Tag Archives: WSJ

Women are driving recent increase in age 25-54 labor force participation

Josh Zumbrun from the WSJ posted some interesting labor market charts that use data from today’s September jobs report. The one that jumped out at me was the one below, which shows the prime-age (age 25-54) employment and labor force participation (LFP) rate.

wsj-prime-age-sept-16-prime-age-lfp

In a related tweet he notes that the 25 – 54 LFP rate is up nearly 1 percentage point in the last year. The exact number is 0.9 from Sept. 2015 to Sept. 2016, and in the figure above you can clearly see an increase in the blue line at the end. So does this mean we are finally seeing a recovery in the prime age LFP rate? Yes and no.

I dug a little deeper and females appear to be driving most of the trend. The figure below shows the prime age male and female LFP rates from Jan. 2006 to the Sept. 2016. (Female data series LNS11300062 and male series LNS11300061)

oct-female-male-lfp-rate-1-06-9-16

As shown in the figure, the female LFP rate (orange line) appears to be steadily increasing since September of last year while the male LFP rate (blue line) is flatter. To get a better look, the following figure zooms in on the period January 2015 to September 2016 and adds a linear trend line.

oct-male-female-lfp-rate-1-15-9-16

The female LFP rate does appear to be trending up since the beginning of last year, but the male line is essentially flat.

Much has been made about the short-term and long-term decline of the prime-age male LFP rate. President Obama’s Council of Economic Advisors wrote an entire report about it, and economists such as Larry Summers have recently said that figuring out why males are dropping out of the labor force and what to do about it is “vital to our future”.

The recent uptick in the overall prime-age LFP rate is a good sign, but it appears to be largely driven by women. I think it’s still too early to say that the LFP rate of prime-age men has started to improve, and what this means for the future is still unknown.

Local governments reluctant to issue new debt despite low interest rates

The Wall Street Journal reports that despite historically low interest rates municipal governments and voters don’t have the appetite for new debt. Municipal bond issuances have dropped to 20-year lows (1.6 percent) as governments pass on infrastructure improvements. There are a few reasons for that: weak tax revenues, fewer federal dollars, and competing budgetary pressures. As the article notes,

“Many struggling legislatures and city halls are instead focusing on underfunded employee pensions and rising Medicaid costs. Some cash-strapped areas, such as Puerto Rico and the city of Chicago, face high annual debt payments.”

The pressures governments face due to rising employee benefits is likely to continue. The low interest rate environment has already had a negative effect on public pensions. In pursuit of higher yields, investors have taken on more investment risk leaving plans open to market volatility. At the same time investments in bonds have not yielded much. WSJ reporter Timothy Martin writes that public pension returns are, “expected to drop to the lowest levels ever recorded,” with a 20-year annualized return of 7.4 percent for 2016.

The end result of this slide is to put pressure on municipal and state budgets to make up the difference, sometimes with significant tradeoffs.

The key problem for pensions is “baked into the cake,” by use of improper discounting. Linking the present value of guaranteed liabilities to the expected return on risky investments produces a distortion in how benefits are measured and funded. Public sector pensions got away with it during the market boom years. But in this market and bond environment an arcane actuarial assumption over how to select discount rates shows its centrality to the fiscal stability of governments and the pension plans they provide.

Ignoring the adverse effects of the minimum wage may cost taxpayers billions

Today the Obama administration issued a statement calling for a ‘First Job’ funding initiative to connect young Americans with jobs.

The statement laments how difficult it is for young people to find employment and emphasizes how important a first jobs is for future career success:

“After the worst economic crisis of our lifetimes, the United States is in the midst of the longest streak of private-sector job growth in our history, with more than 14 million new jobs created during the past 70 months. But for too many young people, getting a first job—a crucial step in starting their career—is challenging.

When a young person struggles to get their first job, it can have a lasting negative impact on her lifetime income as well as her motivation, pride, and self-esteem.”  

I brought up this same issue 3 months ago in a previous blog post that highlighted the differences in teenage unemployment across cities. And unsurprisingly there are substantial differences – in 2012 teenage unemployment was over 45% in Atlanta and only about 26% in Houston.

