Topic: Finance, Banking & Monetary Policy

William Galston’s Not-So-Great Decoupling of Pay, Productivity, and Common Sense

Wall Street Journal columnist William A. Galston says “the Great Decoupling of wages and benefits from productivity [is] the biggest economic story of the past 40 years.”  Wow!  The Biggest Economic Story of the past 40 years!  Imagine that!  I have been researching such data longer than 40 years yet this particular story is so old (and so wrong) I had almost forgotten about it.   

The alleged decoupling of growth of pay from productivity, as Robert Gordon explained in 2009, “compares apples with oranges, and then oranges with bananas.” Median wages for the whole economy were deflated by the consumer price index, which exaggerated inflation and understated real income growth. Rapidly growing health and retirement benefits were often excluded. These muddled measures of real pay, which also failed to adjust for changing household size or hours, were compared to productivity of the nonfarm business sector, not the whole economy. And real output was calculated using GDP deflators that showed much less inflation than the CPI. With those errors, one estimate for the income-productivity gap from 1979-2007 was 1.46 percentage points, but Gordon’s adjustments shrunk that to a negligible 0.16. He also noted that mean and median incomes grew at remarkably similar rates, suggesting inequality did not explain much.

A 2013 study from the London School of Economics likewise found no significant gap between growth of compensation and productivity in the United States or UK (unlike the EU and Japan) if both measures are properly calculated with the same price index. The LSE study concluded that, “the debate around net decoupling in the UK and US is rather a distraction (it is actually more important in Continental Europe and Japan). Obtaining faster productivity growth is a highly desirable policy goal in the current climate of near recession as it will ultimately lead to faster wage growth and consumption.”

Galston tells other stories, such as “mobility has stalled” – which is indefensible nonsense. His allusion to the “past 40 years,” appears based on a Pew Research paper’s pointless claim that the “middle class” constituted a smaller share of adults in 2011 than in the idyllic year of 1971. As Pew Research hesitantly revealed, that is mainly because millions of people moved up – “the upper-income tier [earning more than double median income] rose to 20% of adults in 2011, up from 14% in 1971.”

All this statistical fog is thin camouflage for Galston’s invitation to grant authoritarian politicians and bureaucrats the discretion to somehow “link the tax rates individual firms have to the compensation practices they adopt.” That may well be the worst economic policy idea of the past 40 years, trailing barely behind Nixon’s dictatorial price controls.

Venezuela Verifies Hayek on Exchange Controls

Foreign airlines have begun to restrict ticket sales in Venezuela. As the bolivars’ value evaporates, and with exchange controls in force, the airlines fear that the funds they have in Caracas will evaporate, too. By restricting ticket sales, the airlines will limit the amount of new money that is trapped behind the government’s wall of exchange controls.

Of course, President Nicolas Maduro isn’t the first autocrat to impose exchange controls, and he won’t be the last to impose these confiscatory policies. Indeed, the pedigree of exchange controls can be traced back to Plato, the father of statism. Inspired by Lycurgus of Sparta, Plato embraced the idea of an inconvertible currency as a means to preserve the autonomy of the state from outside interference.

So, the temptation to turn to exchange controls in the face of disruptions caused by hot money flows is hardly new.  Tsar Nicholas II first pioneered limitations on convertibility in modern times, ordering the State Bank of Russia to introduce, in 1905–06, a limited form of exchange control to discourage speculative purchases of foreign exchange.  The bank did so by refusing to sell foreign exchange, except where it could be shown that it was required to buy imported goods.  Otherwise, foreign exchange was limited to 50,000 German marks per person.  The Tsar’s rationale for exchange controls was that of limiting hot money flows, so that foreign reserves and the exchange rate could be maintained.  The more things change, the more they remain the same.

This brings me to Nobel laureate Friedrich Hayek’s 1944 classic, The Road to Serfdom. Many thought Prof. Hayek hurt his case because he was extreme. What nonsense. Just consider the Wall Street Journal’s reportage from Caracas about the real concerns of foreign airlines that have funds locked up in Venezuela. And then reflect on the following insightful analysis from the Road to Serfdom:

The extent of the control over all life that economic control confers is nowhere better illustrated than in the field of foreign exchanges. Nothing would at first seem to affect private life less than a state control of the dealings in foreign exchange, and most people will regard its introduction with complete indifference.  Yet the experience of most Continental countries has taught thoughtful people to regard this step as the decisive advance on the path to totalitarianism and the suppression of individual liberty.  It is, in fact, the complete delivery of the individual to the tyranny of the state, the final suppression of all means of escape—not merely for the rich but for everybody.

Hayek’s message about convertibility has regrettably either been overlooked, or thought to be too extreme. Exchange controls are nothing more than a ring fence within which governments can expropriate their subjects’ property. Open exchange and capital markets, in fact, protect the individual from exactions, because governments must reckon with the possibility of capital flight.

Free the Inside Traders

Manhattan U.S. attorney Preet Bharara claimed another victory in his crusade against “insider trading,” a practice he once called “pervasive.”  Last week he won a conviction against Mathew Martoma, formerly at SAC Capital. 

Another big scalp was hedge fund billionaire Raj Rajaratnam, convicted in 2011 and sentenced to 11 years in prison.  A decade ago Martha Stewart was convicted of obstruction of justice in an insider trading case.

Objectively, the insider trading ban makes no sense.  It creates an arcane distinction between “non-public” and “public” information.  It presumes that investors should possess equal information and never know more than anyone else. 

It punishes traders for seeking to gain information known to some people but not to everyone.  It inhibits people from acting on and markets from reacting to the latest information. 

