 3.5 percent per-year, year after year for 20 years.

This has mattered in the last six elections, because, in recent years, those regular gains virtually stopped. For example, the median income of households headed by people ages 25-to-29 in 1991 rose from $48,098 in 1992 to $66,374 in 2002, for gains averaging 3.8 percent per-year; yet by 2012, their median income was still just $66,551, for annual gains averaging just three-tenths of one percent for a decade.

The graph below depicts the incomes paths of households headed by those ages 25-to-29 in 1982 (the light blue line) and those ages 30-to-34 in 1982 (the dark blue line) from 1982 to 2012. It clearly shows their incomes rising steadily through the 1980s and 1990s, until it simply stopped in 2000 or 2002.

Now, income gains usually slow sharply when people reach their mid-to-late forties and older. So let’s look at the income paths of households headed by people ages 25-to-29 in 1991 and people ages 30-to-34 in 1991. Again, we see their incomes rising sharply and steadily through the 1990s, and stalling out from 2000 or 2002 until the present.

By looking at the path of median income gains by the same age groups under each President, we also can draw some tentative conclusions about the relationships between these gains and political success. For example, take households headed by people ages 25-to-29 in the second year of each President’s term. The median household income of that age cohort increased at average rates of 4.0 percent per-year in the 1980s under Reagan and 5.3 percent per-year in the 1990s under Clinton — and then decelerated sharply to 1.9 percent per-year under Bush II and 2.6 percent per-year under Obama. The contrast is even greater with older households. The median incomes of households headed by people ages 35-to-39 in the second year of each President’s term grew at average annual rates of 2.8 percent under Reagan and 2.5 percent under Clinton, followed by gains of just 0.3 percent per-year under Bush II and actual losses of 0.1 percent per-year under Obama. (The Obama record here covers only 2010-2012, because the last available year of these income data by age covers 2012).

We also constructed the income paths of age cohorts by the gender, race and ethnicity, and educational levels of their household heads. Income differences based on race and ethnicity have not changed much since the early 1980s — which tells us households headed by whites, blacks and Hispanics have made roughly comparable income progress for the last 35 years. In the case of gender, incomes grew much faster for female-headed households in the 1990s than male-headed households, but that dynamic was reversed for the last decade.

There is one finding that can well explain the unusual volatility and disaffection of so many American voters over the last decade. In 2000, 16 percent of households were headed by people without high school diplomas, and another 51 percent were headed by people without college degrees. From 2002 to 2012, the median income of the first group, across age cohorts, declined at an average annual rate of 2.4 percent, year after year; and the median income of the second group, across age cohorts fell at an average annual rate of 1 percent, year after year. That tells us that two-thirds of American households have suffered persistent income losses as they aged from 2002 to 2012, through eight years of economic expansion along with two years of serious recession. The median income of the remaining households, headed by college graduates, increased over this period — but at only one-third of the rate of households headed by college graduates in the 1980s and 1990s.

These trends have enormous electoral consequences. They explain why, in recent years, overall positive economic numbers and growth are not translating into feelings of shared prosperity. That’s why so many Americans are angry and ready to turn on whichever party has most recently failed to restore the broad income progress that almost everyone experienced in the 1980s and 1990s.

Are Financial Crises the New Normal?

June 17, 2014

The policy-making committee of the Federal Reserve Board meets again tomorrow, and the news won’t be encouraging. The one-percent decline in GDP in the first quarter disposed of the Fed’s forecast for 2.9 percent growth this year, and they have to lower it to the range of 2.0 percent to 2.5 percent. That’s just what the IMF did yesterday, forecasting as well that the United States won’t reach full employment again until 2017. So the Fed will leave interest rates at rock-bottom levels through at least next year. But Fed chair Janet Yellen will also continue to wind-down the quantitative easing program, because doing otherwise would signal big troubles ahead for the U.S. economy and scare the daylights out of the markets. In short, happy days are still out of reach, and there’s little the Fed can do about it.

We know it could be a lot worse, since it was much worse not very long ago. And it is much worse in other places. Consider Argentina: On Monday, the Supreme Court refused to let the Argentine government arbitrarily void its contracts with selected American lenders. So, now Argentina — with admittedly the world’s most irrepressibly, irresponsible, freely-elected government — may face another sovereign debt default by the end of the month. And according to the ratings agencies, the place next in line for a debt default is Puerto Rico. If it happens, the Obama administration will have to swallow hard and bail out our island Commonwealth — or risk economic chaos there and new problems for important banks here and in Puerto Rico.