So what’s the proposal? A $5.5 BILLION grab bag of grants, skills investment, and direct wage payments to put young people to work. Naturally, the most obvious solution to the teenage unemployment problem is never mentioned – eliminating the minimum wage. In fact, nowhere is it hinted at that the minimum wage may be contributing to teenage unemployment, despite several recent studies affirming this theory.

From a 2013 study:

“Thus, for older workers, the two effects offset one another, and there is little impact on their long-term employment rate. For teenagers, the extra reduction in hiring implies that their employment rates decline. The results are very similar for males and females.”

From a 2015 study:

Using three separate state panels of administrative employment data, we find that the minimum wage reduces job growth over a period of several years”

From a 2015 study:

We find that a higher minimum wage level is associated with higher earnings, lower employment and reduced worker turnover for those in the 14–18 age group. “ (My bold)

From a 2015 study:

I apply the estimator to estimate the impact of the minimum wage on the employment rate of teenagers. I estimate an elasticity of -0.10 and reject the null hypothesis that there is no effect.”

This glaring omission is unconscionable in light of the abundant evidence that the minimum wage harms the least skilled, least experienced workers, which includes teenagers.

As a Prof. David Neumark stated in a recent WSJ op-ed:

“…let’s not pretend that a higher minimum wage doesn’t come with costs, and let’s not ignore that some of the low-skill workers the policy is intended to help will bear some of these costs.”

An all too common occurrence in US policy is that government intervention causes a problem that the government then tries to solve with additional intervention, completely ignoring the possibility that the initial intervention was the source of the problem. In this case, price controls at the bottom of the labor-market ladder have prevented young people from getting on the first rung, so now the government wants to wheel over a $5.5 billion dollar stool to give them a boost.

While this series of imprudent events is not surprising, it’s still frustrating.

Paving over pension liabilities, again

Public sector pensions are subject to a variety of accounting and actuarial manipulations. A lot of the reason for the lack of funding discipline, I’ve argued, is in part due to the mal-incentives in the public sector to fully fund employee pensions. Discount rate assumptions, asset smoothing, and altering amortization schedules are three of the most common kinds of maneuvers used to make pension payments easier on the sponsor. Short-sighted politicians don’t always want to pay the full bill when they can use revenues for other things. The problem with these tactics is they can also lead to underfunding, basically kicking the can down the road.

Private sector plans are not immune to government-sanctioned accounting subterfuges. Last week’s Wall Street Journal reported on just one such technique.

President Obama recently signed a $10.8 billion transportation bill that also included a provision to allow companies to continue “pension smoothing” for 10 more months. The result is to lower the companies’ contribution to employee pension plans. It’s also a federal revenue device. Since pension payments are tax-deductible these companies will have slightly higher tax bills this year. Those taxes go to help fund federal transportation per the recently signed legislation.

A little bit less is put into private-sector pension plans and a little bit more is put into the government’s coffers.

The WSJ notes that the top 100 private pension plans could see their $44 billion required pension contribution reduced by 30 percent, adding an estimated $2.3 billion deficit to private pension plans. It’s poor discipline considering the variable condition of a lot of private plans which are backed by the Pension Benefit Guaranty Corporation (PBGC).

My colleague Jason Fichtner and I drew attention to these subtle accounting dodges triggered by last year’s transportation bill. In “Paving over Pension Liabilities,” we call out discount rate manipulation used by corporations and encouraged by Congress that basically has the same effect: redirecting a portion of the companies’ reduced pension payments to the federal government in order to finance transportation spending. The small reduction in corporate plans’ discount rate translates into an extra $8.8 billion for the federal government over 10 years.

The AFL-CIO isn’t worried about these gimmicks. They argue that pension smoothing makes life easier for the sponsor, and thus makes offering a defined benefit plan, “less daunting.” But such, “politically-opportunistic accounting,” (a term defined by economist Odd Stalebrink) is basically a means of covering up reality, like only paying a portion of your credit card bill or mortgage. Do it long enough and you’ll eventually forget how much those shopping sprees and your house actually cost.

