Growthology

Let us tax work

It's unbelievable, but higher taxes on work are coming to most states in the Union.

The median increase will be 27.5%. And employers in places such as Hawaii and Florida could see levies skyrocket more than ten-fold.

If anyone wants an easy bipartisan job-creating legislative idea, top of the list is to give states the flexibility to modify the Unemployment Insurance (UI)I system. A smart policy would let states opt out entirely, given that UI is proven to prolong joblessness. There are alternative approaches, but they will be left untested so long as one-size-fits central planning from Washington continues (as it has for decades). Or did I hear that everything is on the table?

Policy Options, KEO part 2

The second set of questions from the Kauffman Economic Outlook Q1 2010 focus on policy options for the U.S. economy.  The summary text from the report itself is copied here:

Despite being a balanced panel in terms of political alignment (16 percent Republican, 19 percent Democratic, 47 percent independent, and roughly 18 percent libertarian/other), there is a strong consensus around many policy recommendations. Seventy-one percent of economics bloggers think the U.S. government is “too involved in the economy,” with only 17 percent calling for greater involvement. When asked what the government should be doing, the only policies with more than 50 percent support are: 1) to increase high-skill immigration (63 percent), and 2) to increase legal immigration at all skill levels (57 percent). Two policies stood out sharply with nearunanimous opposition: increasing business regulation (9 percent) and increasing tariffs (4 percent).

On taxation, the panel was widely in favor of lowering taxes on payrolls (74 percent) and income, both corporate (64 percent) and individual (62 percent). Likewise, there was strong support for higher taxes on gasoline/carbon (68 percent and 57 percent, respectively), and consumption (54 percent). A common battleground for tax policy is progressivity, but 47 percent of bloggers are calling for flatter taxes compared to 26 percent in favor of increased progressivity (i.e., even higher tax rates on higher incomes relative to lower incomes).

According to economics bloggers, the top three variables that policymakers should emphasize in a model of economic growth are human capital, innovation, and economic freedom. In a related question, bloggers were asked to rate the beneficial importance of numerous key players in the U.S. economy. One hundred percent of the panel rate entrepreneurs as “important” or “very important,” and innovation also had unanimous support. Only slightly less important are free trade and education, with nearly all respondents rating them as “important” or “very important.” In contrast, only 30 percent of economics bloggers think labor unions are important, and nearly 70 percent rate them as “unimportant” (numbers may not add to 100 due to non-responses and rounding). Opinion is decidedly mixed on manufacturing, while there is mild support for the importance of big business.

And here are the individual charts (in .gif format) from this section:

 
  

 

As a few observors have pointed out, not all of these policy recommendations might be as popular with a random sample survey of the American public. For example, increasing immigration is arguably a political non-starter. But that has been a top priority here at Kauffman as a boost to economic growth. I was pleased to see this had broad support from the econ bloggers panel, which again I would emphasize is politically balanced. 

Is it biased?  Naturally, a reader of the survey should wonder if this survey is biased. There is a big difference between an ideological bias versus an experiential bias. Indeed, the question of bias goes to heart of survey research. There are random sample surveys (like Gallup) that try to capture public opinion, and most econometric research aspires to the standard of an unbiased sample of observations. The KEO is not of the variety. The Kauffman Economic Outlook is a lot more like a co-authored research paper, with scores of co-authors.  Although some might characterize it as "expert" opinion, that seems to me like a diversionary label and conversation. 

It is trendy these days to hint that economists as a class of thinkers have been discredited for not forecasting the recession. That was the topic of a few panels at the recent American Economic Association conference in Atlanta, where a handful of economists were on hand who expressly had warned of the stock market bubble, the housing bubble, the financial dangers of leverage, various deficits, etc. Indeed, the much-maligned Alan Greenspan mentioned the dangers of Fannie and Freddie more times in Congressional testimony than most Congressman can count. Even if the vast majority of economists and economic commentators warn of the dangers of unsustainable budget deficits, we can never know the exact month when the U.S. will lose credibility and the dollar will fall, but that surely isn't proof of ignorance or failure of the discipline.

