Eppur Si Muove, or, How Not to Explain Stagnant Real Wages

Lately the old-timers here at Cato’s Center for Monetary and Financial Alternatives — which is to say, Jim Dorn and I — have been talking a lot about the Phillips Curve, which seems to be playing a part in monetary policy discussions today almost as big as the one it played in the 1970s. And you can bet that, because both Jim and I actually remember what happened in the 70s, and afterwards, neither of us has a good word to say about the concept, except as a very reduced-form means for describing very transient relationships.

Because Jim has a CMFA Policy Briefing on Phillips Curve reasoning in the works, I won’t belabor here his — and my — general objections to it. My main concern is to draw attention to a current example of that reasoning at work, in the shape of a recent New York Times op-ed by Jared Bernstein, entitled “Why Real Wages Still Aren’t Rising.”

Noting that, despite the low and still falling U.S. unemployment rate, real wage rates for workers in factories and the service industries have been stagnant for several years. Mr. Bernstein finds this stagnancy puzzling: According to the BLS, he writes, as of this June money “wages” (presumably meaning hourly wage rates) grew at an annual rate of 2.7 percent, whereas “looking at the historical link between wages and unemployment, wage growth should have been rising about a percentage point faster.” The “historical link” to which Mr. Bernstein refers is based partly on the Phillips Curve — a negative relation between the unemployment rate on one hand and the rate of either nominal “wage” or price inflation on the other — and partly on the historical tendency for the rate of nominal wage inflation to exceed that of price inflation. In the present instance, prices have failed to rise as rapidly as the decline in unemployment suggests they should, while wages — factory workers’ wages especially — have been rising still less rapidly.

Some Reasons to Trust Mark Zuckerberg with Freedom of Speech

Last week Mark Zuckerberg gave an interview to Recode. He talked about many topics including Holocaust denial. His remarks on that topic fostered much commentary and not a little criticism. Zuckerberg appeared to say that some people did not intentionally deny the Holocaust. Later, he clarified his views: “I personally find Holocaust denial deeply offensive, and I absolutely didn’t intend to defend the intent of people who deny that.” This post will not be about that aspect of the interview.

Let’s recall why Mark Zuckerberg’s views about politics and other things matter more than the views of the average highly successful businessman. Zuckerberg is the CEO of Facebook which comprises the largest private forum for speech. Because Facebook is private property, Facebook’s managers and their ultimate boss, Mark Zuckerberg, are not bound by the restrictions of the First Amendment. Facebook may and does engage in “content moderation” which involves removing speech from that platform (among other actions).

Facebook F8 2017 San Jose Mark Zuckerberg by Anthony Qunintano is licensed under CC BY 2.0

What might be loosely called the political right is worried that Facebook and Google will use this power to exclude them. While their anxieties may be overblown, they are not groundless. Zuckerberg himself has said that Silicon Valley is a “pretty liberal place.” It would not be surprising if content moderation reflected the dominant outlook of Google and Facebook employees, among others. Mark Zuckerberg is presumably setting the standards for Facebook exercising this power to exclude. How might he exercise that oversight?

Pakistan’s Youth: An Untapped Resource by Pakistan’s Political Parties

The Pakistani public is headed to the polls on July 25, to vote in the third consecutive election since 2008. While it remains difficult to predict which political party will emerge victorious, one thing is clear: Pakistan’s youth will most likely determine the winner.

Pakistan is in the middle of youth bulge. According to Pakistan’s National Human Development Report, 64 percent of the population is between the ages of 15 and 29. This population is concerned with completing their education, securing a job to increase the likelihood of financial stability, having the ability to change a job if needed (indicating a desire to not only have a strong economy but also a diverse one), being able to marry and have children, having the ability to buy a house, car, and other material comforts, and being able to emigrate and/or study aboard.

But do Pakistan’s major political parties have the capacity to address the youth’s concerns? Not really.

All major political parties—Pakistan Muslim League–N (PML–N), Pakistan Tehreek-e-Insaf (PTI), and Pakistan Peoples Party (PPP)—have long understood the importance of the youth, and have tried various techniques to appeal to young voters. When campaigning for the 2013 general elections, PML–N introduced a program that provided free laptops to poor students to increase their accessibility to technology as part of a larger initiative to improve the quality of education. PPP sought to engage the youth in policymaking by creating youth councils while PTI appealed to the youth directly, urging young people to join PTI and create a “Naya (New) Pakistan” free of corruption. The 2018 campaign season has also been filled with appeals to the youth, with political parties (even religious ones) hiring DJs to “raise the passion of people.” But the political parties manifestos don’t meet the passion of the rallies.

