Tag Archives: Canada

Manufacturing employment and the prime-age male LFP rate: What’s the relationship?

Recently I wrote about the decline in the U.S. prime-age male labor force participation (LFP) rate and discussed some of the factors that may have caused it. One of the demand-side factors that many people think played a role is the decline in manufacturing employment in the United States.

Manufacturing has typically been a male-dominated industry, especially for males with less formal education, but increases in automation and productivity have resulted in fewer manufacturing jobs in the United States over time. As manufacturing jobs disappeared, the story goes, so did a lot of economic opportunities for working-age men. The result has been men leaving the labor force.

However, the same decline in manufacturing employment occurred in other countries as well, yet many of them experienced much smaller declines in their prime-age male LFP rates. The table below shows the percent of employment in manufacturing in 1990 and 2012 for 10 OECD countries, as well as their 25 to 54 male LFP rates in 1990 and 2012. The manufacturing data come from the FRED website and the LFP data are from the OECD data site. The ten countries included here were chosen based on data availability and I think they provide a sample that can be reasonably compared to the United States.

country 25-54 LFP rate, manuf table

As shown in the table, all of the countries experienced a decline in manufacturing employment and labor force participation over this time period. Thus America was not unique in this regard.

But when changes in both variables are plotted on the same graph, the story that the decline in manufacturing employment caused the drop in male LFP rate doesn’t really hold up.

country 25-54 LFP rate, manuf scatter plot

The percentage point change in manufacturing employment is across the top on the x-axis and the percentage point change in the prime-age male LFP rate is on the y-axis. As shown in the graph the relationship between the two is negative in this sample, and the change in manufacturing employment explains almost 36% of the variation in LFP rate declines (the coefficient on the decline in manufacturing employment is -0.322 and the p-value is 0.08).

In other words, the countries that experienced the biggest drops in manufacturing employment experienced the smallest drops in their LFP rate, which is the opposite of what we would expect if the decline in manufacturing employment played a big role in the decline of the LFP rate across countries.

Of course, correlation does not mean causation and I find it hard to believe that declines in manufacturing employment actually improved LFP rates, all else equal. But I also think the less manufacturing, less labor force participation story is too simple, and this data supports that view.

America and Italy experienced similar declines in their male LFP rates but neither experienced the largest declines in manufacturing employment over this time period. What else is going on in America that caused its LFP decline to more closely resemble Italy’s than that of Canada, Australia and the UK, which are more similar to America along many dimensions?

Whatever the exact reasons are, it appears that American working-age males responded differently to the decline in manufacturing employment over the last 20 + years than similar males in similar countries. This could be due to our higher incarceration rate, the way our social safety net is constructed, differences between education systems, the strength of the economy overall or a number of other factors. But attributing the bulk of the blame to the decline of manufacturing employment doesn’t seem appropriate.

Do We Need a Strategic Cherry Reserve?

What do national public interest and cherries have in common? If you follow national politics on a regular basis, the answer probably will not surprise you. It is federal regulation. This week, the USDA issued an interim rule that revised the deadlines for cherry growers submitting their plans to comply with or applications to divert from the centrally planned production of tart cherries. The plan is approved each year by the Cherry Industry Administrative Board, which is elected by cherry growers. The USDA has the power to sanction any grower that deviates from the plan. Yes, the United States has a federally imposed cartel for cherries (among many other agricultural products; you can check here if your favorite fruit made the list). Take that, Canada.

The Agricultural Marketing Agreement Act, which gave the USDA power to regulate the volume of cherries produced in the country, originally passed in 1937. It is doubtful that it had much economic rationale back then (other than granting privilege to favored interest groups). It certainly makes little sense today. Granted that as a key ingredient in cherry pies tart cherries are dear to many Americans, but counting them as “agricultural commodities with a national public interest,” as the federal government does under the Act, is at best an overstatement. In the end, the best way to protect the national public interest is to for the federal government to stop telling farmers when and how to grow their crops.

Does stimulus displace private economic activity?

According to Keynesian economic theory, many recessions have little or nothing to do with underlying (structural) economic problems. Instead, recessions are the result of a crisis in confidence. People are simply freaked out and therefore not spending. And when they are not spending, others are not earning income and so the economy suffers.

Keynesians argue that the government can cure this crisis in confidence by borrowing (deficit spending) to fund an increase in government purchases. If people are too freaked out to spend, the logic goes, the government can spend for them. And this spending has a multiplier effect, rippling throughout the economy.