The point is that the KEO economics bloggers survey includes numerous voices who warned either of the coming recession or of pitfalls, or both. Even now, the sample includes a balance of opinions that differ on a range of issues.  Thus, finding areas of consensus, especially strong consensus, is a very interesting result.

Specifically, on the issue of taxes, this survey found a consensus for taxing consumption more. That would be unpopular, true. But the finding is not in isolation. Bloggers also overwhelmingly support lower taxes on work (payrolls) and income. The consensus to shift the tax burden should not be couched as a public-versus-expert paradox at all (as the public would probably favor such a change as well). Rather, the finding offers some common ground for policymakers in the years ahead.
 

Did the Unemployment Fever Just Break?

The topline rate of unemployment dropped from 10.0 to 9.7 in this morning's BLS Employment Situation report. Everyone probably had the same reaction I did: "Really??  Or is this some data quirk driven by a collapsing labor force denominator?" 

In fact, the labor force has stopped collapsing. It still has a long way to recover after nearly 2 million stopped looking for work over the last year. The numbers from this survey (the CPS household survey) tend to vary more than alternatives, but the trend lines are more reliable (for instance, one big story today is that the CES payroll numbers were adjusted down by nearly a million jobs. I think the case is closed that payroll figures are not reliable barometers during turning points).

Indeed, my sense that the the recession of 2007-09 might be turning is based on the trend view of the three big CPS components: net employment, net unemployment, and net labor force in the following chart:

   
 
 Hopefully these trends imply a solid employment recovery.  It's too soon to exuberate, first because two data points are not a trend, and second because the Fed will have to raise rates at some point ....

UPDATE: the second chart is not showing title and source line in the original post.  This revised chart should work.  Also, note the turning points I hint at in the title are not those approved by the NBER, rather what looks to appear from this data series only.

What I Meant to Say . . .

Some timely humor, courtesy of here:

And I totally wish I'd had this poster in hand for yesterday's post:

If Only the Public Listened to Economists!!!

Most readers have seen the results of the Kauffman Economic Outlook, a survey of scores of economics bloggers from across the Internet. Kudos to Tim for pulling it together.

Not to sound crankish, but I just wanted to highlight a couple of surprising (to me, at least) reactions the survey results provoked from bloggers:

"Less tax on income, and more on consumption, particularly of energy and emissions. Sadly, the public doesn't seem too keen on the concept."

"In particular, I think we understand better than the typical citizen the role that government health programs play in the outlook for the deficit. And I think we understand better than others that private-sector labor unions are no longer significant."

At the risk of oversimplifying or reading too much into brief remarks, these reactions can perhaps be summarized as: the public is idiotic, economists (and especially economic bloggers) are smarter than the public, so the public should listen more to economists (especially economic bloggers). Such inescapable logic--on the heels of a severe recession that many of these economists swore wouldn't happen just before it actually did--would elicit derisive scoffs from the non-economist-don't-know-what's-good-for-them average members of the public that it seems to be my misfortune to hang around with.

Why So Gloomy? KEO, part 1

The first few questions from the Kauffman Economic Outlook Q1 2010 focus on the overall U.S. economy, and our summary emphasized the gloominess of the blogger's consensus opinion.  Here are the individual charts (in .gif format) from this section:

 
One could say there is no consensus either way based on the first chart, but that is wishful thinking. The natural state of the U.S. economy, historically, is growing.  So even if a majority of the panel say things are "mixed," it is lower than expected.  But the fact that opinion expressed off neutral is 5-1 negative, and the extremes are 5-1 negative, the consensus is powerful. Finally, consider the 20 comments given by survey respondents:

