Month: July 2014

The durability of consumption and economic growth

Posted on by Nick Bunker

The Bureau of Economic Analysis today released data on the U.S. gross domestic product that estimates GDP grew by 4 percent on an annualized basis during the second quarter of 2014. This estimate beat most economists’ expectations of an increase of about 3 percent. Yet, as always, the number is the first of three estimates in the coming months and is subject to revisions, so it should be interpreted with caution.

The largest contributor to GDP growth in the second quarter was gross private domestic investment, comprised of spending on final goods and services to aid in future production. Private investment added 2.57 percentage points to the total growth rate, though 1.66 percentage points of that contribution was an increase in private inventories. In short, more than half of the increase came from goods businesses produced but did not sell during the quarter.

Government expenditures and investment added 0.30 percentage points to the rate, with state and local government expenditures driving all of the growth. Net exports of goods and services were a drag on growth, subtracting 0.61 percentage points from the quarterly growth rate.

Personal consumption expenditures added 1.69 percentage points to the total growth rate. The majority of the growth came from the consumption of durable goods—think cars and household furnishings—at 0.99 percentage points. During the second quarter, the total amount of consumption of durable goods increased by 14 percent, nondurable goods by 2.5 percent, and services by 0.7 percent. The relative importance of durable goods compared to the consumption of nondurable goods and of services, such as food and clothing, and healthcare and transportation, respectively, during this past quarter is a continuation of a recovery-long trend since the end of the Great Recession in June 2009.

Looking from the end of the Great Recession, we can see that consumption of durable goods has been much stronger than consumption of nondurable goods and services and in line with historical trends. Over this time period, the inflation-adjustment amount of durable goods consumption increased 26.6 percent. For nondurable goods, it only increased by 5.5 percent and for services 5.1 percent. As economists Atif Mian and Amir Sufi point out on their blog, consumption of nondurable goods and services have been historically weak during this recovery.

The lack of growth in nondurable consumption provides some context to the recent merger of discount retailers Dollar Tree and Family Dollar. And the importance of durable goods consumption to the growth of overall consumption should be considered when we read stories about a subprime boom in used car loans.

While the economic recovery continues, understanding the sources of our current economic growth is vital. After the Great Recession, economists and analysts have been concerned about the pace of short-term and long-term economic growth. A deeper appreciation of what has been driving growth recently and over the course of the post-war era can help shed light on the path forward.

A post-war history of U.S. economic growth

Posted on by Ed Paisley

Five years removed from the end of the Great Recession, economists, policymakers, investors, business leaders, and everyday Americans from all walks of life remain concerned about the future of economic growth in the United States. The severity of that two-year recession and the lackluster recovery ever since sparks fear among economists and policymakers that the U.S. economy is in for a perhaps new and long period of slow growth. Economist Tyler Cowen of George Mason University raised this concern in his book “The Great Stagnation.” And Harvard University economist and former Treasury Secretary Larry Summers recently warned about secular stagnation where the economy suffers from a prolonged period of inadequate demand.

Read a PDF of the full document with all citations

While these fears are surfacing today, the anemic economic conditions that prevail at present and from which these concerns spring may be the result of structural changes in the U.S. economy over the past 40 years. Since the mid-1970s, the U.S. economy has undergone a variety of changes that may help or hinder economic growth over the long-term, among them:

  • An employment shift from manufacturing to services
  • The advent of the Internet
  • The entrance of women into the paid labor force
  • The greater participation of people of color in all sectors of the economy
  • The greater openness of the economy to international trade
  • The ever-evolving role of government
  • A rapid increase in income inequality

The mission of the Washington Center for Equitable Growth is to understand whether and how these structural changes, particularly the rise in inequality, affect economic growth and stability. But before we can understand how these forces may affect economic growth, we need a baseline understanding of how the U.S. economy grew in the past.

This report helps in that endeavor by looking at the past 65 years of economic growth in the United States—measured by examining our country’s Gross Domestic Product, both its rate of growth and sources of growth, from 1948 to 2014. The starting point, of course, is what this oft-cited statistic GDP actually measures. GDP is comprised of aggregate statistics based upon four major components: consumption, investment, government expenditures, and net exports.