You might be wondering how the government is able to get something for nothing. Government has to borrow the resources from the private economy, doesn’t that mean that the government is competing with private borrowers who have their own plans to invest in the economy? Doesn’t that mean that government investment displaces or crowds-out private investment? The Keynesians, being clever economists, have an answer for this. Their answer is that during a recession there are “idle resources.” That is, individuals and businesses are too freaked out to undertake any major investments and so there is money just lying around. The government can borrow it without displacing any private activity.

Most Keynesians (and by this I mean the economists, not most politicians and pundits who subscribe to Keynesian theory) recognize that this is only a short term phenomenon. Obviously, there comes a time when government borrowing will, indeed, displace private economic activity. That’s why Keynesians believe that the multiplier is larger during a recession and its why they counsel that stimulus should be “timely, targeted, and temporary,” as Lawrence Summers famously put it in December 2007.

Leaving aside the question of whether government can effectively spend the money, is it true that the government purchases multiplier is larger during recessions? A new paper by Michael Owyang (St. Louis Fed), Sarah Zubairy (Bank of Canada) and Valerie Ramey (UCSD) examines this question:

A key question that has arisen during recent debates is whether government spending multipliers are larger during times when resources are idle. This paper seeks to shed light on this question by analyzing new quarterly historical data covering multiple large wars and depressions in the U.S. and Canada. Using an extension of Ramey’s (2011) military news series and Jordà’s (2005) method for estimating impulse responses, we find no evidence that multipliers are greater during periods of high unemployment in the U.S. In every case, the estimated multipliers are below unity. We do find some evidence of higher multipliers during periods of slack in Canada, with some multipliers above unity.

Remember, the way the government calculates GDP, $1.00 in government purchases, automatically increases measured GDP. So a multiplier “below unity” (<1) implies that government purchases displace private economic activity, that stimulus shrinks the private economy.

The paper can be found here.

Maryland realtors fight to protect their subsidy

Image via Flickr user Images_of_Money

We’ve already explored Governor O’Malley’s proposal for the Maryland budget here and here, but recently, a perhaps unintended consequence of the budget came to light. By limiting the deduction that residents earning over $100,000 can make on their state income taxes, the proposed budget would limit the size of the mortgage interest tax deduction for many taxpayers.

I stand by my earlier argument that reducing deductions for only one group of people is not a step in the direction of fairness, but a reduction in the mortgage interest tax deduction may be a positive side effect of an otherwise bad policy. From a limited-government perspective, the obvious downside of a reduction in the mortgage-interest tax deduction is that this represents a revenue-positive change in Maryland’s tax code in a state that already has one of the highest tax burdens in the country. Overall though, I think reducing this tax expenditure is a positive change because the policy has many negative consequences.

While the causes of the financial crisis were many, by subsidizing investment in homes, the mortgage interest tax deduction played some part in the overvaluation of housing stock. Aside from the poor incentives that this tax expenditure creates in financial markets, it amounts to favoritism of suburbs over cities. In Triumph of the City, Ed Glaeser argues that the deduction leads many people to abandon renting in a city center for homeownership in the suburbs. However the Federal Reserve Bank of Boston provides evidence that the policy is more likely to lead people to buy larger homes than they otherwise would rather than trading renting for buying a home. Richard K. Green and Andrew Reschovsky write:

If one set out to design a policy to encourage homeownership, it would make sense to target the
largest subsidies to the households least likely to be homeowners, while providing little or no subsidy to
households likely to become homeowners even without a subsidy. Data from countries that do not
subsidize homeownership (such as Canada, Australia, and Japan) indicate, not surprisingly, that
homeownership rates rise with household income. This suggests that a policy to encourage
homeownership should give the largest incentives to households with modest incomes and no subsidies
to high-income households.

The MID, however, does exactly the opposite. For low- to middle-income taxpayers, the mortgage
deduction provides little financial incentive to abandon renting for homeownership. For those
purchasing modestly priced houses and facing the lowest marginal tax rate (currently 10 percent) the
benefits of the mortgage deduction are small. In fact, for households with low state income taxes, the
mortgage deduction may be of no value at all, because the mortgage deduction, even when combined
with other itemized deductions, may be smaller than the standard deduction.

For most high-income taxpayers, the tax savings resulting from the MID are a minor influence on
their decision to become homeowners; these households are likely to own a home regardless of the tax
treatment of housing. Rather than encouraging homeownership among high-income households, the
MID provides an incentive to buy a larger house and to take out a bigger mortgage. Economists have
long argued that the result is an inefficient pattern of investment, with too many resources invested in
housing and too few resources placed in more productive investments in factories and machinery (Mills,
1989; Poterba, 1992).