1. Outlook differs strongly from region to region.
2. At the moment, we have growth without new jobs.
3. Output is expanding, but the prospects for job creation are fairly bleak
4. momentum of growth picking, but much weakness
5. It is important to distinguish the real economy from the financial economy and the stock market. The real economy has not benefitted at all from the stimulus. In fact, it has been harmed by it.
6. I actually have a bet with David Henderson of EconLog that we will experience double digit inflation as well as double digit unemployment within the next 6 years
7. The risk of hyperinflation is much greater than the statements of public officials would indicate.
8. All indicators barring unemployment rate have shown ptomise in recent months. But much of the growth is because of the government/Fed measures. It is very difficult to say how would the economy fare minus the stimulus.
9. It looks like we are heading into a weak, prolonged recovery
10. I'd like to be optimistic, but keep seeing the revisions.
11. Another slow down or double-dip recession awaits in 2010
12. While Wall Street is back to profits (using cheaper funds because of US guarantee), Main Street is hurting and will continue to hurt for a long time--without remedying that hurt
13. Seeing a curious blend of caution and new thinking and a scary return to many practices from only two years ago that were reckless.
14. Growth in places like Texas/Wyoming, stagnation or worse in Michigan/California/Rhode Island.
15. Underlying problems have been swept under the carpet
16. Fiscal stimulus, foreclosure prevention, accounting tricks, and inventory restocking enough to elevate GDP. But investment remains weak, debt servicing burdens rising despite low rates, and employment situation continues to deteriorate. Q2/3 should see a second wave of deleveraging and contraction.
17. Labor, GDP, stocks, savings, consumption?? How measured?
18. Data manipulations. Freight traffic and sales taxes are only reliable data left, and they are still pointing downwards. The rest of the markets are based solely on paper fluff.
19. Massive and wrenching re-orderings of the economy still lie ahead -- long term government obligations are unsustainable.
20. I'd like to say "Weak but growing"

And take a close look at chart 3, which asks about growth prospects for the next 3 years for 12 different variables.  Like most of questions in our survey, this one aims for a qualitative answer, not a specific forecast.  There were 5 answer choices for each variable: strongly increasing, increasing, stable, decreasing, and strongly decreasing.  When we average the responses together, four things had average responses near 0.4 (where 0.5 represents mere "increasing"), and neither U.S. employment not U.S. GDP per capita were included.  Those two variables had average ratings of 0.18 and 0.17 respectively, which is closer to stable than increasing.

 

Now, nobody loves the notion of "competitiveness" and Paul Krugman famously savaged it once upon a book.  But we included it in the survey because the phrase is a useful summary of the business/policy environment in the U.S. relative to the world. It strikes me as a sad commentary that zero respondents mark U.S. competitiveness to increase strongly over the next 3 years. Zero. Of the twelve things considered, competitiveness was the only one without a single high mark. Granted, the 83 respondents to this question probably had 83 different reasons (or more) to anticipate weaker relative U.S. competitiveness (and many of them are probably related to the U.S. budget deficit), but that's not very reassuring.

 

 

Data in Excel for Q1 Kauffman Economic Outlook

For anyone interested, here is the excel file with responses to the Kauffman Economic Outlook Q1 2010 survey.  Keep in mind, 85 respondents completed the survey, but no question was mandatory, and many chose to skip a few.  I think the average response is 80 per question.

Download KE_Outlook_Q12010

Inaugural Kauffman Economic Outlook: survey of leading economics bloggers

Here is the first edition of the quarterly Kauffman Economic Outlook: survey of leading economics bloggers:

Download Kauffman Economic Outlook Q1 2010

It is very light on text, heavy on charts.  We offer a brief summary, but hope the collective opinions of the economics bloggers speak for themselves.

UPDATE: Here is a link to a public version of the survey with the exact questions and structure.  It is open to the public and we welcome your participation.  It will be interesting to see if readers of growthology have different opinions than the experts. 

Econ bloggers give DC mixed marks (a.k.a. Congress gets an F)

The question is "How do you grade the performance of the following organizations and institutions? (A = best, F = )"

Average answers (i.e. Grade Point Average) from 85 leading economics bloggers:

2.3    CBO, GAO, and other watchdogs
2.2    U.S. business community
2.0    European Central Bank
1.7    U.S. Federal Reserve
1.6    World Bank / IMF
1.2    Wall Street firms
0.7    U.S. Congress

Here is the chart:

 
What's this all about?  Tomorrow morning, the Kauffman Foundation will be releasing the results of an exciting new survey project that we have been working on for many months.  It is a survey of leading economics bloggers.  All of the questions were generated by and rank ordered by a blogger advisory board.  Today, we are releasing a teaser e-alert with results from one of the questions, a "report card" for major economic institutions.  It is fortunate that the teaser coincides with the major budget discussion because the best grade point average goes to the CBO as part of the Washington watchdog community.  Without the CBO, GAO, and similar watchdogs, Washington would probably be even more dysfunctional.