Delaware Senate votes to bail out three casinos

Delaware’s state senate has voted to redirect $10 billion in economic development funding to bail out three gambling casinos. The measure now goes to the House. Two reasons the casinos are failing: increased competition from Maryland and Pennsylvania and having to share a large chuck of revenue with the state. Lawmakers admit the bailout is only a “Band Aid,” and not enough to salvage the operations.

Supporters defend SB 220 as a jobs protection measure. But the real incentive is more likely the revenues involved. Lottery receipts are the fourth largest source of Delaware’s revenues at about 7 percent of the total bringing in $277 billion in 2013, right behind Income taxes, Franchise taxes, and Abandoned Property.

The casinos are certainly in trouble. According to Delaware Newszap.com Dover Downs Gaming & Entertainment saw a $1 million loss in Q1 2014 and is $46 million in debt. During that same first quarter the casino paid the state $16 million in revenue.

Revenue sharing between the state and the casinos has grown more onerous over the past 20 years. In 1997, the casino claimed 50.2 percent of the revenue and the state took 25.2 percent. In 2009, that split reversed, with the state claiming 43.5 percent of revenues and the casino keeping 37.8 percent.

The incentive for the bailout is fairly clear though the economic thinking is convoluted. Why not reduce the tax rate instead? Economist James Butkiewicz at the University of Delaware notes that as a voluntary tax it’s easy revenue and the state doesn’t have to raise taxes elsewhere.

But do casinos deliver for state coffers and economies?  Economists Douglas Walker (whose field is casino economics) and John Jackson find that while lotteries and horse racing tend to increase state revenues, casinos and greyhound racing tend to decrease it. Using recent data, Walker and Jackson find casinos have a positive economic impact. There are many other things to consider when thinking about the effects of casinos. As state creations there is ample opportunity for corruption and regulatory capture. Walker and Calcagno find just such a link in their paper in the journal Applied Economics (Dec 2013), “Casinos and Political Corruption in the United States: A Granger Causality Analysis.” And as a recent article by the WSJ notes oversaturation of casinos on the East Coast has also triggered an interstate “war” for revenues. Delaware’s gaming revenues are down 29 percent since 2011. A Delaware Casino Executive laments that the business model they are using is simply, “unworkable.”

 

 

 

Step one in obtaining government privilege is to have a seat at the table

The weekend edition of the WSJ featured an interview with Uber founder Travis Kalanick by Andy Kessler. It offers a nice lesson in how regulatory bodies can get captured by incumbent firms. In city after city Kalanick and his team encountered regulations and regulators intent on privileging the established taxi and luxury limousine industries.

The interview touches a bit on the Uber experience with the DC Council, (which I first wrote about back in July):

…the city tried to change the law—with what were actually called Uber Amendments—to set a floor on the company’s rates at five times those charged by taxis. “The rationale, in the frickin’ amendment, you can look it up, said ‘We need to keep the town-car business from competing with the taxi industry,’ ” Mr. Kalanick says. “It’s anticompetitive behavior. If a CEO did that kind of stuff—you’d be in jail.”

In the end, the city backed away from its proposal, allowing Uber to operate without the requirement that it charge 5 times what its competitors were charging. So far so good. Unfortunately, however, the legislation that gave Uber access to the DC market also mandated that any firm wishing to serve that market be licensed. As I wrote in The Washington Examiner in December, this adds one more chapter to the story:

As tech reporter Ryan Lawler points out, the licensing requirement erects a barrier to entry for other businesses. SideCar, for example, is a West Coast service that, according to its website, “instantly connects people with extra space in their cars with those who need to get from one place to another.” It is, they say, “like a quick and hassle-free carpool.” Since these instant carpoolers are obviously not licensed, they’d be illegal in DC. That’s handy for Uber. The company managed to cross the regulatory velvet rope and, alongside taxis, obtain access to a lucrative market. But once inside, Uber put the rope back up.

The incident raises questions about how much responsibility firms bear for the privileges they enjoy. I honestly don’t believe Mr. Kalanick set out to obtain a privilege for his firm. The problem is that once he had safely passed through the maze of red tape, he hardly had an incentive to ensure that anyone following him got through. And, of course, he even stood to gain if no one did. The simple fact is that when the deal was hashed out, Mr. Kalanick was at the table while the folks at SideCar (and hundreds, if not thousands of other would-be startups) were not. This is how regulatory capture works.

