Thursday, February 22, 2018

A Grasshopper View: The 2018 Economic Report of the President

The Council of Economic Advisers was established by the Employment Act of 1946 as a separate office in the White House. Along with an ongoing stream of stream of reports and advice, the CEA also produces an annual report, and the 2018 Economic Report of the President  is now available. The CEA is headed by three political appointees, which is fine by me. I expect every president to choose appointees who are broadly in agreement with administration policies. My (often unrequited) hope is that the president will then actually listen to such experts on the dangers of likely tradeoffs and the details of policy design.

If you want to read the reasonable person's defense of Trump's economic policies--either because you want to support these policies or you want to rebut them--the Economic Report thus offers a useful starting point. For example, the first chapter is a defense of the Tax Cuts and Jobs Act (TCJA) passed in December 2017, and the second chapter is a defense of the Trump's regulatory policy efforts.  I tend to skim over such partisan arguments, but I still appreciate the figures and tables surrounding these arguments. They often describe facts and patterns worthy of note, whatever one's policy beliefs about the appropriate reaction to them.

In that spirit, I'll offer a grasshopper view of the report, leaping with no particular rhyme or reason between figures that caught my eye, with a few sentences quoted from the report about about each. Topics include: geographic mobility, road infrastructure, the US balance of trade since 1790, the fall in US manufacturing employment after 2000, the opioid epidemic, firms are investing less while paying out more to shareholders, and there is an international decline in labor productivity in the last decade or so.

The Fall of Geographic Mobility 

"High levels of unemployment concentrated in particular locations may amplify exit from the labor force, especially when workers are unwilling or unable to move to a location with a stronger job market. People move to improve their life circumstances, but the share of Americans moving has been declining, and is currently at its lowest value on record (figure 3-21).
"In addition to family and social connections, deterrents to moving include (1) search time, (2) State-specific occupational licensing requirements, (3) local land use regulations that raise housing costs in places with the greatest potential growth, and (4) homeowners’ limited ability to sell their homes. Such obstacles to finding better employment opportunities, coupled with high local unemployment rates, may lead employees to ultimately exit the workforce. More research is needed to determine the direct relationship between geographic immobility and labor force participation, specifically exploring whether obstacles to moving have increased over time, and how prime-age workers in particular have been affected."
More Driving on the Same Roads

"For example, between 1980 and 2016, vehicle miles traveled in the United States more than doubled, while public road mileage and lane miles rose by only 7 and 10 percent, respectively (figure 4-1). Unsurprisingly, queuing caused by traffic congestion has risen, imposing both direct and indirect costs on business and leisure travelers alike ..."

Swings in the US balance of trade since 1790

"Figure 5-7 illustrates the U.S. trade balance from 1790 to the present, expressed as a share of GDP. From 1790 through 1873, the U.S. trade balance was volatile, in part due to the low trade volumes (Lipsey 1994). The trade balance swung back and forth between surplus and deficit, but was mostly in deficit. From 1873 through the 1960s, the trade balance was mostly in surplus. The largest historic surpluses were during the years 1916–17 and 1943–44, as wartime production and trade with allies predominated. Since 1976, the trade balance has been continually in deficit. The largest deficit as a share of GDP was nearly 6 percent in 2006, a share exceeded in only six other years in U.S. history and not seen since 1816."
The sharp fall in manufacturing employment after 2000

"Although employment in the sector has long exhibited procyclicality, it has seen changes since 2000. In the expansionary period from the end of 2000 through 2007, the economy failed to recover the manufacturing job losses it experienced during the previous recession years."

The Opioid Epidemic

"And since 1999, over 350,000 people have died of opioid-involved drug overdoses, which is 87 percent of the 405,399 Americans killed in World War II (DeBruyne 2017). The staggering opioid death toll has pushed drug overdoses to the top of the list of leading causes of death for Americans under the age of 50 and has cut 2.5 months from the average American’s life expectancy (Dowell et al. 2017). ... 
"The opioid epidemic evolved with three successive waves of rising deaths due to different types of opioids, with each wave building on the earlier one (Ciccarone 2017). In the late 1990s, in response to claims that pain was undertreated and assurances from manufacturers that new opioid formulations were safe, the number of opioid prescriptions skyrocketed (CDC 2017b). What followed was an increase in the misuse of and deaths related to these prescriptions (figure 6-2). As providers became aware of the abuse potential and addictive nature of these drugs, prescription rates fell, after peaking in 2011. Deaths involving prescription opioids leveled off, but were followed by a rise in deaths from illicit opioids: heroin and fentanyl. Heroin deaths rose first, followed by a rise in deaths involving fentanyl—a synthetic opioid that is 30 to 50 times more potent than heroin and has legitimate medical uses but is increasingly being illicitly produced abroad (primarily in Mexico and China) and distributed in the U.S., alone or mixed with heroin. In 2015, males age 25 to 44 (a core group of the prime-age workers whose ages range from 25 to 54) had the highest heroin death rate, 13 per 100,000. Fentanyl-related deaths surpassed other opioid-related deaths in 2016."
Investment is down, while firms pay out more to shareholders

"It is a matter of concern that net investment has been generally falling as a share of the capital stock during the past 10 years, which limits the economy’s productive capacity. In 2016, net investment as a share of the capital stock fell to a level previously seen only during recessions (figure 8-10). The Tax Cuts and Jobs Act is designed to increase the pace of net investment. As discussed further below, the slowdown in investment has also exacerbated the slowdown in labor productivity growth. ...
"The rate of payouts to shareholders by nonfinancial firms, in the form of dividends together with net share buybacks, has been gradually trending higher for several decades, although it fell in 2017 (figure 8-11). Nonfinancial corporations returned nearly half the funds that could be used for investment to stockholders in 2017. In a well-functioning capital market, when mature firms do not have good investment opportunities, they should return funds to their stockholders, so the stockholders can invest these funds in young and growing firms. Although it may be admirable for individual firms to thus return funds to their shareholders, the rising share of paybacks to shareholders suggests that investable funds are not being adequately recycled to young and dynamic firms. GutiƩrrez and Philippon (2016) find that firms in industries with more concentration and more common ownership invest less."
The International Decline in Labor Productivity
"Labor productivity growth has been slowing in the major advanced economies (figure 8-41), driven by an estimated decline of 0.3 percent in annual multifactor productivity growth relative to average precrisis growth of 1 percent a year. This slowdown is broad-based, also affecting developing and emerging market economies. Although the causes of this productivity slowdown are unclear, a number of hypotheses have been offered—including financial crisis legacies, such as weak demand and lower capital investment; the trade slowdown; the aging of the post–World War II Baby Boom generation in its various forms around the world; the rising share of low-productivity firms; and a widening gap between high- and low-productivity firms. The Organization for Economic Cooperation and Development (OECD) finds that the survival of abnormally low-productivity firms may have contributed to the slowdown in productivity growth."