Tuesday, March 10, 2015

50 Shades of Grey: The Economic Report of the President 2015

A colleague of mine whose Stage Name is Dr. Bobby J alerted me to the fact that the Economic Report of the President (ERP) was published this February.  The ERP2015 is the latest in a long line of such annual reports that are widely available since 1995 when I was just a macroeconomist in diapers. Here is what the web site says about this annual publication: http://www.gpo.gov/fdsys/browse/collection.action;jsessionid=FKpBJ8tDXS8K1LZ8TlQvpC8sD7VGYWcnJs3yWr3DfJ2wXPJhXlJG!-1529450296!-1448731224?collectionCode=ERP&browsePath=2015&isCollapsed=false&leafLevelBrowse=false&isDocumentResults=true&ycord=0
The Economic Report of the President is an annual report written by the Chairman of the Council of Economic Advisers. It overviews the nation's economic progress using text and extensive data appendices. The Economic Report of the President is transmitted to Congress no later than ten days after the submission of the Budget of the United States Government. Supplementary reports can be issued to the Congress which contain additional and/or revised recommendations. Documents are available in ASCII text and Adobe Portable Document Format (PDF), with many of the tables also available for separate viewing and downloading as spreadsheets in Microsoft Excel (XLS).

I know – I am putting you to sleep. But for those of you who like to keep up with the economy, let me recommend this 414 page document for several reasons. First, it always contains an analysis of the past year and a forecast of the future economy. The 2015 ERP doesn’t say a lot about 2015 but does have a very complete forecast of the US economy for the coming 10 years. While you might not agree with the forecast, at least you see its composition and causal factors. 

Second, the document is full of historical data. There are charts, tables and figures in each chapter. Even better is the appendix which houses 26 historical tables. The latter makes it easy for you to research questions relating to past inflation, past unemployment rates, and so on. The 26 tables have just about everything you could want from GDP to wages to ownership of government securities.

Finally, the body of the report has several chapters that look into what the current administration believes are key economic issues and goals. The ERP2015 has chapters on Challenges in the US Labor Market, Business Tax Reform, Economic Benefits and the Foundation for a Low-Carbon Energy Future. These chapters contain the explanations and defenses for the Administration’s new budget proposals. These chapters are, of course, very political, biased, and incomplete.

50 Shades of Grey is a movie that my mommy won’t let me see. But I did some research and found that the term “50 shades of grey” has an interesting meaning. It means that any issue may have a lot of facets to it. And one can believe that because the issue is so complicated and multifaceted that one cannot easily come to a simple binary conclusion about it. Thus all the shades of grey mean  you can’t summarize an issue and say it is right or wrong; good or bad; hot or cold. Apparently there is something in the movie about whips and chains but I won’t go into that.

Interesting in the ERP2015 is the whole issue of income distribution. As we know, President Obama is very keen on improving income distribution. His speeches and what you see in the various chapters of this volume constitute a case for improved worker earnings. He also favors entitlements for the poor and middle class and higher tax rates on the rich as means to attain income equality.

While economists might favor the goal, some would argue about the means or ways. Some economists point to a trade-off between income equality and national economic growth. Others worry that Obama’s approach would create a larger and thus riskier national debit.

ERP2015 adds fuel to this discussion. The writers noted that there are three salient facts about US  economic performance – slowdowns in US labor force and productivity and widening of the income distribution. So the President’s economists did an interesting analysis. They asked what might have happened to the nation’s average income if each of these slowdowns had NOT occurred between 1973 and 2014. By doing this exercise we get some insight into the relative importance of each of these three problem areas. The shades of grey are:

            If the labor participation rate had not fallen, incomes would have risen by an additional $3,000 per person.
            If the income distribution had not fallen, incomes would have risen by an additional $9,000 per person
            If productivity had not fallen, incomes would have risen by an additional $30,000.