Maybe it's worth noting that the CBO has a blog?  (And no ... they did not participate in this survey!)

The Value of Bernanke's Reconfirmation

Federal Reserve Chairman Ben Bernanke is up for a reconfirmation vote in the Senate tomorrow. He will likely be confirmed, and that's good news.

A perceived surge in populism is roiling both the Democratic and Republican parties, and a strange combination of all the political tension somehow fell on Ben Bernanke. And it was bipartisan. Politicians got the message that voters were angry: angry at Wall Street, angry at Washington policies, angry at elites wherever they may be. So Ben Bernanke, the calm-voiced Princeton professor and author of macro textbooks, became the fall guy for all those who really contributed to the subprime mortgage-induced recession. There's been a drumbeat of attacks on his stewardship of the central bank. But a funny thing happened on the way to guillotine. A majority of Senators seem to have decided to reconfirm.

In our view, Chairman Bernanke has been creative when others were dogmatic. He was decisive when others were silent. For that reason alone he should be praised, as Time magazine has done, certainly not condemned.

Second, what too many fail to understand is that for millions of Americans the U.S. recession is not over. There is no certain destiny for a recovery, strong or weak, in the coming year. And the biggest danger remains the fragility of the global financial system. The Chairman has demonstrated that he understands that danger. We need him now as much as we needed him in September 2008 when things looked much darker.

The third value in reconfirming Bernanke has hardly been noticed, but here it is. In a city drowning in partisan rancor, the bipartisan victory of the chairman reconfirmation will emerge as an invaluable island of sanity, and perhaps point the way toward more bipartisan, constructive action ahead. Let’s hope.

SIGNED

Robert Litan and Tim Kane

Fred Wilson and the Venture Capital (Non-)Cartel

When a capitalist says that he is pleased to see his industry shrink and calls for his competitors to cut back is that a cartel? How is it different from the CEO of, say, Honda, gloating about the elimination of other auto companies, and then asking the remaining companies to hold the line on prices?

All these questions came to mind in reading some of the more entertainingly outraged comments to venture capitalist Fred Wilson's post today about the venture capital diet. Echoing my paper from last summer that called for the venture industry to shrink by half, Fred points to the latest industry data and says that we're pretty much there, with annual outlays touching $17-billion. He goes on to worry, however, that Q4 of 2009 saw outlays tick back up to an annualized $20-billion, and suggests people need to pull back.

So, is Fred calling for a cartel to contract VC spending? I don't think so. Fred is one of the good guys, and my position here is public: We need to shrink to have a healthy venture capital business. We have an industry that hasn't delivered a multiple above 1.0 on invested capital since 1997. We have an industry that, as of end of year 2009, sunk to a negative ten-year IRR, with the bubble exits finally falling off the sheet. This is a sick business, and that is understandably leading to fewer investors wanting a part of it, which means outlays are shrinking. Eventually the industry will shrink back to a point where it delivers competitive returns -- and it may even be there now.

Now, two points. First, some may say that venture can fix performance by making better investments. It doesn't need to shrink: We have can have our capital, and our startups too. Fine, but history doesn't bear that out. The modern venture industry has never delivered competitive returns with this much money under management, and you can't point to deals that, had they been invested in, would have fixed that. Yes, absence of evidence isn't evidence of absence, but the heavy-lifting must be on the side of those who would argue the venture biz can deliver compelling returns at higher levels of capital outlay.

Second, others may argue that it really doesn't matter. Venture capital provides a valuable societal function -- job creation, innovation, economic growth, etc. -- and we can't hold venture back when we need all three of those so badly. I understand the inclination, but a venture capital industry no longer tied solely to delivering competitive returns to its investors is newly a quasi-governmental entity, an expanded regional economic development agency, albeit one with your pension money at risk.

