Honey, Who Shrank the Economic Pie?

Copyright, TheHill.com

Last week the White House released the latest Economic Report of the President that, following both statute and tradition, begins with a short letter to Congress from President Trump, followed by the detailed annual report of his Council of Economic Advisers.

The period from 2010 should have had relatively rapid growth as the economy recovered from the 2008-09 recession, but it did not. Both the president's letter and the CEA annual report blame the slow growth on federal policy failures during the previous administration.

A lot of research backs up their claim and suggests that higher growth rates are forthcoming if only some of those failures are reversed and not too many new ones are created.

First is the high statutory corporate tax rate that had prevailed for decades prior to 2017 (yes, the "effective rate" was not as high, but a low effective rate is just a symptom of some of the growth-retarding effects of corporate-income taxation.)

The Obama administration agreed that America would benefit if the federal statutory rate were reduced, saying that a reduction would be "as close to a free lunch as tax reformers will ever get."

But they were not enough interested in corporate tax reform to reach a deal with Congress, so the long-overdue rate cut has President Trump's signature on it and is expect to add to economic growth over the next several years.

Second was the so-called federal "stimulus" law of 2009 that was supposed to jumpstart the recovery. But, unlike the stimulus laws in some other countries, such as the United Kingdom, our stimulus did not expand the economic pie by enhancing incentives.

Instead, our stimulus was a redistribution exercise that eroded incentives to work and earn income by expanding food stamps, mortgage subsidies, health insurance assistance and unemployment assistance primarily for people who were unemployed or otherwise had low incomes (the end of the Bush administration did some of this too). The result was less work and less national income for as long as the stimulus lasted.

Third, very soon after the stimulus expired, a new permanent redistribution began to take effect in the form of the Affordable Care Act (ACA). Indeed, the health-insurance assistance provisions of the ACA were presaged in the 2009 stimulus.

As its authors attempt to target assistance to people who they thought needed it most, the ACA unleashes a host of unintended consequences that shrink the economic pie in the process of redistributing it.

Businesses are encouraged to forgo hiring in order to keep their employment below 50 full-time equivalents and to cut workers' hours in order to keep the workweek less than 30 hours. Productive and knowledgeable employees are encouraged to retire early in order to be eligible for taxpayer-funded assistance.

The ACA is also remarkably uneven in its treatment of different sectors, regions and workplace circumstances. Another result is therefore a misallocation of resources away from the most penalized activities to the most favored ones, thereby depressing productivity; i.e., the amount of value that workers create in the marketplace.

Most businesses and households did not react to these incentives because other considerations were dominant, but it only takes a small percent of them who do to make a noticeable dent in the growth rate. If and when the federal government can repeal the ACA or relax its growth-retarding provisions, that will add to the growth rate.

Fourth, other regulations came into effect during the Obama years. Perhaps the leading instance is the 2010 Dodd-Frank financial regulation law. The law is so remarkably complicated that research on its effects will be ongoing for years, and massive complexity is hardly the leading ingredient for economic growth.

But it is likely that new financial regulations have reduced the willingness of banks to lend to small and medium-sized businesses, which further restrains economic activity.

The national economic pie has been smaller due to Obama-era policies, leaving opportunities for subsequent federal policies to enhance economic performance.

Casey Mulligan is a professor of economics at the University of Chicago. His recent research has focused on non-pecuniary incentives to save and work and how the economy affects policy. His two recent books are, "The Redistribution Recession: How Labor Market Distortions Contracted the Economy," and "Side Effects: The Economic Consequences of the Health Reform."

Your job cannot be automated? Then you need to worry!

Copyright, TheHill.com

One of the greatest labor force changes of the 20th century was the movement of workers out of farming. In 1900, more than two out of five workers were in agriculture. Now it is less than two workers out of every 100.

It's not that people stopped eating. Rather, farm machinery and innovation increased the amount of food that could be produced per farm worker by more than a factor of 10. Food got cheaper and that got people to buy more food, but not 10 times as much. The end result has been fewer jobs in agriculture.

Automation is expected to come to other industries and occupations, and it is tempting to forecast less employment for them too. A variety of studies are using engineering information to determine which jobs will be automated next.

While automation may be a question of engineering, job loss is even more a question of economics. A key part of the agriculture story is that people were unwilling to purchase all of the food that farmers were capable of producing, even though food was getting cheaper. But not all industries share this with agriculture. 

Suppose that the automation in agriculture had only been for chicken farming and not for any other food production. Chicken would have gotten cheaper relative to beef, fish, vegetables, fruit, etc., and that would have caused people to buy more chicken and less of other types of food.

Many -- even most -- of the extra chickens produced would have been purchased by consumers, and there would have been less need to reduce employment in chicken farming. 

The most dramatic job losses would have occurred in the food industries like beef and fish that were not automated and that compete with chicken. In other words, jobs that are difficult to automate from an engineering perspective may be exactly the jobs pushed to extinction by automation because they cannot compete.

It all depends on the competitive landscape and how willing are consumers, encouraged by lower prices, to absorb the extra output made possible by automation.

Trucking is a modern example, because engineers are predicting that machines will soon do a lot of the driving formerly done by trucking employees. But the result may be more jobs for people in trucking and fewer jobs for people in railroads, airlines and shipping that compete with trucking (unless they also get more productive at the same time that trucking does).

Another example has occurred in my own profession: Two or three generations ago, a large fraction of economists were employed manually performing the arithmetic of statistical analysis. Then, computers came along to automate that arithmetic, without really automating the tasks done by theoretical economists.

The result was an increase in the fraction of economists doing statistical work, because universities, businesses and government wanted more statistical analysis when computers made it became cheaper and more accurate. The fraction of economists doing theoretical work fell, precisely because their tasks were not automated.

So the more interesting economic question for a worker is not whether his job can be automated but whether he or she will miss out on automation to occur in the workplace of his or her primary competitors.