This analysis ignores that those at the margin of being least likely to be homeowners are likely the riskiest loan candidates and those most likely to foreclose, but they do make a strong case for why the MID leads to larger homes. Regardless of whether the deduction primarily increases homeownership or leads to larger houses, it results in a subsidy for suburban sprawl and its negative side effects of traffic congestion and demand for public services across a wider geographic area.

Unsurprisingly, the Maryland Association of Realtors is strongly opposed to a budget that would lead to lower tax expenditures on housing. The current policy directly subsidizes their industry. The Washington Post reports:

The Greater Capital Area Association of Realtors says that mortgage interest and property taxes account for almost 70 percent of total itemized deductions in Maryland, and they argue that the proposal, if passed, would further harm the area’s housing market, which has struggled to recover.

WAMU interviewed a leader among MD realtors on the issue:

Jim Scurvin, past president of the Howard County Realtors Association says it’s just wrong to jeopardize an industry responsible for 49 percent of revenue that goes to state and local government

“When someone buys a house, on the average you employ two people, and you put $60,000 into the economy right then and there,” he says. “Real estate is the lead when it comes to getting the economy moving again. We have the wind in our sails, the last thing we need is someone to knock the wind out.”

Scurvin, however, is acknowledging only the visible impact of the tax expenditure. As Frederic Bastiat artfully explained, all policies have unseen consequences. In this case, the unseen impact is that the mortgage interest tax deduction fuels malinvestment in housing at the expense of other, more productive sectors of the economy. While Governor O’Malley’s budget proposal has many negative features, the potential for reducing the state subsidy to housing could be its silver lining. Unfortunately as Maryland realtors demonstrate, eliminating tax expenditures is a painful and politically difficult process.

Economic Freedom, Economic Growth, and Freedom in the 50 States

Today, Mercatus released a new edition of William Ruger and Jason Sorens’s Freedom in the 50 States. To my knowledge, it is the most-comprehensive analysis of freedom at the state level, covering both economic freedoms and personal freedoms. The authors explain their study in this pretty awesome video:

Vero offers some interesting analysis over at The Corner.

The timing is excellent, as the World Bank recently released a new study of the impact of economic freedom on economic performance (HT to Robert Lawson). They conclude:   

Reviewing the economic performance—good and bad— of more than 100 countries over the past 30 years, this paper finds new empirical evidence supporting the idea that economic freedom and civil and political liberties are the root causes of why some countries achieve and sustain better economic outcomes. For instance, a one unit change in the initial level of economic freedom between two countries (on a scale of 1 to 10) is associated with an almost 1 percentage point differential in their average long-run economic growth rates.

To put the numbers in perspective, what if, in 1975 (the first year for which they have data), the US level of economic freedom had been 1 unit lower? This would have put us in the neighborhood of Canada or Panama at the time. Then, other things being equal, the World Bank study suggests that we’d expect today’s economy to be about 30 percent smaller than it actually is. What if we’d had 1 unit less freedom in 1945? Then we’d expect today’s economy to be about half its current size.   

 As I have mentioned elsewhere, state-level studies corroborate the international evidence on the importance of economic freedom. I hope decision makers at the state level are reading Ruger and Sorens’s new study.

Can a reduction in government spending stimulate the economy?

This, of course, is quite relevant given the latest news. To help find the answer, I consulted my graduate macroeconomics text. There, on pp. 546-7, I found this passage:

[A] small reduction in current government purchases could signal large future reductions, and therefore cause consumption to rise by more than the fall in government purchases.

Surprisingly, these possibilities are more than just theoretical curiosities. Giavazzi and Pagano (1990) show that fiscal reform packages in Denmark and Ireland in the 1980s caused consumption booms, and they argue that effects operating through expectations were the reason. Similarly, Alesina and Perotti (1997) show that deficit reductions coming from cuts in government employment and transfers are much more likely to be maintained than reductions coming from tax increases, and that, consistent with the importance of expectations, the first type of deficit reduction is often expansionary while the second type usually is not.

I did my graduate work at George Mason, so you may be thinking that this is some free-market fundamental text. It is actually David Romer’s Advanced Macroeconomics (David, of course, is the husband of President Obama’s former CEA chair, Christina Romer).