The report then looks at the overall growth of real (inflation adjusted) per capita GDP as well as the contributions of each component to growth over time, specifically over business cycles, or patterns of economic recessions and expansions. (See graph.)

web-econgrowth01

Based on the overall trends, we divide the post-World War II into three eras of growth—the booming post-war period to the early 1970s (the fourth quarter of 1948 to the fourth quarter of 1973), the transition period to the early-1980s characterized by a series of economic shocks and high inflation (the fourth quarter of 1973 to the third quarter of 1981), and the ensuing period of low economic volatility and heightened growth known as the Great Moderation up until the start of the Great Recession in 2007 (the third quarter of 1981 to the fourth quarter of 2007).(See graph.)

web-econgrowth02

Specifically, economic growth in the third period, leading up to the Great Recession, was:

  • Not as brisk as it once was
  • More dependent upon consumption
  • Held back by net exports
  • Less driven by government expenditures and investment

The current business cycle, starting with the beginning of the Great Recession, appears to be the beginning of a new era—one tentatively defined by tepid consumer demand, stagnant real-wage gains, and growing economic inequality.

This report will have achieved its purpose if it spurs new thinking about how exactly we can and should promote economic growth in the United States.

Evening Must-Read: Paul Krugman: Circles of Influence

Posted on by Brad DeLong

Paul Krugman: Circles of Influence: “Thomas Palley is upset….

I was reacting to… his claim that mainstreamers like me were looking in all the wrong places…. This wasn’t about intellectual priority–it was about refuting a claim of ideological blindness…. I’m willing to accept that Palley was somewhat ahead of the curve. And it’s… true that… those like me… think of it as an arc from Tobin to Akerlof-Dickens-Perry to Daly and Hobijn…. There’s so much stuff out there, and you have to filter somehow, so you mainly read stuff by people you know and people they tell you are worth reading…. This is a tendency one ought to lean against…. On the other hand, if you want the mainstream guys to listen to you, you probably shouldn’t accuse them of being denser and more rigid than they really are…

Me? I tend to think that if you cannot trace the idea to Smith, Ricardo, Malthus, Say, Mill, Bagehot, Walras, Wicksell, Keynes, Arrow, or Samuelson, you aren’t trying hard enough. And once you have traced the idea to one of them and cited them, you are safely on base…

Afternoon Must-Read: Greg Sargent: Senate documents and interviews undercut ‘bombshell’ lawsuit against Obamacare

Posted on by Brad DeLong

Greg Sargent: Senate documents and interviews undercut ‘bombshell’ lawsuit against Obamacare: “Documents from the Senate committees…

…that worked on versions of the bill in 2009–combined with a close look at the history of the phrase itself, and interviews with staffers directly involved in the drafting of the statutes–strongly undercut the argument that the law did not intend or provide subsidies to those on the federal exchange…

Things to Read on the Afternoon of July 29, 2014

Posted on by Brad DeLong

Should-Reads:

  1. David Beckworth: The Other Important Legacy of World War One: “An important point I… could not find…. WWI shattered the classical gold standard of 1870-1914, which had worked relatively well, and replaced it with an incredibly flawed one to which many attribute… the severity and global reach of the Great Depression in the 1930s. And the Great Depression… brought the Nazis to power…. Barry Eichengreen and Peter Temin…. ‘At some level… the Nazis were the party of the Depression. They were a fringe group in the 1920s and grew to electoral prominence only in 1930 when economic conditions deteriorated. They gained even more seats in the Reichstag in the first election of 1932, but lost seats in the second election later that year as economic conditions appeared to improve…. Almost any model would say that better economic conditions would have decreased political support for the Nazis and therefore the probability that Hindenburg would have asked Hitler to be chancellor.’ So far all the problems WWI created, the flawed interwar gold standard was probably one of the the more important ones. It led to the Great Depression which, in turn, guaranteed the rise of the Nazis and another world war. The big lesson, then, is getting the international monetary system right matters a lot.”