Bad News in the Bond Market for States

The market for municipal bonds is showing signs of skittishness, The Wall Street Journal reports. The New Jersey Economic Development Authority cut a bond issue by 40 percent on the news of increasing yields on tax-exempt debt as well as decreased demand. Governor Christie’s state of the state address used the word “bankrupt” to describe the state’s health care costs, a choice of words some are linking to the reduced bond sale. While it may be easy to pin the blame on the b-word, the state is in bad shape where its off-balance sheet debts are concerned, bested only by Illinois.

The yield for 30-year AAA rated General Obligation bonds rose to 5.01 percent yesterday, reflecting higher levels of perceived risk.

This bond-market news comes at a time when governments and public entities are trying to refinance their debts. During the financial crisis many governments brokered debt conversions with variable interest rates. This allowed government borrowers to keep their costs low, temporarily. About $109 billion in such deals expire this year. Governments will have to re-fi at higher rates or get new guarantees.

As the WSJ notes, the problem of a short-term cash crunch is likely more concentrated among smaller borrowers such as hospitals and schools. Most state and municipal borrowers will likely be able to rollover their debts.

Would a Permanent Extension of Tax Rates Really Create Certainty?

In the late 1990s, there were typically fewer than a dozen tax provisions that had just a limited lease on life and needed to be renewed every year or so.

Today there are 141.

That is from today’s Wall Street Journal. If speculation is accurate, today’s Congressional vote will only exacerbate this trend. By my count, it creates temporary provisions for:

  • All income tax rates
  • Capital gains tax rates
  • Dividend tax rates
  • The Social Security payroll tax rate
  • The estate tax rate
  • Student loan tax credits
  • Per-child tax credits
  • The Earned Income Tax Credit
  • The tax credit for blending ethanol into gasoline
  • The $1.00 per gallon biodiesel tax credit
  • A tax credit to incentivize alternative fuel
  • A tax credit for maintaining railroad tracks (really?)
  • Expensing of business investments
  • And others (the WSJ refers to “dozens of corporate-tax provisions that already were subject to annual renewal”; some of these may or may not be in my list above). 

As my colleague, Jason Fichtner and his coauthor, Katelyn Christ, have recently written, uncertainty and tax policy are a fatal policy mix.

Previous research suggests that policy uncertainty can be very harmful to economic growth.

But all of this talk about temporary tax provisions obscures an important fact: Even if the Congress were to make current tax provisions permanent, there would still be an enormous amount of uncertainty in current tax policy. This is because, over the long run, government expenditures are on an unsustainable path and by the simple arithmetic of budgeting, taxes will eventually have to go (way) up or spending will have to go down.

If policy makers truly want to generate certainty and create an environment conducive for economic growth, they will need to reform the tax code, make the reforms permanent, and bring spending in line with taxes.

Underestimating the Pension Bomb’s Impact

Today’s Wall Street Journal discusses why both corporations and governments are sticking to “unrealistic return assumptions” in forecasting their pension liabilities. The majority of pension plans expect an 8 percent return and have clung to this expectation, “through thick and thin.” These estimates the WSJ notes are partly due to the high returns witnessed in the 1990s bull market years. Indeed over a 25 year period pension plans had an annualized median return of 9.3%. Over a 10 year period that fell to 3.9%.However, it’s not the number they’re selecting that matters, it’s the rationale.

Part of the difficulty of lowering the discount rate lies in what happens as a result. Reducing the discount rate increases the size of the  liability and the contribution needed to ensure adequate funds. That is one reason states are moving slowly. New York, New Jersey, and Colorado have all reduced their discount rates from the 8 percent to the 7 percent range.Virginia cut its investment return from 7.5% to 7 percent to avoid an even worse strategy – investing the funds in more risky assets to make up for losses.

The discount rate issue will continue to be a big challenge for government pension systems in part due to GASB’s guidance.

We will be discussing this and other issues facing state pension systems this Friday at Mercatus.  Speakers include myself, Dr. Andrew Biggs of AEI, Scott Pattison, Executive Director of the National Association of State Budget Officers, and Utah State Senator Dan Liljenquist. You can register for the event, or view it online.