Today the Department of Labor provides the first read of 2016 on the state of the U.S. labor market. Recall that in December, payroll employment rose by 292,000, while the unemployment rate remained unchanged at 5.0 percent. What can one expect in the January report?
At the time of the announcement of the Iranian nuclear deal, the administration claimed it would provide Iran access to about $50 billion in frozen assets. Weeks ago, Secretary of State john Kerry labelled as “fictional” the notion that Iran would gain access to $100 billion due to the Iran nuclear deal. Suddenly, the State Department has changed its tune; spokesman John Kirby said the U.S. would be releasing about $100 billion to Iran. (The humorous footnote to this episode is the State Department’s attempt to convince reporters that because Iran would have to repay $45 billion in debts, it was really only “getting” $55 billion. Conveniently, this is closer to the original number but it is the same as asserting your paycheck is misleading because you have to pay student loans, mortgages, car loans or other expenses. It makes no sense.)
The Hill newspaper is reporting that White House Press Secretary Josh Earnest "said [Speaker Ryan, Majority Leader McConnell and President Obama] will probably discuss the Trans-Pacific Partnership, earned income tax credit, and heroin addiction problem.” It is a healthy development for there to be good communication between these three leaders. And there may be room for some agreement on enhancing the Earned Income Tax Credit, (EITC) a shared commitment to the Trans-Pacific Partnership, and concern over the scourge of addiction. But that is a far thing from constituting a “to do” list for the Congress.
The Earned Income Tax Credit (EITC) is the most successful federal anti-poverty program. It uses the tax system — in the form of a refundable tax credit — to subsidize the wage earnings of those low-income Americans who choose to work. To date, however, the focus of the program has been on families with children, especially single mothers. However, with labor force participation at 30-year lows and poverty rising during the recovery from the Great Recession, it is quite timely for House Speaker Paul Ryan’s plan to expand the EITC for childless adults.
Friday’s report on growth in Gross Domestic Product (GDP) during the fourth quarter of 2015 checked in at a paltry 0.7 percent annual rate. The weak GDP report, coupled with a disastrous start to 2016 in equity markets, has raised considerable chatter about an impending U.S. recession. For what it’s worth, that is far from the consensus in the economics profession. The Financial Times reports that "Leading global economists now see a 20 percent chance of the US falling into recession this year”. Still slowing global growth and financial market turbulence have taken their toll; the same group previously put the probability of recession at 15 percent over the next two years.
A policy scuffle has broken out between Barry Ritholtz and David Beckworth and Ramesh Ponnuru over the causes of the financial crisis. Without refereeing the skirmish (although I will say I have zero sympathy for the views of the latter), it remains astonishing that there is still any debate on this issue. Or perhaps not. Congress did commission the Financial Crisis Inquiry Commission (FCIC) (spoiler alert: I was a commissioner). It failed its mission “to examine the causes, domestic and global, of the current financial and economic crisis in the United States.” Instead of providing the American public with a clear and coherent explanation, the divided FCIC permitted all sorts of simplistic (“Wall Street greed,” “too little regulation,” “mortgage fraud,” etc.) explanations to survive.
A simple way to diagnose America’s economic ills is displayed in the chart below. It compares the rate of new business startups (red) and business failures (blue) (3-year moving averages; calculated using Census business dynamics data). As shown, for the bulk of the period for which data are available, entrepreneurs started businesses at a rate significantly higher than the pace at which businesses failed. Since 2007, however, the startup rate has fallen significantly — sometimes even below the failure rate.
Tuesday the Congressional Budget Office (CBO) released the final version of its January Budget and Economic Outlook. It is somber reading. The deficit is projected to rise by $100 billion to roughly $540 billion next year, exceed $1 trillion in 2024 (the final year of the 2nd term of the next president), and exceed $1.3 trillion a decade from now. The deficits occur despite rapid growth (4.1 percent annually) in federal revenues and very limited defense (2 percent) and non-defense (1.6 percent) discretionary spending. By process of elimination, the problem emerges: exploding entitlement spending. Social Security grows 5.9 percent per year, Medicare 6.4 percent, Medicaid 5.4 percent, and Obamacare subsidies 6.9 percent.
The Federal Open Market Committee (FOMC), the Fed’s policymaking body, has its next meeting today and tomorrow(January 26th and 27th). In light of recent turmoil in global financial markets, what should the Fed do? The first observation is that the economic (as opposed to financial market) indicators are solid. Core (excluding food and energy prices) Consumer Price Index (CPI) inflation is 2.1 percent between December 2014 and December 2015. (Although some other measures of consumer inflation are a bit softer.) The unemployment rate is 5 percent and payroll employment growth (the best contemporaneous measure of economic growth) continues above 200,000 jobs per month. These indicators suggest that economic growth is closer to “normal” than is monetary policy with its extraordinarily low interest rates. This indicates that the Fed should continue to raise its target federal funds rate.
On February 9, President Obama will release his budget proposals for fiscal year 2017 (which beginsOctober 1, 2016). The projections in any president’s budget inevitably look pretty good. But that is hardly a surprise. The president’s team controls the economic assumptions, which — while rarely transparently “red” — are inevitably a bit rosy at the margins. In addition, the economic forecast presumes the full implementation of the president’s proposals — the budget is dynamically scored — and no president admits that the proposals harm economic growth. Finally, presidents are loathe to admit to fiscal profligacy, so the proposals inevitably show the deficit falling, even if the proposals that generate the deficit reduction are politically dead upon arrival.