  2. Walter Shapiro: Hillary for Liberals: “Hillary has been through two disastrous disorganized White Houses under Bill Clinton and Obama…. She would come into the White House with a greater understanding of White House dysfunction than anyone in Democratic Party history… steel you against creating a White House where people believe they’ve invented the wheel, that they’re geniuses…. At this point, NSA spying and drone attacks are just not voting issues for liberals. Getting tough with Wall Street–like single-payer health insurance–was something much more likely to trigger an adrenaline rush for the left in 2009 than in 2016…”

  3. Jonathan Chait: I Have Mocked Ross Douthat One Time too Many: “for his fatal flaw of detecting signs of ideological moderation in a succession of Republican figures like Sarah Palin, Eric Cantor, Tim Pawlenty, and others. Now he has finally snapped…. My piece notes that Douthat praises Ryan for his moderation, while dismissing the 2012 GOP ticket as hopelessly plutocratic, yet he defended Romney and Ryan against exactly this charge at the time. Douthat points out that he also devoted numerous items to complaining about Romney’s upper-class tilt. And yeah, he certainly did…. I argued… with Douthat–me insisting Romney’s plan cut taxes for the rich; he insisting it did not…. [And] the situations are fairly analogous. Ryan now, like Romney-Ryan then, is making a series of irreconcilable promises. Douthat is treating the more mainstream version of those premises as binding, and the more extreme promises as null and void…. What he calls ‘cherry-picking’, I call ‘condensing’. But a less patient person would have lashed out years ago…”

  4. Kevin Kelly: You Are Not Late: “Can you imagine how awesome it would have been to be an entrepreneur in 1985 when almost any dot com name you wanted was available? All words; short ones, cool ones. All you had to do was ask. It didn’t even cost anything to claim…. Thirty years later the internet feels saturated, bloated, overstuffed…. Even if you could manage to squeeze in another tiny innovation, who would notice it?…. But, but… here is the thing. In terms of the internet, nothing has happened yet…. Most of the greatest products running the lives of citizens in 2044 were not invented until after 2014…. Here is the other thing the greybeards in 2044 will tell you: Can you imagine how awesome it would have been to be an entrepreneur in 2014? It was a wide-open frontier! You could pick almost any category X and add some AI to it, put it on the cloud. Few devices had more than one or two sensors in them, unlike the hundreds now. Expectations and barriers were low. It was easy to be the first. And then they would sigh, ‘Oh, if only we realized how possible everything was back then!’ So, the truth: Right now, today, in 2014 is the best time to start something on the internet…. Today truly is a wide open frontier. It is the best time EVER in human history to begin. You are not late.”

  5. Paul Krugman: How Prophets Get Lonely: “At Bloomberg View, Leonid Bershinksy weeps over the cruel world that for some reason isn’t listening to Jaime Caruana of the BIS, who warns that we must raise interest rates now now now. Why is this prophet so lonely? Well, it might have something to do with the fact that three years ago Caruana and the BIS warned that interest rates must rise to avert a surge of inflation. That didn’t happen…. Now, everyone gets things wrong sometimes. But when that happens, you’re supposed to think about why you were wrong, and reconsider your policy views. If the BIS did any soul-searching, nobody else noticed…. Why, exactly, should anyone take its views seriously?… But being a hard-money guy seems to mean never having to reconsider…”

And:

Should Be Aware of:

  1. Philippa Skett: Ebola outbreak: What you need to know about its spread: “The recent Ebola epidemic in West Africa has so far claimed more than 670 lives…. Now it has reached Lagos in Nigeria…. Ebola… causes extensive internal bleeding, and can lead to those infected dying from shock. Initially, those infected experience a sudden onset of fever, muscle pain, weakness, headaches, a sore throat and vomiting and diarrhoea…. Ebola is highly contagious and can be transmitted even after those infected have died, because the virus is transmitted via bodily fluids. It has a 90% fatality rate…. Bausch thinks it is unlikely that the outbreak will spread through Europe or the US if someone infected gets on an international plane…. Currently there is no cure…”

