February 25, 2018

If a Law Bars Asking Your Past Salary, Does It Help or Hurt?

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CreditChristoph Hitz

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Feb. 16, 2018

Laws prohibiting employers from asking job candidates about their past compensation before making a salary offer are gaining momentum, aimed at reducing pay disparities and other obstacles confronting women and minorities.

The premise is simple: Judging an applicant’s worth from his or her previous salary can perpetuate pay gaps that arise from discrimination — or make it hard to get in the door at all.

Laws banning the practice have taken effect in New York City, Delaware and California in recent months. But the way some researchers see it, such laws are likely to be ineffective or even backfire. For example, employers who can’t ask about prior salary might assume that a female candidate would accept less money than a man, because women make less on average.

“It seems like the general social impulse is, ‘We don’t like employers using particular information, so we’ll tell them they can’t use it any more and assume that’s the end of the conversation,’” said Jennifer Doleac, an economist at the University of Virginia. “But if they cared enough about it to ask it to begin with, they probably care about it enough to try to guess.”

Ms. Doleac pointed to some recent studies, including one on which she was an author, showing that employers engaged in precisely this kind of guessing after several cities and states prohibited questions about candidates’ criminal records early in the application process. In her study, employers appeared to assume that young black and Hispanic men were more likely than members of other groups to have a criminal conviction and hired fewer of them once the policies were in place.

But the consequences may not be as clear when it comes to salary history. Some academic evidence suggests that the new laws may help women in certain circumstances.

To anticipate the effects of such laws, it’s worth exploring why employers ask about a candidate’s salary history in the first place. Here are a few reasons.

Employers may want to minimize payroll expenses.

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CreditChristoph Hitz

If employers know what a candidate previously made, they effectively know how little that person will accept.

“On one level, I’d like to pay people the least amount of money to get the most amount of benefit from that person,” said Adam Klein of the employment law firm Outten Golden, who has represented many workers in discrimination cases.

“Under that market-efficiency construct, why wouldn’t you pay women less?” Mr. Klein said, channeling a hypothetical employer who can ask lower-paid women about their salaries. “It makes business sense.”

Several economists said a ban on questions about salary history would probably prompt such employers to engage in what’s known as statistical discrimination — relying on group averages in place of information they were previously able to obtain about an individual.

(Alternatively, employers may try to get the information in slightly less direct ways, like asking candidates about their minimum salary expectation, Mr. Klein said.)

In doing so, employers will be further enabled by another feature of the recent salary history laws: They typically allow job applicants to disclose their previous salary voluntarily. As a result, some employers may feel comfortable making lowball offers to women, because they assume applicants will speak up if they make significantly more than the employer’s offer. Those who don’t speak up will be deemed to have made less.

This could, in turn, leave women worse off than before, since they tend to be more reluctant to bargain than men, as a range of studies have documented.

“By adding that hoop — putting them in a position where they have to negotiate more — I imagine it widening the gender gap,” Ms. Doleac said.

Employers may be trying to determine how to pay fairly.

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CreditChristoph Hitz

By asking what the candidate currently makes and paying the same or slightly more, an employer may simply want to ensure that an offer is accepted and that the new hire is satisfied — but may be oblivious to the risk of perpetuating pay disparities.

“What we are seeing is the myth of the sneaky employer,” said Andrew Hoan, president of the Brooklyn Chamber of Commerce.

“In Brooklyn, a high percentage of all firms in the borough are 50-person firms or less,” Mr. Hoan added. “The C.E.O. is the person making the offer. Frankly, he or she has no time to go around and create comparable stats. All this stuff they’re doing now is simply streamlining the process.”

Where this is true, banning salary-history questions could help substantially, advocates say.

“In companies that are treating people the same, and not thinking about how their behavior might differentially harm people, this type of law raises awareness of it,” said Joelle Emerson, the founder and chief executive of Paradigm, a firm that advises employers on promoting diversity. “It forces companies to sit down and say: ‘O.K., why were we doing this before? How should we set compensation now that we don’t do it this way?’”

At Dime Community Bank, which employs about 400 people at 29 branches in the New York City area, the standard job application asked candidates for their salary history until shortly before the New York ban took effect in October.

