Macro Roundup

WSJ reports on the BLS study on the "Gig Economy" we looked at last summer and previews a forthcoming Krueger/Katz paper confirming the findings

".... “After sifting through the new evidence,” Mr. Krueger said, “Larry Katz and I now conclude that there was a modest rise in the share of the workforce in nontraditional jobs over the last decade—probably on the order of one to 2 percentage points, instead of the five percentage point rise we originally reported.”Comparisons between 2005 and 2015 had a hard time accounting for the difference in economic health. In 2005, wages and overall gross domestic product were growing around 3% a year—the housing bubble meant this growth would be fleeting—and about 63% of U.S. adults had jobs. The housing bust and recession that began in 2007 wrecked all of that, and by 2015, the economy had been on a slow mend. Wages and GDP growth were stagnant at 2%, and employment as a share of the population was about 4 percentage points lower. This created a fertile environment for people to experiment with gig work. Butit didn’t represent a permanent shift, as the Labor Department’s 2017 survey made clear Messrs. Krueger and Katz also conclude surveys of the topic have flaws.By studying individual survey responses, they found that when people answer questions about their spouses, they are much less likely to mention secondary jobs than when they answer questions about themselves. Their own survey hadn’t asked additional questions about spouses, whereas the Labor Department does, leading to a significant discrepancy. “These factors distorted our initial comparison, and highlight the importance of using consistent methods to measure labor force trends over time,” Mr. Katz said...."
Josh Zumbrun, "How Estimates of the Gig Economy Went Wrong,"Wall Street Journal, January 7, 2019, https://www.wsj.com/articles/how-estimates-of-the-gig-economy-went-wrong-11546857000

just a FYI new Moretti blogpost on his paper from the fall, charts are better then the ones from the paper

“…Assortative matching matters in two different ways. First, there is the tendency of high-quality workers and plants to co-locate in the same local labour markets. The top two panels in Figure 2 show the positive relationship between average worker and plant quality across the 204 cities for two separate time windows. The figure suggests that the strength of this co-location pattern almost doubled over time: the elasticity is 0.457 in the period 1985-1991 and 0.884 in 2008-2014. The places were high-quality workers and plants cluster together tend to be the large West German cities like Munich, Hamburg or Frankfurt. This is shown in the bottom two panels of Figure 2 where we find positive associations between local population size and both average quality measures. But large cities like Munich do not only exhibit increasingly better pools of workers and plants than small cities like Uelzen. The second key mechanism is stronger assortative matching within those local labour markets. Inside Munich, matches are formed where the qualities of employers and employees are tightly aligned. The relatively best-paid persons tend to work for the relatively best paying local firms. Within Uelzen, by contrast, matching is far less assortative; who works for whom is closer to random. To show this more specifically, we compute the correlation of the worker fixed effects and the corresponding plant fixed effects of their employers in the first year of the respective time window. Figure 3 shows that this correlation tends to be higher in larger cities. Moreover, the association between local labour market size and within-city assortativeness has become considerably stronger over time: the elasticity is 0.038 in the period 1985-1991 and 0.061 in 2008-2014. In other words, job matches in Munich were more assortative than in Uelzen already in 1985-1991, but even more so in 2008-2014. This has contributed considerably to the rising wage gap between Munich and Uelzen….”
Wolfgang Dauth, Sebastian Findeisen, Enrico Moretti, Jens Südekum, “Assortative matching in cities,” Center for Economic and Policy Research, January 6, 2019, https://voxeu.org/article/assortative-matching-cities

very disingenuous Krugman column/chart"... Look at the history of top marginal income tax rates (left) versus growth in real GDP per capita (right, measured over 10 years, to smooth out short-run fluctuations.):.... What we see is that America used to have very high tax rates on the rich — higher even than those AOC is proposing — and did just fine. Since then tax rates have come way down, and if anything the economy has done less well....."