Across the pond, Yellen’s counterpart at the European Central Bank (ECB), Mario Draghi, continues to work overtime to stave off a European financial crisis. Two years ago, Greece, Spain, Portugal and Italy were all teetering towards sovereign debt crises, until Draghi stepped in and pledged that the ECB would purchase as many of their bonds as it took to support their debt markets. Two years later, those debts continue to rise, though not as fast as before. But their economies are still not productive enough to attract the foreign investors they need to support their large public debt burdens. And the large European banks which hold more of those bonds than anyone except the ECB are still unprepared to weather a serious crisis. Yet, you wouldn’t know it from official pronouncements: Wolfgang Münchau reported this week in the Financial Times that the “adverse scenario” designed by the ECB to stress-test those banks’ ability to weather a big shock is, in certain respects, more optimistic than the ECB’s own forecast.

Finally, while China blusters that its renminbi should be an exchangeable, global currency on par with the dollar, the flood of credit it unleashed to maintain high growth in recent years has left much of its banking system technically insolvent. And its “shadow banking system” — the network of arrangements that many Chinese municipalities and businesses use to borrow funds outside the regular banking system — is in equally precarious shape. The only things protecting China from its own financial crisis are strict credit controls and the fact that the renminbi is not an exchangeable currency, which insulate it from the judgments of global capital markets.

The fact is, financial crises have become as common as they were in the 19th century before the rise of central banking. This new cycle started in Latin America in 1985–1986, followed by Spain, Japan and Sweden in 1990–1991, moved on to Mexico in 1995 and East Asia in 1997–1998, and then to the United States in 2008–2009. The European Union has barely skirted its own crisis for the last three years, and the strains are intensifying in China. In ways that no one understands, the ultimate source of these cascading crises almost certainly lies in the globalization of capital markets. Until we figure out how and why this is happening, everyone’s prosperity will be hostage to upheavals that governments cannot control and can only barely manage.

World Bank Shocker — China’s GDP to Top the U. S. in 2014 — Means Little

May 1, 2014

The World Bank shook up a lot of people this week with its declaration that by a new accounting, China’s GDP will top America’s this year. But the meaning and significance of that accounting remain at best elusive. Last year, the World Bank reported that using prevailing exchange rates, China’s GDP in 2012 was barely half that of America ($8. 2 trillion versus $16. 2 trillion). The new report draws on a statistical adjustment called “purchasing power parity,” or PPP, often used to compare GDP in two or more countries when exchange rates fluctuate widely. In analytic shorthand, PPP calculates GDP by looking at what it costs households in one country to feed, house, educate and otherwise take care of itself — including the costs of doing business and maintaining government — compared to households in another country.  

Setting aside the fact that U. S. -China exchange rates have been pretty stable, here’s how PPP works. You start with a basket of personal and business goods and services in each country, taking account of habits, tastes and preferences. So, the Chinese basket will be different from its American counterpart because, for example, Americans eat potatoes and subscribe to premium cable stations while Chinese eat rice and go to outdoor cinemas. Since a serving of potatoes in America costs more than a serving of rice in China, China’s GDP is adjusted (upward) to take that into account. These comparisons also require adjustments for quality. Americans pay much more for health care and housing than Chinese — but the quality and quantity per-household of these services and goods as Americans consume them is much higher and larger than Chinese enjoy. So, World Bank statisticians have to not only observe prices and levels of consumption, but also come up with adjustment factors for differences in quality for each country. The truth is, nobody knows how to do that for countless goods and services, including the Bank’s PPP experts.

The United States is the baseline for PPP calculations. So if China’s basket of goods and services takes half as much income to buy there as the American basket does in the United States, after accounting for quality differences, China’s GDP is adjusted up by that increment. I should also mention that PPP analysis can produce a range of results based not only on all of the adjustments, but also on which of four distinct and accepted ways of calculating PPP the analyst uses. This week’s announcement of PPP-based GDP came after the World Bank applied a new weighting regimen to one of the four methods. What it means, then, depends on all of those assumptions and calculations, which makes any conclusions based on that accounting problematic, at best. As the Bank itself noted, “Because of the complexity of the process used to collect the data and calculate the PPPs, it is not possible to directly estimate their margins of error.

By any accounting, China’s GDP has been growing very rapidly for several decades. The reasons are pretty basic. They start with the world’s largest workforce producing Chinese goods and services. And, thanks to the foreign direct investments of advanced technologies and business methods, much of it from America, Western multinationals have given China the means to make all those workers more productive. Yet, the lives led by China’s people remain a world away from the lives of Americans. Even using the World Bank’s PPP calculations, per-capita GDP in China is just $9,844, compared to $53,101 in the United States.

One more caveat: China’s PPP-adjusted GDP may be said to statistically rival America’s — whatever that means — only because U. S.  growth has been unusually slow for more than a decade. If the American economy had continued to expand since 2001 at the rate it grew in the 1990s, our GDP would still be more than 20 percent bigger than China’s even using the World Bank’s new adjustments and accounting. For that, we have no one to blame but our policymakers and ourselves.