Finally, is  it possible that venture is just so badly broken that we have no idea what the right amount of capital is? Yes, it is possible that we could see 10x as many startups and find that it is a distribution with many local maxima, some of which are much more attractive than the current level of investing. Good luck making that case, however, to burned limited partners who have just watched an expanded venture industry deliver the worst returns in its history.

The End of Poverty

Some thought-provoking new research argues that, absent catastrophe, and despite continuing population growth, we will never see a billion people in poverty worldwide:

World poverty is falling. This column presents new estimates of the world’s income distribution and suggests that world poverty is disappearing faster than previously thought. From 1970 to 2006, poverty fell by 86% in South Asia, 73% in Latin America, 39% in the Middle East, and 20% in Africa. Barring a catastrophe, there will never be more than a billion people in poverty in the future history of the world. [Emphasis mine]

 

More here.

Blow Your Mind Study of the Day

A study published yesterday by the Kaiser Family Foundation finds that American kids are, for better or worse, entirely absorbed in electronic media. Kids 8-18 years old spend an average of 7 hours and 38 minutes consuming media content, 7 days a week. This is a 1 hour, 20 minute increase from five years ago. And, final fun thought, the study was initiated before Twitter existed.

It's an easy study to skim, chock full of good charts and tables. Things that stuck out for me are (1) low correlation with bad grades and media consumption habits, (2) an amazing percentage of teens who are allowed TVs in their bedrooms (which is considered bad parenting here at growthology, right guys? Or am I just expressing jealousy hangover from my teen years with my cruel, cruel rents?), (3) the rapid rise in DVR penetration, (4) music consumption is the big gainer, which should cheer the icy hearts at music labels.

Meta-lesson that maybe only I find interesting: Losing Touch is Lost
So here America stagnates in the teeth of the worst recession in modern times, and yet a report shows an explosion of media consumption. Life is worse for these kids how? The growth of virtual consumption is not appreciated by standard GDP metrics, but I think Plato was right. Humans are a social animal, and we derive unmeasurable value from social networks that have become instantaneous in speed and global in reach.  In a nutshell, can you imagine being a high school student today and have no sense of ever losing touch with your friends?  Losing touch. Losing touch is a non-operative concept in their world.

Corporations and Elections NEWSFLASH

"The censorship we now confront is vast in its reach," Justice Anthony Kennedy said in his majority opinion, joined by his four more conservative colleagues.

U.S. politics changed dramatically today, and in a much, much bigger way than the election of a Republican from Massachusetts.

The Supreme Court ruled today (5-4) to overturn limits on corporate involvement in U.S. elections. It is a decision ripe for simplistic interpretation, as if the "conservative" justices are allowing big business to run the legislature. In fact, the law has been badly confused ever since campaign finance censorship started growing in the early 1970s.  Even then, the Supreme Court ruled that one aspect of free speech was sacrosanct: individual voice.  In electioneering terms, the Court has consistently ruled that individuals are free to spend as much as they want in favor or against any candidate. Period.

Here is where it gets tricky. These independent expenditures must pass all sorts of litmus tests -- no coordination with a candidate committee, no affiliation with other individuals, organizations, etc.  And biggest of all, it must be individual expenditure, not a corporation, union, club, etc.

But does that make sense in a lawsuit happy society?  What if a someone, anyone, files an FEC complaint against your expenditure?  Without the protection of limited liability that an LLC or Corporate structure affords, you are on the hook.  Can you say chilling effect? 

The net result of corporate finance law was not cleaner elections, but a stranglehold of partisanship as the Two Party Duopoly and its attendant pro-incumbency bureaucracy stifled all opposition. It has been bad for progress, bad for new ideas, bad for economic growth.

So this ruling is unadulterated good news. It might just be the fix America needed for her broken politics.

What wouldn't you sacrifice for Haiti?

A lot of people around the world are sending donations to Haiti.  Kauffman, which is a philanthropy and employs many charitable souls, has multiple ways for staff to send help on our internal website. Very heartwarming.