Can we conclude anything from this exercise by the President’s economists? I think so. While we could have raised incomes with policies that increase labor participation or income equality, the big dog in this contest is productivity. High productivity alone would have increased incomes by 58%. Productivity accounted for 72% of the improvements brought by all three factors. Economists do these kinds of analyses all the time but they are not beyond criticism.We have to recognize that this analysis is counterfactual. We are asking what might have happened in the past had one or more factors behaved differently.  Much depends on the models used. One could criticize this analysis on many counts. Even if the conclusions are correct for the past, that does not mean the same effects would be generated in the future. 

With these caveats, the black or white part of this is the overwhelming role played by productivity in increasing national income. This does not say that policies for income redistribution are wrong or bad – but it does establish a clear pecking order as we think about  the future.

While ERP2015 is clear about policies to improve these three factors as a means to increase national income, there is a clear bias in this report. The bias is in using government spending and regulation to enhance productivity. Another bias is ignoring any adverse impacts of income equality policies on productivity growth. Almost totally silent in these 400+ pages is any discussion of the known and published long-term increases in national debt – and how increases in national debt in the decade ahead will be a drag on national income.

Unrestrained entitlements, aggressive family-friendly workplace policies, expanded regulatory zeal in health and energy, and half-hearted business tax reform contribute to an environment of rising government debt and business uncertainty. The President is right to place his focus on rising productivity. But the debate is not so much about the goal but on how you get it. Too much policy emphasis on income inequality if it does have the above trade-offs promises to hurt all Americans. A more complete and less biased approach in this book would have been refreshing. 


  1. Your last sentence says it all. I'm also somewhat puzzled when people talk about productivity increases. Those are not always the result of employees working more efficiently. Many times, human bodies are replaced by robotics which can work 24/7/365 without coffee and smoke breaks or, in the case of Chrysler, weed, crack, and JD (probably really just Annie Greensprings) breaks.

    Perhaps my concerns are addressed in the ERB, but don't hold your breath that I will read a 414-page document put out by a bunch of Paul Krugmans working for this administration, or any administration, for that matter.

    1. Thanks Fuzz. Productivity changes are "caused" bythe factors you mention but keep in mind that the measurement of productivity is a simple arithmetic division of output by employment. Anytime output/employment rises we say we got more out of labor -- or labor productivity increased. Economists usually wait to declare an increase in productivity until it lasts a while -- letting the transient factors wash out of the data. Not many people read the ERP. But I find it to be a nice reference piece...especially those appendix tables I mentioned.

  2. Transfer of funds via tax or debt would increase incomes via more spending. That is a false picture since the people receiving the funds have a propensity to remain in the shadow economy.

    Productivity is a very vague term. If in 1960 it took 10 people to make 5 cars per day and by 1990 5 of those people were replaced by robots or some other technical advance and the wages of the remaining 5 (with inflation ) were flat.....where is the productivity gain other than costing less to make the car and charging much more for it.

    Technology replaced labor participation and that is not shown in any of these graphs, charts or statements. Socially we have to figure out how to handle the rapid changes created by technology before we get a grip on helping the middle class or taxing the 1% to transfer funds to the lower class.

    POTUS did suggest training programs for tech jobs and in Florida we have entrepreneurial training to create new business formations that adapts and sells new technology or services to that technology. In this case the transfer payments have an impact on growth and it can be measured against objectives.

    It is complicated ...thanks for sharing the site.

    1. James, as I said above to Fuzzy, productivity is a very simple and specific concept. It simply measures units of output per units of labor. If a machine replaces a worker and the machine keeps up output at the same pace as the worker, then the arithmetic says productivity increased. That is, you get more physical output per unit of labor. Your issue is not so much with this specific concept. You want to take it into social benefits. There it gets more cloudy. But I will say that often the longer term impacts of productivity increases are to increase employment and raise incomes. The short run effects could be anything. But the long run effects are usually good ones. Do you want to go back to plows and horses? I doubt it. Training programs are definitely part of the solution.

    2. As I read on the internet, figures lie and liars figure, and if I read it on the internet, it's true. I read that Abe Lincoln said that....on the internet.