Paul Krugman, "The Economics of Soaking the Rich,"New York Times, January 5, 2019, https://www.nytimes.com/2019/01/05/opinion/alexandria-ocasio-cortez-tax-policy-dance.html

new intuitive finding from Rajan finds that geographic lending distances expand and contract with credit conditions, ie banks stay close to home during contractions and expand their reach during expansion. holds true across bank sizes

"....We examine the degree to which competition amongst lenders interacts with the cyclicality in lending standards using a simple measure, the average physical distance of borrowers from banks’ branches. We propose that this novel measure captures the extent to which lenders are willing to stretch their lending portfolio. Consistent with this idea, we find a significant cyclical component in the evolution of lending distances. Distances widen considerably when credit conditions are lax and shorten considerably when credit conditions become tighter. Next, we show that a sharp departure from the trend in distance between banks and borrowers is indicative of increased risk taking..... We find that the long-run trend toward greater average distances between banks and their borrowers, initially documented by Petersen and Rajan (2002), persists in the past 20 years. Importantly, we also find a significant cyclical component in the evolution of lending distances. Distances widen considerably when credit conditions are lax and also shorten considerably when credit conditions become tighter. Between 2004 and 2007, banks increased their average distances from 175 miles to 350 miles. These distances, however, quickly slipped back to approximately 200 miles following the 2008 financial crisis.This cyclical pattern in lending distances is robust to the inclusion of county-year fixed effects and bank fixed effects suggesting that the results cannot be explained by differences in growth across counties or by changes in the composition of lenders in the economy. This cyclicality also holds when we examine other points of the distribution of distances, such as the median, and lower and upper deciles. We also confirm that it is not driven by a few large banks but can be seen in different size classes of banks...... Finally, we provide evidence that as competition in banks’ local markets increases, their willingness to make loans at greater distance increases. Since average lending distance is easily measurable, it is potentially a useful measure for bank supervisors..... We find that the higher the average non-performing loan ratio of the bank, the more cyclical is its pattern in lending distance, suggesting that it was risky to go the extra mile during the boom...."

João Granja, Christian Leuz, Raghuram Rajan, "Going the Extra Mile: Distant Lending and Credit Cycles," National Bureau of Economic Research, October 2018, https://www.nber.org/papers/w25196

Ernie Tedeschi, "Average effective tax rates on top 1%," Evercore ISI, January 5, 2019, https://twitter.com/ernietedeschi/status/1081725446243434496

"....Here's how a 70% top marginal rate would have affected the avg effective tax rate for the top 1% in 2014Had the rate only applied to incomes >$10 mil, the top 1% AETR would have gone up 0.4pp to 36.8%. If the entire top bracket had gone to 70%, AETR would have risen 5pp to 42%In other words, when looking at the whole top 1% by income, raising marginal rates just on filers above $10m doesn't affect top 1% AETRs much; therefore, it raises very little revenue. Raising the whole top bracket to 70% by contrast pushes top 1% AETRs back to their 1945-70 & 2000 levels Note these AETRs may have fallen between 2014 and 2018 thanks to the TCJA. We find out in a few years. The >$10M hike would have yielded at most $9 billion in 2014....."

Ernie estimate the revenue from a hypothetics new 70% marginal income tax rate on income over 10m on Federal revenue using 2014 numbers. 9 billion dollars.

Kevin Erdmann, "Rich Cities Created the Housing Shortage,"Wall Street Journal, January 6, 2019, https://www.wsj.com/articles/rich-cities-created-the-housing-shortage-11546804458

Rich Cities Created the Housing Shortage

Could the dramatic pause in the housing market soon become a steep slide? Home sales, prices and new construction have been rising more slowly each month, triggering memories of the 2008 collapse. That crisis was a comeuppance from the excesses that preceded it: too much money, debt, housing, imports and consumption. Americans lived beyond our collective means, and the bills inevitably came due.

But what if that understanding of what happened is wrong? What if, even at the peak of building in 2005, the problem was too little housing rather than too much? And what if we still haven’t diagnosed the true cause of the crisis, let alone resolved it?

The first overlooked factor in the crash was the urbanization triggered by the information economy. Four main urban centers—New York, Los Angeles, Boston and San Francisco—share two important characteristics: They’re centers of new economic opportunity, and they permit new housing at rates much lower than their successful peers. Call them closed-access cities.

These metro areas had—and still have—a lid on the number of families that could access their lucrative labor markets. The lack of adequate housing, especially in prosperous urban centers, led to a stagnant job market. The mounting mortgage debt before the crisis was the result of a bidding war for access to limited urban prosperity.