  2. Lars Syll: What to do to make economics a relevant and realist science: “What shall neoclassical economists do when the modeling assumptions made are shown to be harmful and not even remotely matching reality?… (1) Stop pretending that we have exact and rigorous answers…. (2) Stop the childish and exaggerated belief in mathematics…. (3) Stop pretending that there are laws…. (4) Stop treating other social sciences as poor relations…. (5) Stop building models and making forecasts of the future based on totally unreal microfounded macromodels with intertemporally optimizing robot-like representative actors equipped with rational expectations. This is pure nonsense. We have to build our models on assumptions that are not so blatantly in contradiction to reality. Assuming that people are green and come from Mars is not a good–not even as a ‘successive approximation’–modeling strategy.”

Already-Noted Must-Reads:

  1. Tim Pawlenty (2011): US headed for double-dip: “I think we’re headed for a double-dip. That’s my personal view…. It may look like there is temporary improvement because they have artificially infused the economy with government money, but the consequences of that will, as sure as we’re sitting here, will rear its head…”

  2. Emily Badger: How big cities that restrict new housing harm the economy: “For the last couple of years San Francisco has been erupting with periodic protests aimed, rather imprecisely, at a nexus of grievances related to gentrification, affordable housing, transportation, the tech industry, newcomers to the city, its changing skyline and Silicon Valley to the south. The city is screaming, although at what its protestors seem a little confused. ‘In my view, the whole debate here misses the point’, says Enrico Moretti…. ‘People are marching against Google buses when they should be marching for more housing permits.’ At the root of San Francisco’s tension is a mismatch of supply and demand: Affluent workers have been flocking to the area for its tech jobs, but as the number of jobs in the region has grown, the number of housing units to accommodate people taking them hasn’t remotely kept pace. As a result, rents are going up. Low-income residents are pushed out. Landlords who see more lucrative opportunity in condo conversions have ramped up evictions. ‘Once I started seeing what was going on in the San Francisco public debate, I got appalled by the lack of understanding of basic economics among the general public, the protesters’, Moretti says. ‘And it’s even more problematic among policymakers.’ The culprit here isn’t really the tech industry. It’s much-harder-to-protest land-use policy. And from Moretti’s point of view, the rest of us should care… because the economic repercussions of such local decisions stretch nationwide…”

  3. Paul Gigot (2009): The Bond Vigilantes: “The disciplinarians of U.S. policy makers return. They’re back…. The vigilantes… appear to be returning with a vengeance now that Congress and the Federal Reserve have flooded the world with dollars to beat the recession. Treasury yields leapt again yesterday at the long end, with the 10-year note climbing above 3.7%…. Investors are now calculating the risks of renewed dollar inflation. They have cause to be worried, given Washington’s astonishing bet on fiscal and monetary reflation…. Chinese and other dollar asset holders are nervous. They wonder–as do we–whether the unspoken Beltway strategy is to pay off this debt by inflating away its value…. The Fed is desperate to keep mortgage rates low to reflate the housing market, and last week it promised to inject hundreds of billions of dollars…. This week the bond vigilantes are showing what they think of that offer, bidding up yields even higher. It’s not going too far to say we are watching a showdown between Fed Chairman Ben Bernanke and bond investors, otherwise known as the financial markets. When in doubt, bet on the markets.”

Afternoon Must-Read: Paul Gigot (2009): The Bond Vigilantes

Posted on by Brad DeLong

Paul Gigot (2009): The Bond Vigilantes: “The disciplinarians of U.S. policy makers return…

They’re back…. The vigilantes… appear to be returning with a vengeance now that Congress and the Federal Reserve have flooded the world with dollars to beat the recession. Treasury yields leapt again yesterday at the long end, with the 10-year note climbing above 3.7%…. Investors are now calculating the risks of renewed dollar inflation. They have cause to be worried, given Washington’s astonishing bet on fiscal and monetary reflation…. Chinese and other dollar asset holders are nervous. They wonder–as do we–whether the unspoken Beltway strategy is to pay off this debt by inflating away its value…. The Fed is desperate to keep mortgage rates low to reflate the housing market, and last week it promised to inject hundreds of billions of dollars…. This week the bond vigilantes are showing what they think of that offer, bidding up yields even higher. It’s not going too far to say we are watching a showdown between Fed Chairman Ben Bernanke and bond investors, otherwise known as the financial markets. When in doubt, bet on the markets.