But I have felt a bit like Paul Krugman in not saying much here on the blog about Haiti because it all seems so obvious.  But maybe saying the obvious, especially the insensitive obvious, needs to be said because it so rarely is said. Haiti was a disaster long before the earthquake. I suspect that absolutely no one believed or believes the people there (or any good people in such a place) would be able to escape the poverty trap that Haiti has long defined.

Haiti is the poorest nation in the Western Hemisphere.  It did not get that way by accident.  Centuries of abuse, neglect, and massive internal corruption have doomed the poor people born there. According to the 2009 INDEX OF ECONOMIC FREEDOM, Haiti's economy is  50.5 percent free, ranked 26 out of 29 in the region, ranked #147 in the word, and about the only thing it ranks well on is "Government Size" which is only because it essentially has no governance. Apparently the new 2010 Index is slated to be released tomorrow, and I suspect the score will not have changed. I made a quip the other day that it is hard for many Americans to fathom a place like Haiti because it simply is not a nation in the conventional sense. It is just a place, understood more in terms of what it lacks institutionally than what it has.

So here is the question: what would you be willing to sacrifice for the people of Haiti?  Most of us would send money, but what if that won't help?  What else, creatively, would you be willing to give?

There are 9.4 million Haitians.  Would you be willing to give them citizenship? Would you be willing to offer them statehood?  A new protectorate status, something like Guam or Puerto Rico? Would you allow President Obama to build a U.S. joint forces military base there, adjoining a new city chartered under U.S. law, with all tax revenues from the city to be shared equally with the people of Haiti, but under protection of the U.S.?

Surely, the people of Haiti could turn down these offers.  I just wonder what you be willing to extend?

It is worth noting that Paul Romer has already written a powerful comment on this topic at his chartercities.org blog, rather strongly against the notion of a charter city. Read the whole thing, but let me cite some key lines here:

Contrary to what some have suggested, a charter city in Haiti is simply not an option at this time. A charter city can only be created through voluntary agreement. Under the current conditions, the government and people of Haiti do not have the freedom of choice required for any agreement reached now to be voluntary.

In 2004, most knowledgeable observers concluded that the crisis in Haiti met the stringent criteria required for a humanitarian military intervention. A UN dispatched a force of 7000 soldiers and 2000 police officers. It made real progress, particularly after 2006. It reduced kidnappings and established a police presence in areas where criminal gangs had been so strong that Haitian police could not enter. The UN also paid for the expansion and training of the Haitian police force.

On top of its enormous human and economic cost, the earthquake has setback these efforts at strengthening the Haitian government. The case for a foreign military presence is now much stronger. The number of foreign troops is increasing rapidly. They are likely to stay much longer.

In the current circumstances, any attempt at creating a new city in Haiti under foreign control would turn a humanitarian military intervention into a humanitarian military occupation. This approach is fraught with risks that the concept of a charter city is designed to avoid.

Paul is right that this is not the ideal setting for a "Charter City" as he has carefully defined it.  However, I think it is more than ideal for something radically different than humanitarian aid. The outline of what I would recommend the U.S. President offer to the government of Haiti is this:

1. With your approval, we will build a new transportation hub and commerical territory on a section of unoccupied land (compensating whatever landowners have title to that land now). The U.S. will have a 49-year lease on the land and be given authority to manage it under U.S. law. At the end of those 30 years, full sovereignty will return to the government of Haiti.

2. The U.S. will commit to constructing an air and sea port on this land. it will be a hub for humanitarian aid over the next year and into the future.  Adjoining space will also be parceled out for commerical purposes. Commerical sovereignty will be shared and the government of Haiti will receive 50 percent of all property and sales tax revenues.

3.  On the issue of free choice, no Haitian people will be required to work here, but all Haitian people will have the right to work, visit, and live in this new territory if they choose to.  All people in the territory will be suject to the U.S. laws governing the territory, as well as the police and courts of the territory.

New Paper on Firm Formation

Why is the annual number of new companies so constant? Read it here.

How Do Entrepreneurs … ?

Fun with Google search auto-complete, this time asking about the entrepreneurs. In short, Google tries to complete your query based on the most common questions people ask of the form you’re positing.