Angela Blum-Finlay, the bank’s head of human resources, said that she had already begun de-emphasizing salary history in determining compensation beforehand, and that she was asking hiring managers to use competitive benchmarks for different positions instead.

Ms. Finlay said that it was counterproductive for employers to try to squeeze candidates on compensation, especially in a tight labor market.

“We are, at Dime, trying to be an employer of choice, a place people want to come,” she said. “If I lowball you coming in, I’m not going to make you feel valued.”

Employers may be seeking to gauge productivity.

Image
CreditChristoph Hitz

Standard economic theory holds that workers are paid in line with their productivity, so a higher salary should imply a better worker.

In effect, employers may also be using salary on the front end of the hiring process — to help determine whom they want to interview — rather than solely on the back end, when preparing an offer.

But restrictions on asking for salary information can play out very differently in those situations. When employers want to know how little money a worker will accept, and the law prevents them from asking, they may rely on cruder information, like stereotypes.

But when employers want to know how good a worker is, they have several alternatives to considering salary history, many of them more revealing. They can, for example, interview the candidate, read letters of recommendation, and talk to former employers and co-workers.

In a recent study, the economists John Horton of New York University and Moshe Barach of Georgetown University conducted an experiment on a prominent online freelancing platform and found that employers responded in precisely this way.

During a roughly two-week period in 2014, half the employers in the experiment were no longer able to view the wage history of prospective workers, as they had in the past, while the other half could continue to see workers’ wage history.

Compared with employers who had the wage information, those without it ended up interviewing and hiring workers who, on average, had made significantly less money in the past. When employers could no longer consult salary history, they expanded the pool of workers they considered and went to greater lengths to evaluate them.

“You’re widening the top of the hiring funnel,” Mr. Barach said. “It doesn’t allow you to as easily throw people away.”

He and Mr. Horton acknowledged that because this approach required spending more time collecting information, employers might not find it worthwhile when filling a low-skilled or entry-level job. In those cases, they might retreat to stereotypes involving gender or race, as other economists have suggested.

But “for some range of jobs,” Mr. Barach said, “more upfront costs could have benefits down the road. If you actually talk to someone, interview them, it will allow you to locate a high-quality candidate.”

Follow Noam Scheiber on Twitter: @noamscheiber.

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Article source: https://www.nytimes.com/2018/02/16/business/economy/salary-history-laws.html?partner=rss&emc=rss

Trump Administration Recommends Stiff Penalties on Steel and Aluminum Imports

Mr. Ross also proposed an alternative for the steel industry that involved no tariffs, but would set a quota limiting steel imports from all countries to roughly two-thirds the level they were at last year.

For aluminum, the Commerce Department also outlined three alternatives, including a flat 7.7 percent tariff on imports from all countries, or a targeted 23.6 percent tariff on aluminum from China, Hong Kong, Russia, Venezuela and Vietnam. A third option involved putting into effect quotas to limit aluminum imports to lower levels than were shipped to the United States last year.

Mr. Ross did not indicate which way Mr. Trump might go, saying the president could pick a separate path, or reject the penalties altogether. But the president’s longstanding support for tariffs and his recent remarks suggest he is likely to support some kind of action.

In a meeting with lawmakers of both parties on Tuesday, Mr. Trump played down objections to the trade measures, and said that the United States was considering tariffs, quotas or both. “You may have a higher price, but you have jobs,” Mr. Trump told the bipartisan group.

Supporters of the trade action, including American steel companies and the United Steelworkers union, say American metal makers badly need the White House to step in and halt the flood of cheap imports, which has depressed the price for steel and aluminum. Many American steel and aluminum plants are struggling to compete in an oversaturated market and some have had to scale back production and eliminate jobs.

“This is a step in the right direction, and hopefully the president responds sooner than later,” said Todd Leebow, the chief executive of Majestic Steel USA, which buys American-made steel from mills to sell to customers in construction, agriculture and other industries. Mr. Leebow said he had seen a troubling decline in the industry in recent years, and he was hopeful Mr. Trump’s measure might reverse that.

But the investigation has also prompted criticism from American industries that use steel and aluminum to make their products, including automakers and food packagers. These businesses say tariffs or quotas will cause their prices to rise and shrink their profits, and could end up costing American jobs.