Martoma was alleged to have gotten advance notice of the test results for an experimental drug.  Martoma then was accused of recommending that SAC dump its stock in the firms that were developing the pharmaceutical.

If true, SAC gained an advantage over other shareholders.  But why should that be illegal?  The doctor who talked deserved to be punished for his disclosure.  However, Martoma’s actions hurt no one.

No Big Deal. Just Taxpayers Getting Clobbered

According to Ben Jacobs at the Daily Beast, Sen. Elizabeth Warren (D-MA) will soon be introducing legislation to allow holders of federal student loans to refinance at lower interest rates. There’s no indication that the new rates would be in exchange for longer terms, or anything like that. Just lower rates because someone might have borrowed at 7 percent, rates for new loans are now at 3 percent, and, well, paying 7 percent is tougher.

According to Jacobs, the proposal “seems to encapsulate…free-market principles” because recent changes to the student-loan program connect rates on new loans to broader interest rates. Apparently, pegging interest rates to 10-year Treasuries is very free market-y.

Perhaps more concerning than the questionable use of the term “free-market principles,” however, is the article’s handling of my reponse to the author’s request for comment. Apparently, I was fine with Warren’s rough idea, except for one little thing. Writes Jacobs:

In fact, Neal McCluskey, a higher education expert at the libertarian Cato Institute, had difficulty finding objections to the concept of Warren’s bill though he cautioned that was without any legislation for him to read. Instead, he was agog at the issues involved with reducing government revenue through lowering interest rates because the lender has to pay for it and, in this case, the lender is the American taxpayer.

How much bigger an objection could there be to “the concept of Warren’s bill” than that such a move would leave taxpayers holding the bag? As I often try to emphasize, taxpayers are people, too. There are lots of other concerns – most centrally, easy aid fuels tuition inflation – but to gently paraphrase Vice President Biden, reducing revenue that’s already been budgeted is a big deal!

Let me rephrase that: It should be a big deal. But as proposals like this indicate, it’s not nearly as big as it ought to be.

 

Argentina Graph of the Day

The graph below is from an op-ed I wrote on Argentina’s 15% devaluation last week, which looks like the beginning of a wider economic crisis. It shows how total government spending as a percent of GDP has doubled to an estimated 44% in the era of populist politics that began with Argentina’s massive debt default in 2002. The country has been spending beyond its means and paying for it by printing money. The government shows no signs of wanting to tame inflation or reduce spending. The bottom line is this: as the government draws down its reserves, and with few other sources of finance, we can expect people to continue to lose confidence in the currency and the economy to deteriorate further and faster.

Source: Luis Secco

Senate Prepares to Roll Back Flood Insurance Reforms

A funny thing happened in 2012, Congress actually passed a bill that intentionally cut subsidies.  In this case subsidies given to homeowners under the National Flood Insurance Program (NFIP).  The Biggert-Waters Act of 2012, if fully implemented, would eliminate almost half of the annual billion in estimated subsidies under the NFIP.  Now before your opinion of Congress suddenly improves, its important to remember that subsidies reductions were done only because the NFIP had expired and some responsible members objected to extending the program without reform.  Now that the program is up and running again, beach front homeowners and their friends in the real estate industry want their subsidies back.

The Senate is currently moving towards that goal.  Not even wanting to bother with the normal process of hearings and a Committee vote, Senate Majority Leader Harry Reid has brought S.1926 directly to the floor for a vote, likely to occur this week.  S.1926 would indefinitely delay the premium increases passed in Waters-Biggert, effectively hitting the taxpayer for $100s of millions annually.  But hey there’s a close Senate race going on it Louisiana, so regular order can wait.

Now I have every sympathy for households facing rate increases under NFIP.  They’ve been getting a subsidy for years and have grown used to it.  Given the sometimes high cost of NFIP, it might not even feel like a subsidy.  But then part of that is because almost a third of the premium income is pocketed by the insurance companies (at no risk to them I might add).  The solution is to let those households either get out of NFIP altogether or to purchase private insurance, that would likely be cheaper given the inefficiencies of the NFIP.  If one feels that maintaining flood coverage is vital for these households, yet they cannot bear the higher raters, another option would be a significantly higher deductible.  Rolling back the premium reforms in Biggert-Waters is simply short-sighted and irresponsible, but then that’s nothing new for Washington.

Political Inequality: Residents of Washington are Different from the Rest of Us

America is a class-based society. Based on politics, not economics. An elite political class runs the state to their benefit. The rest of us pay the bill.

The differences between the assumptions and values of people within and without Washington’s 68 square miles of fantasy long have been on ostentatious display. The Democrats’ health care “reform” has become the latest example, offering tender treatment for those in the capital who approved the measure despite opposition from those outside the capital.

Critics of ObamaCare successfully pushed an amendment requiring congressmen and congressional staffers to purchase their health insurance through the new government exchanges. Being tossed from their special plans meant the end of federal subsidies, which run $5000 annually for individuals and $11,000 for families.

The new rule was meant to diffuse the anger of tens of millions of Americans who were forced to change plans and pay more for health care coverage. No surprise, residents of Capitol Hill were not happy. Alas, it wouldn’t look good to voters if Congress now enacted a special exemption. So without any legal authority, President Barack Obama maintained existing federal contributions.

Rep. Chris Stewart (R-Utah) observed:  “There’s no question it was the right thing to do. Not just for me, but for my staff. Heavens, I have staff who don’t make much money. This would be a really big bite for them.”

Too bad the president didn’t similarly step in to ensure that the rest of us won’t have to suffer “a really big bite” from ObamaCare.