Can we please stop saying the S&P 500 is at an all time high?

A big boost to global growth…

…that politics will likely continue to stop.

Yesterday, I linked some commentary on immigration liberalization from The Economist.  I really want to highlight some of the comments from the Free Exchange column in this week’s issue.

Most of this wage gap is down to productivity differences, stemming from disparities in the quality of infrastructure, institutions and skills. An individual worker, however talented, cannot hope to replicate the fertile environment of a rich economy all on his own. But transplanting a worker into rich soil can supercharge his productivity. A Mexican worker earns more in the United States than in Mexico because he can produce more, thanks to the quality of US technology and institutions.

Millions may move from poor world to rich without bidding down wages in the rich country relative to the developing one. True, a rapid burst of immigration might temporarily reduce wages. But if the pace of movement is slow enough to allow investment to adjust, borders could open without any wage dislocation in either origin or destination economies. Migrants themselves would benefit handsomely, however. In a new paper* John Kennan of the University of Wisconsin-Madison estimates that opening borders could raise the average wage of workers from developing countries by $10,100 a year, or more than 100%, thanks to the large rise in the incomes of those opting to migrate.

Those bigger incomes should swell global GDP. In a recent report Sharun Mukand of the University of Warwick calculates the effect of movement by half of the developing world’s workforce to the rich world. Such a vast migration could never happen in practice, of course, but as a thought exercise it is instructive. If migration closes a quarter of the migrants’ productivity gap with the rich world, their average income would rise by $7,000. That would be enough to raise global output by 30%, or about $21 trillion. Other studies find even bigger effects. A 2007 paper by Paul Klein, now at Simon Fraser University, and Gustavo Ventura, now at Arizona State University, reckons that full labour mobility could raise global output by up to 122%. Such gains swamp the benefits of eliminating remaining barriers to trade, which amount to just 1.8-2.8% of GDP, reckons Mr Mukand.

Even a modest (and more practical) easing of restrictions could be very rewarding. Lant Pritchett of Harvard University estimates that just a 3% rise in the rich-world labour force through migration would yield annual benefits bigger than those from eliminating remaining trade barriers. The incorporation of women into the rich-world workforce provides an analogy: this expanded the labour supply and the scope for specialisation without displacing the “native” male workforce.

For a framework on how this all comes together I recommend MR University’s Solow Model talks (part one is below).

Household Incomes

The Census Bureau recently released its annual Income, Poverty and Health Insurance Coverage in the United States report.  For a summary see Sabrina Tavernise and for reactions see Catherine Rampell.  My favorite point by Rampell was, “There’s more evidence that the work force is “hollowing out,” as there was significant job growth in the first, second and fifth income quintiles, but not in the third and fourth ones,” as evidenced below.

Productivity

The Economist‘s Free Exchange blog has an interesting post about productivity growth during the period referred to as the Great Stagnation.  Essentially it is a summary and critique of the argument made by Robert Gordon’s latest working paper on growth, which is further summarized by FT Alphaville.  The crux of the paper can be found in the conclusion of the abstract where Gordon writes:

Even if innovation were to continue into the future at the rate of the two decades before 2007, the U.S. faces six headwinds that are in the process of dragging long-term growth to half or less of the 1.9 percent annual rate experienced between 1860 and 2007. These include demography, education, inequality, globalization, energy/environment, and the overhang of consumer and government debt. A provocative “exercise in subtraction” suggests that future growth in consumption per capita for the bottom 99 percent of the income distribution could fall below 0.5 percent per year for an extended period of decades.

A big part of the productivity equation is the relationship between technology and employment.  Gordon seems to have a problem with the idea that technology has the ability to improve productivity anymore.  He argues that the internet revolution dissipated in about 8 years.  He writes (as quoted by the FT Alphaville post):

A thought experiment helps to illustrate the fundamental importance of the inventions of IR #2 compared to the subset of IR #3 inventions that have occurred since 2002. You are required to make a choice between option A and option B. With option A you are allowed to keep 2002 electronic technology, including your Windows 98 laptop accessing Amazon, and you can keep running water and indoor toilets; but you can’t use anything invented since 2002.

Option B is that you get everything invented in the past decade right up to Facebook, Twitter, and the iPad, but you have to give up running water and indoor toilets. You have to haul the water into your dwelling and carry out the waste. Even at 3am on a rainy night, your only toilet option is a wet and perhaps muddy walk to the outhouse. Which option do you choose?

I have two general responses:

1. It seems that under option B, the concept of running water would come about fairly quickly.  There is ample research in historical economics on the relationship between communication technology and overall economic and standard of living growth (see this for an example).  Someone would think of how to take advantage of water pressure to develop piping from their well to their house, they would write a post on Facebook, someone would Tweet there post and by the end of the week directions would be on every iPad in the world (that’s just using the technology he left on the table in option B).
2. This is my second point.