At the height of the boom, closed-access cities lost more than 200,000 households each year on net as families were forced to withdraw their bids for access to metropolises. Most of those were lower-income residents who decamped for places like Arizona and Florida. Their arrival created a new housing bubble.

As in the San Francisco Gold Rush of 1849, the inflow of people overwhelmed local infrastructure and drove up costs in cities like Phoenix. But what they experienced from 2004-05 was a reverse gold rush, taking in people who had been pushed out of places where others were striking it rich. Phoenix did experience a housing bubble, but it was inflated by exclusion and compromise. It was more like a refugee crisis than a credit boom.

When the Federal Reserve tried to deflate the bubble by raising interest rates, one of the first unintended consequences was the collapse of the reverse gold rush. Net migration from Los Angeles to Phoenix had grown to about 16,000 residents annually in 2005. By 2008, it was less than 1,500 and continued to fall.

Credit standards were tightened in 2008 to control what appeared to be loose lending in lower-priced markets. Yet the reverse gold rush dried up long before 2008. Housing starts in Phoenix and cities like it, such as Las Vegas and Tampa, Fla., had been declining since early 2006. They had felt plenty of discipline already, thanks very much.

For decades leading up to the crisis, closed-access cities accumulated rules restricting new construction. This produced trillions of dollars of wealth for existing urban owners and prevented millions of Americans from moving to where they could be teachers, nurses and custodians for the companies and employees who design software, medical devices and autonomous cars.

The current housing slide seems unlikely to end in a 2008-like crash because the flight from high-price cities is less pronounced. Tepid income growth and federal restrictions on mortgage lending have dampened funding for the closed-access bidding war. But that’s a perverse method—and a temporary one—of avoiding a housing bubble. Growing metropolitan areas eventually will have to loosen housing restrictions in order to expand access. Those restrictions to access are the true source of a “bubble economy,” pushing up asset prices which then collapse in a frenzy when the economy slows.

The prudent path toward a stable housing market is more construction, more lending and more homeownership. Housing restrictions make economic growth painful by overinflating the price it takes to access the gains. Until they are reformed, many Americans will be stuck in the hopeless circumstance of running from booming regions rather than toward them.

Mr. Erdmann is a visiting fellow at the Mercatus Center at George Mason University and author of the forthcoming book “Shut Out: How a Housing Shortage Caused the Great Recession and Crippled Our Economy.”

James Pethokoukis, "Before we consider cranking up tax rates, let’s have a smart debate," American Enterprise Institute, January 7, 2019, https://www.aei.org/economics/before-we-consider-cranking-up-tax-rates-lets-have-a-smart-debate/

Before we consider cranking up tax rates, let’s have a smart debate

It now seems there’s going to be a national conversation about whether top federal tax rates should be dramatically higher. And for that you can partially credit first-term House member Alexandria Ocasio-Cortez — as well as the extreme media attention given to her every policy utterance. But only partial credit here. At a time of a) high national debt that’s heading even higher, and b) increased inequality — including the creation of some truly massive personal fortunes — it’s a discussion that was probably inevitable.

And there was a lot more happening back then with the American economy and growth than just the impact of tax rates, whether good or bad. Spared the ravages of war, the US was the planet’s economic colossus. It also benefited from a wave of productivity advances in the 1920s and 1930s that didn’t fully play out until after the war. Finally, unlike today, economic growth during those decades was greatly helped along by demographics in the form of strong labor force growth.

Also worrisome: the frantic hand-waving away of concerns about the possible unwanted economic impact from much higher taxes rates. Little is understood about the long-term impact of very high tax rates on taxpayer behavior and the economy. Those are as important as they are hard to measure. America, in particular, benefits greatly from people who take risks and make career choices influenced to some degree by hopes of striking it rich. “Significantly reducing that possibility by hitting those individuals with extremely high income taxes is of first-order importance in determining the optimal top tax rate,” my AEI colleagues Aparna Mathur, Sita Slavov, and Michael Strain argue in their 2012 research note “Should the Top Marginal Income Tax Rate Be 73 Percent?”

But it’s early, and as this debate continues perhaps the quality will improve.