PML–N’s 2018 manifesto describes: a self-employment scheme for youths that includes low-interest loans and increased access to community banks; the creation of low-medium skilled jobs in the agricultural sector; and an emphasis on vocational training. The manifesto states that PML–N is making youth representation in democratic forums a top priority. Yet, the manifesto is blatantly Punjab-centric. For example, the vocation training programs are all sourced from Punjab, such as TEVTA or Technical Education and Vocational Training Authority in Punjab, the PSDF or the Punjab Skills Development Fund that is designed to provide free vocational training to poor and vulnerable populations, and the PVTC or the Punjab Vocational Training Council, which focuses on vocational teacher training. What about the youth in other provinces and tribal areas?

PPP’s 2018 manifesto has a broader scope. While it goes into a more detail reforming and modernizing education, improving access to quality education, revitalizing sports, and increasing technical and vocational programs, it fails to provide actual policies and programs that can achieve these lofty goals. For example, the manifesto states that PPP aims to regulate internship programs to all young people to increase their work experience, making them more appealing when they enter the workforce. Yet, no details have been provided on this regulation program. Will it be based on a quota system? Will students be able to get university credit for internships?

Similar to PPP’s manifesto, PTI’s 2018 manifesto lists a number of noteworthy goals but fails to provide any implementation details. For example, PTI’s manifesto focuses on doubling the size of existing skill development and vocational training programs but fails to explain how. The manifesto states that PTI will launch a national program to provide practical training to graduates in the public and private organizations but fails to name any specific organizations it has been in touch regarding such a program. PTI also wants to establish a liaison under the Ministry of Foreign Affairs to promote foreign placement of Pakistani talent but does not discuss what a PTI-led government will do to reduce visa restrictions that Pakistani nationals face worldwide.  

Pakistan’s National Human Development Report found that 80 percent of Pakistan’s youth has voted in the past, and reports indicate that Wednesday’s election won’t be much different. While youth involvement in Pakistan’s political processes has evolved over time, one thing is clear: Pakistan’s political parties need to not only engage the youth but also focus on how they can meet the youth’s demands in a fiscally responsible way. For now, none of the parties seem to have a clear idea of how to deal with the country’s youth bulge. 

The Good Government Effects of Drug Legalization

Last week, the Washington Post picked up on an article in Police Quarterly that showed clearance rates for property and violent crimes increased in Colorado and Washington following their legalization of marijuana for recreational purposes. The clearance rate is the percentage of reported crimes that result in an arrest for those crimes. These data support the notion that Cato and other pro-legalization advocates have been saying for years: if the government ends the drug war, it frees up police resources to solve other crimes and perform other functions more necessary to public well-being than prosecuting drug crimes. Of course, these data are not conclusively causal and different agencies may react differently to legalization in their jurisdictions, but they are a good sign for reform that academics can measure as more states legalize.

On a related note, my colleague Jeff Miron published a piece today examining the budgetary impact of ending drug prohibition. You can find that here.

What To Make of the Trump Administration’s Occasional Positive Statements about Trade Liberalization

Over the weekend Treasury Secretary Steven Mnuchin made some remarks that could be interpreted as positive for trade liberalization:

Treasury Secretary Steven Mnuchin is “very hopeful” the US can make progress brokering separate free trade deals with the European Union and Japan during a weekend summit in Buenos Aires.

“I’m encouraged by the EU’s trade agreement with Japan,” Mnuchin said Saturday in an interview with CNN at the sidelines of the G-20 meeting in Argentina.

The EU and Japan signed a massive trade deal earlier this week, cutting or eliminating tariffs on nearly all goods. The deal is in contrast to escalating trade disputes between the US and several of its major allies, including the European Union.

The EU-Japan agreement, which covers 600 million people and almost a third of the global economy, will remove tariffs on European exports such as cheese and wine. It will also reduce barriers on Japanese automakers and electronic firms in the European Union.

President Donald Trump has imposed tariffs on a range of foreign goods from Europe, Canada, Mexico and other trading partners, and is threatening even more action.

Mnuchin said he is still reviewing the details of the EU-Japan agreement, but stressed that any free trade deal with the EU would have to go beyond cutting tariffs on goods.

“This has to be about dropping non-tariff barriers and subsidies as well. This has to be a deal with its entirety,” he said.

Elsewhere, it was reported that he said: “If Europe believes in free trade, we’re ready to sign a free trade agreement.”

If you haven’t been following trade policy for the last two years, you might see this as a positive and constructive approach by the Trump adminstration towards trade liberalization. But the broader context makes clear that this is not the case. Among other things, the Trump administration has imposed new tariffs on the EU, Japan, and others; and while there have been offhand remarks about trade liberalization (see similar remarks from President Trump and National Economic Council Director Larry Kudlow here), the administration has not made any formal efforts to get such a process started. In short, and contrary to Mnuchin’s statements, the Trump administration does not seem the least bit ready to sign a new free trade agreement, with the EU or anyone else (it is, however, revisiting some older trade agreements).