Since Mr. Romer wrote the passage above (the second edition was published in 2000), the case for expansionary spending cuts has, if anything, strengthened. Consider this 2010 piece by Harvard’s Alberto Alesina. He finds:

[N]ot all fiscal adjustments cause recessions. Countries that have made spending adjustments to reduce their deficits have made large, credible, and decisive cuts. Even in the very short run, many reductions of budget deficits, even sharp ones, have been followed immediately by sustained growth rather than recessions.

Or consider this 2010 piece by David Henderson. It focuses on the Canadian experience of cutting spending in the 1990s. He writes:

Canada was able to escape from chronic deficits and trimmed its debt from nearly 70 percent of GDP to 29 percent of GDP, all without sacrificing growth.

What’s more, “There were six to seven dollars in budget cuts for every dollar of tax increases.”

Or consider another piece, also by Henderson, focusing on post-WWII spending cuts in the U.S. He writes:

In the four years from peak World War II spending in 1944 to 1948, the U.S. government cut spending by $72 billion—a 75-percent reduction. It brought federal spending down from a peak of 44 percent of gross national product (GNP) in 1944 to only 8.9 percent in 1948.

The post-WWII U.S. economy is widely regarded to have been quite healthy. This, of course, confounded Keynesians like Paul Samuelson who had predicted that war demobilization would lead to the “greatest period of unemployment and industrial dislocation which any economy has ever faced.” (emphasis original)

Or try this 2010 piece by Goldman Sachs economists Ben Broadbent and Kevin Daly. They report:

In a review of every major fiscal correction in the OECD since 1975, we find that decisive budgetary adjustments that have focused on reducing government expenditure have (i) been successful in correcting fiscal imbalances; (ii) typically boosted growth; and (iii) resulted in significant bond and equity market outperformance. Tax-driven fiscal adjustments, by contrast, typically fail to correct fiscal imbalances and are damaging for growth.

In contrast, some people are pointing to a new IMF report that claims “fiscal consolidation typically reduces output and raises unemployment in the short term.” But as Alberto Alesina argues, the IMF findings are not all that different from his own. Critically, the IMF agrees that “tax increases are much worse for the economy than spending cuts.” Moreover, the IMF agrees that “after a few years, even large (but spending based) fiscal adjustments create growth for the economy.”

To me, the evidence suggests that Obama’s Deficit Commission chairs are on the right track in emphasizing 75 percent spending cuts relative to 25 percent revenue increases.

Assorted Links

The Washington Post calls on Rep. Charles Rangel to resign from the House Ways and Means Committee.

To save money in New Jersey, Five Morris County, N.J. towns may merge health services, and two Cumberland County towns split their elementary school.

Waiving the “Buy American” restriction in the stimulus bill doesn’t please unions in Auburn, Maine. Manhole covers for a$2.3 million sewer project will be made in Canada.

Is a smart grid a dumb idea?

Detroit Isn't Dying

Having gone to grad school in southeast Michigan, I’ve been surprised by the continued prognostications that the state and, specifically, Detroit are dying or dead. There are too many things going for the area, from the international airport, to the transport links with Canada, to the University of Michigan, to declare the area a wasteland and just walk away. And I’ll even be so bold as to predict that in thirty years’ time we’ll be reading stories about the “Michigan Miracle” and the rebirth of Detroit and the state’s economy, testaments to the power of entrepreneurship and creativity.

The Financial Times’ motor industry correspondent John Reed has a great take on the present and future Motor City:

Detroit may be the archetypal down-and-out rust-belt city, but to call it “dying” masks a more complex reality. Greater Detroit still has three to four million residents, a world-class university next door in Ann Arbor and the bone structure of a great city, as a car-industry consultant with the ear of a poet put it over lunch one day. Why, then, the relentless focus on its failings? Nearly everyone you meet is either weary or angry at seeing their home town made the butt of jokes on late-night television and the subject of anguished political commentary. But no one denies that the region’s property market is abysmal, its finances a mess and its industrial base shrinking at an alarming rate.

Instead, Michiganders, despite being self-deprecating to a fault, make a point their countrymen won’t want to hear: Detroit is no longer the nation’s worst-case scenario, but on its leading edge, the proverbial canary in the coal mine. “It’s like the rest of the country is getting to where Detroit has been,” said Peter De Lorenzo, who writes the acerbic and very funny Autoextremist.com blog. That means that smug mock-horror is no longer the appropriate reaction to the frozen corpse. Instead, get ready for a shock of recognition.

The whole thing is worth a read. HT to Katherine Mangu-Ward.