“…Recent history demonstrates that the price of each new government program rarely tells the whole story. In the past decade taxpayers were charged $27.2 trillion for federal services that cost $35.6 trillion, adding more than $9 trillion to the national debt. Our tax bills told us that Uncle Sam’s good works were about 26% cheaper than their real cost.And Sam’s nose is growing thanks to rising deficit projections and the unfunded future costs of entitlements like Social Security and Medicare. Official projections put the present value of these two unfunded liabilities at $50 trillion over the next 75 years. Boston University economist Laurence Kotlikoff calculates that the total U.S. fiscal gap is more than four times that amount and that closing it would require a tax hike of more than 60%. Many Americans pay a minimal share of even the apparent cost of government, so it’s no surprise that socialist ideas are becoming more popular. Big government looks like a bargain….”

Lying Prices Keep America Hooked on Spending

Margaret Thatcher famously said the problem with socialism is that you “always run out of other people’s money.” The trouble with resisting socialism is that until the money runs out, free-spending progressive policies are remarkably seductive. Their appeal comes from what economists call lying prices: advertised prices that don’t reflect the full cost of what you’re buying.

When prices lie, people make bad choices—especially when they think something is free. Take rush-hour commutes. We jump in our cars hoping for a quick trip only to find the streets clogged; with access priced at zero, demand exceeds supply. Absent a price signal to encourage carpooling or other alternatives, we creep, beep and waste huge amounts of time and fuel. Transportation consulting firm Inrix tallied up the cost of this waste in a study last year, calculating that $305 billion of value was burned in traffic across the U.S. in 2016, with the typical Los Angeleno wasting more than $2,800.

For many politicians, lying prices are actually a goal. Policies that set dishonest prices or fudge budgets can fuel the growth of government and lure voters leftward. Sen. Bernie Sanders and his socialist followers use such sleight of hand to obscure the vast costs of proposals for “free college” and “Medicare for all.”

Recent history demonstrates that the price of each new government program rarely tells the whole story. In the past decade taxpayers were charged $27.2 trillion for federal services that cost $35.6 trillion, adding more than $9 trillion to the national debt. Our tax bills told us that Uncle Sam’s good works were about 26% cheaper than their real cost.

And Sam’s nose is growing thanks to rising deficit projections and the unfunded future costs of entitlements like Social Security and Medicare. Official projections put the present value of these two unfunded liabilities at $50 trillion over the next 75 years. Boston University economist Laurence Kotlikoff calculates that the total U.S. fiscal gap is more than four times that amount and that closing it would require a tax hike of more than 60%.

Many Americans pay a minimal share of even the apparent cost of government, so it’s no surprise that socialist ideas are becoming more popular. Big government looks like a bargain.

Escalating debt will bring predictable consequences, which include crushing interest payments that crowd out other spending and misallocation of capital, which saps productivity. Yet most politicians continue to put voters at ease by advertising lying prices for current and future spending. Even many Republicans seem content to pile on debt and spend their children’s money. How’s that for “taxation without representation”?

Is there a way out of this moral and fiscal quagmire? In the 1980s Milton Friedman championed a balanced-budget amendment to the Constitution. One version passed overwhelmingly in the Senate in 1982 but failed to secure the necessary two-thirds majority in the House. That was as close as Friedman’s dream would get to reality. Economists John Merrifield and Barry Poulson have called for a limited constitutional convention to propose a balanced-budget amendment. Twenty-eight states have standing calls for such a convention—six shy of the needed 34.

It’s tempting to think that such an amendment would make an honest republic of us and deprive the spreading socialist grass fire of oxygen. Politicians seeking Medicare for all, free college, subsidized housing and guaranteed jobs would be forced to convince taxpayers to pony up $40 trillion according to the Center on Budget and Policy Priorities. Good luck with that. “Free” sells itself, but honest prices get a hard look.

Yet even if an amendment was ratified—which would require the assent of 38 state legislatures—it wouldn’t be enough to assure honest pricing of government. Current unfunded liabilities show how skilled politicians and bureaucrats have become in lying “off the books.”

It is foolish to hope that the Democratic Party will join in reversing this trend any time soon. As it has moved left, it has embraced ever more deceptive prices for reforms to government services, labor (Fight for $15!), health care, higher ed, housing and much else.

This is a cynical strategy, and it creates a dangerous political feedback loop. First, progressive thinking leads to bigger, debt-financed government. But debt-financed government, and the lying prices it embodies, also can lead to more progressive thinking. Absent honest signals about government’s full costs, more voters are likely to shrug and assume it’s a good buy.