Responding to the “tacocopter” above, Adam Ozimek writes:

While ZMP [ed. note: see this for ZMP definition] workers may or may not currently be a big problem, it seems quite possible that it could be in the future. Say tacocopters triple what you can buy with a dollar, but cut the marginal product of a large portion of the population in half. Now those who have their wages halved but their buying power trebled are still better off, but it’s quite possible their wages might have fallen below their reservation wage, and they’d rather live off their spouses, parents, kids, or the government. While these individuals may still be better off directly, I think there are reasons to worry about this. If a large enough percent of the population becoming ZMP, it creates a large constituency for a basic income payment. Maybe huge swaths of the country not working would be fine. But I tend to have a little conservative in me where I think there is a chance this has big negative cultural and political impacts. This is the threat of tacocopters.

Gordon may be right about headwinds facing future economic growth.  However, I think he is significantly discounting the adaptability and innovative capacity of the modern economy.

Maintaining The Zero Bound

 

Karl Smith asks how a central bank would maintain zero nominal interest rates forever.  Then he writes the answer himself.

[W]e must move the natural rate to zero. How to do this?

In theory the natural rate will tend towards the expected nominal growth rate of the economy, so you want to keep that at zero. For this you will need low inflation, preferably deflation.

However, if population and productivity are growing you still have a problem. The natural rate will try to rise to meet them.

Yet, you could try to drive a wedge between the natural rate and the real growth rate. You could do this by engineering a permanent increase in the risk premium.

More precisely you could promise the following: If by some chance this economy starts to take off and desired savings falls below desired investment then I will raise interest rates so far, so fast that it will crush every single investor in America, drive homebuilders into a ditch, shutter factories, skyrocket the Federal debt and put half the population on the bread line.  Test me if you dare!

He concludes by saying:

So, if we observe an economy, in which the interest rate was below the nominal growth rate and inflation was not increasing what might we conclude? One possibility is that the Central Banks has frightened people into believing that it will crush full recovery, if the economy even looks like its about to make one.

Demographics, Productivity and a little more on Japan

Following my AM Reads post about Japan earlier, this FT Alphaville entry caught my eye.  Kate Mackenzie writes:

To what extent has Japan’s soft growth over the past 20 years been due to its population ageing? And to what extent unfavourable demographics can be offset by increases in labour market participation (especially by old people) and/or labour productivity gains?

The post is mostly a rundown of a report by Citi that looked at different growth factors for the United States, the European Union and Japan.  The chart below highlights some of that research.

After looking through the Citi report, here is what FT concluded:

We’d also argue that these are some of the more interesting points in all the data above:

- Population growth and favourable demographics have helped the US’ performance in the past 20 years.

- But population and demographics will work against them soon, and hours worked probably don’t have much room to move.

- Japan’s post-bubble output would probably be lower if it wasn’t for the increased labour participation rate.

- Sluggish growth can actually enhance labour productivity if companies choose to respond by cutting hiring and increase investment.

- The eurozone’s monetary union has coincided with slowed labour productivity growth.

-  Europeans are not going to see any let-up in pressure to stay in the workforce longer.

While the report believes that these three economies will see growth, albeit slow, for per capita GDP over the long-run, the demographic challenges may not be quite as quantifiable as the writers suggest.  The political and therefore fiscal impacts of increased aging (especially in Japan) likely carry some unforeseen consequences.

The Original Housing Boom

Matthew Chambers, Carlos Garriga and Don Schlagenhauf have a new working paper at the St. Louis Fed that attempts to explain the growth in homeownership following World War II.  The paper concludes:

Government intervention via the mortgage market was a key part of the housing boom. The model suggests that moving from a 20-year to a 30-year FRM accounts for roughly 25 percent of the increase in homeownership. When combined with a narrowing mortgage interest rate wedge, the total impact of mortgage innovation is approximately 30 percent. Government intervention via tax policy was also a signiÖcant factor in the housing boom. The model suggests that the mortgage deduction can account for 13 percent of the increase in ownership. The model also Önds that the lack of taxation of housing services has an important e§ect on ownership.

More Support on U.S. Debt

I linked an article on growth patterns, wages and debt this morning. Here is some additional supporting data.

Wages and Growth

Jeff Madrick writes an interesting paper for The New America Foundation on wage-led growth.  He writes confidently:

The unsustainability of low-wage growth models came to a head with the financial crisis of 2007-2008 and the Great Recession. And rising current account imbalances borne in part of diverging wage and productivity growth among Eurozone economies was the primary cause of the crisis in Europe that began in 2010.

Read the article that produced this quote

From The Atlantic:

In this time of economic uncertainty and political strife, the United States must play to its strengths. Our most enduring strength – the thing that sets us apart and ahead – has always been that we are the country where the world’s best want to live. In return for the chance to live here, immigrants have time and again helped our nation to maintain its pole position among the nations of the Earth.