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Christine McDaniel, a senior research fellow at the Mercatus Center, a think tank that supports free markets, said that for every one steelworker that may be helped by trade restrictions, more than 38 workers in other sectors that could be harmed by it. “There is ample evidence that import taxes will harm economic growth and cost American jobs,” she said.

In a call with reporters on Friday, Mr. Ross played down any negative impact from the trade actions, saying that any increase in the cost of steel and aluminum for products like soft drinks and canned soup would be “trivial.” “We really don’t buy that argument,” Mr. Ross said.

Shares of American steel companies, including United States Steel, Nucor and AK Steel, rose following the release of the report. Stocks of Ford Motor Company and General Motors, which purchase aluminum and steel for their cars, declined.

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Steel wire to be used in the manufacturing of tires at the Zhong Tian Steel Group Corporation in Changzhou, Jiangsu. China produces roughly half of the world’s steel and aluminum. Credit Kevin Frayer/Getty Images

United Steelworkers, which strongly supported the tariffs, commended Mr. Ross’s announcement. “These recommendations have the potential to focus on the bad actors in the world that historically and systemically cheat in international trade,” said Leo W. Gerard, the president of United Steelworkers International.

Companies with operations outside of the United States were more circumspect. Aluminum companies including Alcoa, Rio Tinto Aluminum and Constellium issued statements urging the administration to exempt Canada, a major supplier of aluminum, from the rule, and focus on the issue of Chinese overcapacity instead.

Mr. Trump will have authority to determine which countries should be subject to any trade action, in part because of way in which the investigation was started. In April, the administration opened an investigation into steel and aluminum imports with a little-used provision of trade law that gives the president broad discretion to act to protect national security.

Drastically remaking American trade has been one of Mr. Trump’s defining political promises. But his first year in office delivered a mixed record on trade. He withdrew the United States from the Trans-Pacific Partnership, an Obama-era trade deal, and began renegotiating trade pacts with South Korea, Canada and Mexico. Those talks now look likely to take longer than he anticipated.

The administration is also weighing a series of trade cases this year that would protect American industries against imports. In January, the Trump administration decided to impose tariffs on washing machines and solar cells and modules to help domestic industries. It has also started an investigation into claims that China infringed on American intellectual property, which could result in investment restrictions or further tariffs.

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The Trump administration has said that its steel and aluminum investigation would help address a global issue created by China, which has used generous state subsidies to dominate the global metals trade. China now produces roughly half of the world’s steel and aluminum, after making little two decades ago. That surge in production has helped push down global metal prices to a point where American companies say they can no longer compete.

But American options for aiming at China directly are limited. Because the United States has already imposed a raft of restrictions on Chinese steel in previous years, only 2 percent of American steel imports came directly from China in 2015.

That means that any measures from the Trump administration are likely to weigh more heavily on other countries, including some close allies. In 2016, Canada accounted for the largest proportion of United States steel imports, about 17 percent, followed by Brazil, South Korea, Mexico, Turkey and Japan.

Allies including the European Union, South Korea and Japan have also pushed back against the United States curbing imports, saying their products support the American military by providing a secure supply of metals, rather than harming it.

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Article source: https://www.nytimes.com/2018/02/16/us/politics/trump-administration-recommends-stiff-penalties-on-steel-and-aluminum-imports.html?partner=rss&emc=rss

The White House Is Very Optimistic on Growth. It Shouldn’t Be.

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Making its forecast come true would require productivity improvements not seen in decades and an atypical policy on interest rates.

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Feb. 14, 2018

President Trump has been nothing if not bold in his promises to generate supercharged economic growth.

When a report showed a strong 3.3 percent growth rate last fall, he said, “I see no reason why we don’t go to 4 percent, 5 percent, and even 6 percent,” and he has spoken wistfully of emerging economies where growth can reach higher than that.

Even if you treat those musings as presidential bombast, his administration is making detailed projections that the economy will expand much faster in the decade ahead than it has in recent years — a forecast that underpins the Trump policy agenda.

The administration forecasts growth in the neighborhood of 3 percent through the next decade, compared with around 2 percent projected by private forecasters and the economists at the Congressional Budget Office and the Federal Reserve. If the administration’s forecast comes true, it will imply an economy 12 percent bigger in 2028 than that projected by the more cautious forecasts — an extra $2.8 trillion in economic activity that year, in today’s dollars.