The late economist William Niskanen documented the relationship between deficits and spending, showing that attempts to “starve the beast” of big government via tax cuts don’t work: As tax receipts decrease, spending rises. In his words, “a tolerance for deficits leads to increased government spending.” Polls confirm this trend. Since 2011 the proportion of voters who worry “a great deal” about federal spending and deficits has fallen from 64% to 51%, while the national debt has risen 45%.

Before such tolerance for debt and a concomitant fondness for “freebies” afflicts a majority of the electorate, it would be wise for the party of Lincoln to seize the political, fiscal and moral high ground, steer clear of lying prices, and rebrand: Goodbye, Grand Old Party, and hello “Honest Abe Party.” Attempting to out-lie the Democrats is, in the long run, unlikely to be successful politically, and certain to be disastrous economically.

Steve Hanke and Stephen Walters, "Lying Prices Keep America Hooked on Spending,"Wall Street Journal, January 7, 2019, https://www.wsj.com/articles/lying-prices-keep-america-hooked-on-spending-11546908833

Jared Berstein, "A little graph with a big message: Full employment raises wages,"Washington Post, January 7, 2019, https://www.washingtonpost.com/outlook/2019/01/07/little-graph-with-big-message-full-employment-raises-wages/

"...Over the period covered by the figure (2014-18), the Federal Reserve’s preferred inflation gauge rose from about 1.5 percent to 2 percent. That’s an increase, but not much of one, and it merely brings inflation to the Fed’s 2 percent target. For whatever reason, employers paying higher labor costs haven’t been passing those costs forward to consumers as much as they used to.This has two implications. First, it implies that higher labor costs could take a bite out of business profits. If so, that’s a good thing from my perspective (though the stock market disagrees), as the profit share of national income has been historically high in recent years (and labor’s share has thus been low). Second, and this is a particularly interesting potential result, employers finding themselves in an unusually high-pressure labor market may be forced to find efficiency gains to offset the higher labor costs, especially if they’re unwilling to raise prices very much. Why, if they could find such gains, did they not do so earlier? Because weak worker bargaining clout at higher unemployment rates meant employers didn’t need to raise pay and, thus, didn’t need to be more productive to maintain their profit margins. Now, they either discover those efficiencies, pass on price increases or face smaller profit margins....."

will have to reach-out to the authors to get the data the economist used to build their tables, not currently online (2011 paper) but clearly they have been tracking"...Labor fluctuations are a central focus of business cycle research, but this has been limited by the fact that typically only employment, rather than total hours worked, is available for many OECD countries. This paper has constructed quarterly time series of total hours worked for 17 OECD countries, with a focus on constructing hours that are consistent with national income and product account constructs. These hours measures provide new data for earlier years that can shed light on a number of questions involving comparisons over time, including changes in the nature and sources of fluctuations over time, how changes in fscal and monetary policy have impacted fluctuations over time, and how changes in labor market regulations have impacted fluctuations over time. The results reported here stand in sharp contrast to many common views about cyclical labor market dynamics. Specifically, these new data indicate that employment is a poor proxy for cyclical labor input, and consequently provides poor measures of productivity, as in many OECD countries about 50 percent of labor adjustment occurs along the intensive margin. Employment fluctuations in much of Western Europe appear to be much too high compared to the US, given much higher hiring and hring costs in Europe. And given the large fluctuations in European hours, employment-based labor wedge fluctuations in Europe are too high, and hours-based labor wedge fluctuations are too low. Our findings also have implications for the international Great Recession. Specifically, there is a common view that the Great Recession across countries was the result of very similar responses to very similar banking crises. The findings presented here contrast with that view, as Western European recessions feature very small labor wedges compared to the US, measured either with employment or hours, and instead feature much larger productivity shocks than the US. The data presented here will aid future research in addressing these puzzles, with a focus on understanding why the intensive margin adjustment is not larger during European recessions, why labor wedges are so small in many European countries during the Great Recession, and why they are so large in the US...."
Lee E. Ohanian, Andrea Raffo, "Aggregate Hours Worked in OECD Countries: New Measurement and Implications for Business Cycles," National Bureau of Economic Research, September 2011, https://www.nber.org/papers/w17420