Well, a Nice-to-See Consensus on Fiscal Stimulus…: Wednesday Focus for July 30, 2014

Posted on by Brad DeLong

Poll Results | IGM Forum:

IGM Economic Experts Panel IGM Forum

The odd person out is Alberto Alesina.

The interesting thing is that two years earlier, Alberto Alesina agreed that “because of the American Recovery and Reinvestment Act of 2009, the U.S. unemployment rate was lower at the end of 2010 than it would have been without the stimulus bill.”

I do wonder what pieces of evidence could possibly have made him more pessimistic about the effects of the ARRA on unemployment over the past 30 months. What do people think?

Back in February 2012, it was Caroline Hoxby who strongly disagreed with the statement that the ARRA had reduced the unemployment rate; Ed Lazear who disagreed; and Ken Judd who was uncertain. This time Hoxby does not answer, Lazear is off the panel, and Judd agrees that the ARRA lowered unemployment.

Poor rate of return on for-profit universities

Posted on by Nick Bunker

Today at The Upshot, David Leonhardt has a piece showing the importance of looking at the tuition actually paid when calculating the value of a college degree. Once the value of aid is included, the return on a college degree still appears to be substantial. But that calculation might not come out the same way for proprietary, or for-profit, universities. Research indicates that the high costs incurred by students attending for-profit schools outweigh the benefits of a degree. These low returns on investment from these universities amplify rates of default and student debt, contributing to the growing national accumulation of student debt.

A paper by Harvard University professors of economics David J. Deming, Claudia Goldin, and Lawrence F. Katz finds that the marginal returns of for-profit universities are outweighed by the high rates of default and long-term burdens of student debt, compared to community colleges and non-profit universities. They determine that in 2009, 26 percent of students with $5,001 to $10,000 in cumulative federal student loans came from for-profit universities, as opposed to 10 percent of students from community colleges and 7 percent of students from four-year public and nonprofit schools.  Similarly, students from for-profits were more likely to be unemployed and experience lower earnings six years after starting college than observationally-similar students from public and non-profit institutions.

Another study by Stephanie Riegg Cellini, an associate professor of public policy and economics at George Washington University, and Latika Chaudhary, a professor of economic history at Scripps University, calculates the exact return on investment for students enrolled in proprietary universities. Cellini and Chaudhary find that students who complete an associate’s degree at a for-profit institution receive a 4-percent return per year of education. This return on investment falls below estimates of the returns of public community colleges, yielding a return estimated to range between 5 to 8 percent, and traditional four-year colleges, which yield an estimated return of between 10 to 15 percent. Incidentally, returns to for-profit universities also fall below the returns needed to offset the costs incurred by students attending these institutions.

Despite attempts to open doors to higher education for non-traditional students, research finds that degrees from for-profit institutions yield a poor return on investment. That’s also why policy initiatives to address issues of student debt and default were recently enacted. In 2011, the “gainful employment” rule implemented federal restrictions to student-aid eligibility for students attending for-profit institutions. Central to this policy was the regulation that after three consecutive years of student rates of default reaching 30 percent or more, the program would be ineligible to apply for federal aid for at least three years.

On March 24, 2014, the regulations for this policy were revised and re-introduced by the U.S. Department of Education, allotting 60 days for the public to provide feedback. In the following months, the department will finalize the regulation and a second attempt will be made to tackle the growing national student debt. Understanding the rate of return for institutions of higher education remains essential for addressing issues of default and student debt, as well as for confronting the broader ties between education and human capital.