Of course, the Trump administration could, if it wanted to, negotiate free trade agreements with the EU, Japan, and others. These agreements are not a panacea for eliminating protectionism, but they do achieve significant liberalization. As long as expectations on both sides are kept at reasonable levels (in terms of timing and scope), deals are possible. Through these agreements, most tariffs on trade between the parties could be eliminated, and some non-tariff barriers could be reduced (subsidies, by contrast, are rarely addressed in bilateral deals).

However, aside from occasional offhand remarks, the Trump administration is not taking any steps towards starting these negotiations, and instead is making the possibility of deals less likely through its confrontational and unjustified Section 232 tariffs on steel and aluminum (and possibly soon, on cars). As the EU and Japan have just shown, these trade deals are possible. It remains to be seen if the Trump administration is willing and able to negotate them.

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Multi-Billion Dollar Boondoggle at DOE

The federal government spends an unreal amount of taxpayer money cleaning up nuclear weapons sites. In this study at Downsizing Government, I noted that between 1990 and 2016, Congress spent $152 billion on nuclear cleanup, with about $6 billion more every year.

Where does the money go? About $5 billion has been spent at a facility in South Carolina called the Savannah River Site. In the study, I said, “The facility has a negligent safety culture, and environmental issues such as water contamination plagued it for years. Cleanup costs have soared. The construction of a mixed oxide fuel facility at the site was supposed to cost $5 billion, but the price tag has soared to $17 billion.”

The Wall Street Journal provided an update on the Savannah River boondoggle today:

The U.S. Energy Department says it is spending $1.2 million a day on a partially built South Carolina nuclear facility that it wants to abandon due to soaring costs.

Congress has continued funding construction of the plant, which would be used to dispose of surplus weapons-grade plutonium, despite a series of reviews casting doubt on the financial logic involved.

… The recent jousting marks the latest twist for the troubled Mixed-Oxide Fuel Fabrication Facility. In 2007, U.S. officials said the so-called MOX plant would cost $4.8 billion and be completed by 2016. DOE officials today estimate it would cost $17.2 billion and take until 2048, assuming $350 million a year in federal funding.

… In 2014, the Energy Department concluded that plutonium could be disposed far more cheaply using a different method, known as “dilute and dispose.” The shift is opposed by South Carolina officials and members of the state’s congressional delegation, including Republican Sen. Lindsey Graham.

… From 2014 to 2016, Congress gave the Energy Department the same message: Keep building the MOX plant. Last year, Congress authorized the energy secretary to stop construction if evidence showed another method would cost less than half as much.

In May, Energy Secretary Rick Perry invoked the provision and prepared to halt construction in June. South Carolina sued, and U.S. District Judge J. Michelle Childs granted a preliminary injunction June 7 in the state’s favor, pending further litigation.

For more on energy spending, see www.downsizinggovernment.org/energy/energy-subsidies.

 

49 Nations Accept Asylees & Refugees at Higher Rates Than America

On numerous occasions, President Trump has described America’s asylum laws as the most accepting—or, in his words, “dumbest,” in the world. “When people, with or without children, enter our Country, they must be told to leave… only country in the World that does this!” he tweeted this month. But many other countries are much more accepting of asylum seekers than the United States is. In fact, the United States ranks 50th in the world in net increase in asylees, refugees, and people in similar situations as a share of its population since 2012.

The United Nations High Commissioner for Refugees (UNHCR) publishes data on the number of refugees and asylum seekers in each country. From 2012 to 2017, UNHCR finds that the United States accepted a net increase of 654,128 asylees, refugees, and people in similar circumstances. That amounted to 0.2 percent of the U.S. population in 2017. As the Figure below shows, 49 other countries had higher rates of acceptance than the United States did. The average rate of acceptance for the top 50 countries was 1.2 percent of the population—six times higher than the U.S. rate.

Figure: Top 50 refugee-asylee receiving nations

In absolute terms, the United States does rank in the top 10, but it is important to control for the size of the population of the receiving country both to understand the likely effects of the absolute numbers on the country and to allow a legitimate comparison across countries. This is the same reason why per capita Gross Domestic Product (GDP) is a better measure of how wealthy people in a country are than just aggregate GDP. The Chinese are not seven times wealthier than Canadians because China’s GDP is seven times larger. In fact, Canadians are five times wealthier because Canada’s per capita GDP is five times larger. To understand how wealthy or how accepting a country is, the population of the country is as relevant as the size of its aggregate wealth or the absolute number of immigrants it accepts.