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. 

Immigration Reform, Guitar tabs, and Forecasting

We cannot be too sure where politicians will go next with legislation for immigration reform. There are lots of angles here both political and economic. One discussion in the press lately has to do with CBO forecasts of the impact of immigration reform. The CBO found that when they forecast out 10 or 20 years they get a net positive impact of immigration reform on the US economy. They found that more legal immigration creates jobs and incomes and tax revenues. While there will be social costs of more immigrants, the CBO found that the extra revenues far outweighed the benefits.

We read these forecasts and then choose our favorite spears and throw them at each other. Imagine how many serious as well as drug-induced debates are going on right now about the CBO study. That makes me think about guitar tabs and forecasting. As I understand it a guitar tab is a sort of sheet music to help you learn how to play the guitar. It is along story but I decided that foot tapping to I Wanna Hold Your Hand was not enough for me, so I purchased a guitar and starting taking lessons. Learning a guitar takes a lot of practice. Part of it is exercise to teach you to put your fingers in the right places on the guitar. Anyone who has ever watched a real guitar player knows that they move their hands all over the guitar at high speed and with almost no effort. Anyway, I am spending a lot of time doing mindless practice moving my hands around the guitar strings as if I was caressing a hot steamy bottle of JD.

It is VERY apparent when looking or listening to me “play” that I am about 10,000 hours away from being the next Tiny Tim. But there ain’t no other way but to put in the hours. I must admit that I often drink or watch Fox Business News while I practice so it isn’t real torture or anything like that. So what does this have to do with Immigration legislation and the CBO?

The answer is that practicing with tabs on a guitar is NOT playing songs. And the CBO estimates of the economic impact of immigration reform are NOT the impacts of immigration reform. Just because practicing tabs is not playing real music, that does not mean that practice is not valuable. The CBO estimates are dead wrong – but that does not mean they are not valuable. It also means that one party can say the estimates are just right while the other one says they are backwards.

Before any televised sporting event, there is often a gaggle of experts who tell us who is going to win that game. Analysts never agree but the process of listening to the analysts gives you a pretty good idea of the kinds of things that will determine the outcome. No analyst ever gets all the details and the main outcome right – but some will have been “righter” than the others. That’s the way we can think about the CBO report. It has value not because it will be right, but because the report and the ensuing debate help us focus on the kinds of things that will happen if the legislation is passed.

How can this be helpful to us now as we debate the issue? First, it should make us a little less confident in our own economic projection. If we really listen to those with opposing views, we may learn something. Second, if we start looking seriously at the assumptions made by the CBO about very specific impacts, we realize that this is very much “educated” storytelling. Do those economists at the CBO REALLY know how fast immigrant incomes will rise over the next decade or two?  Do they know how many babies they will have? How many will lose their jobs? Please! Either side of the debate can tweak an assumption about the future and come away with different conclusions about net economic impact. Third, every decade has its surprises. What if Mexico goes to war with Cuba? Or global warming makes Canada the new Caribbean? Stuff happens right?

The upshot is that while the CBO report is totally wrong about the economic impact of Immigration Reform the report does facilitate a debate that will be useful. But keeping in mind how fragile are the numerical conclusions, it is natural to guess that the political debate will be overshadowed by the ethical and ideological issues. One congressman said he would never vote for reform if it meant that criminals – illegal aliens – would be allowed a path toward citizenship. Another one countered that it is simply wrong to evacuate people or families that had been living and paying taxes in the US for extended period of time. While these two opinions might be extremes it is probable that many congressional votes will be more determined by these kinds of issues than by a very fragile set of economic impact numbers. A dysfunctional Congress has yet another chance to resolve difficult issues. We can only guess what the outcome will be.