But when you look closely at the details of the forecast, not all of it quite adds up. To come true, it would require some of the strongest improvements in productivity seen in decades, yet also require that interest rates not react the way they have historically when growth strengthens.

To understand some of the Trump administration’s buoyant assumptions and the apparent contradictions buried within them, it helps to go step by step on where economic growth comes from and how it relates to interest rates, employment and inflation.

Capital spending can fuel higher growth, but not forever

Think of the simplest arithmetic on how a single company can produce more goods and services. There are three ways:

  • Workers can put in more hours of labor. If the company hires more people, or has current workers do longer shifts, it can increase production.

  • The business can invest in more capital to make workers more effective. The latest equipment or software can mean each hour of labor creates more stuff.

  • The business can adjust its management techniques and how it operates to try to get more productivity out of the same workers and equipment.

The same idea applies to the economy as a whole. Growth comes from either more hours being worked, or more capital for each worker, or the third, which is called “total factor productivity.”

The Trump administration leans heavily on the second of these — more capital — as justification for its optimism. With lower taxes on business, as well as regulatory policies that are more favorable to capital, the budget statement says, it will unleash “growth-enhancing policies” in terms of more capital in the economy per worker.

It is indeed plausible that these policies will encourage more capital investment in the next few years, said Joel Prakken, chief U.S. economist at Macroeconomic Advisers, with higher productivity growth as a consequence.

But that should be a one-time adjustment, after businesses increase their capital stock in response to more favorable policies. Once that process is complete and has resulted in higher productivity, there’s no reason to think that capital investment would keep rising as a share of the economy.

In other words, the benefits in terms of productivity growth and economic growth should fade over time, which the administration acknowledges.

“The new tax law would be a one-time shift, spread out over several years, after which there would be a new steady state growth path for labor productivity,” DJ Nordquist, chief of staff at the White House Council of Economic Advisers, said in an email. “Nevertheless, in that new steady state, faster growth than we have seen in recent years can still be expected because of the elimination of excessive regulations, to which this administration is committed and because of our infrastructure plan. This deregulation will have enduring benefits to the rate of growth.”

Some private economists are not persuaded these effects are powerful enough to account for continued strong growth a decade from now. “I try to fit these numbers into a mainstream paradigm and I can’t make them fit,” Mr. Prakken said.

What about other sources of growth?

But even if higher capital investment can’t do all the lifting of generating 3 percent growth, there remain those other two possibilities, of hours worked or total factor productivity, that could help achieve the 3 percent growth forecast even after the lift from tax cuts and capital investment fades.

But demographic trends are putting a lid on potential growth from more hours of work. The retirement of the baby boomers and stabilization of the proportion of women in the work force mean that potential hours worked will rise only 0.4 percent a year in the coming decade, according to the C.B.O.’s forecast (compared with 1.3 percent a year from 1950 to 2016).

Moreover, the Trump administration’s immigration policies, if anything, would tilt that number in a negative direction, as deportations, tighter border security and more restrictive issuance of work visas reduces the potential supply of labor.

Ms. Nordquist argued that Trump administration policies would help increase the labor force, and hence growth potential.

“We think that labor force participation has dropped in the past decade in part because of government policies that discourage work,” said Ms. Nordquist, including growth in Social Security disability insurance and the Affordable Care Act. “There is much room for the Trump administration to improve on those policies, for example through marginal individual income tax rate cuts,” citing evidence that older, near-retirement workers may be more likely to work when taxes are lower.

Then there’s total factor productivity, the black-box driver of growth. Economists don’t really understand it, and calculate it only as a residual — it is the number left over after calculating how much a rise in output comes from more hours worked or more capital.

It would be great for the long-term prospects for the economy — and for the Trump administration’s forecast — if total factor productivity started rising faster. But it’s hard to predict, and it doesn’t show much relationship with either corporate taxes or government regulation. For example, it was quite high from 1950 to 1973, when corporate income taxes were between 48 and 52 percent (they were recently cut to 21 percent). And it was quite low from 1982 to 1990, amid the Reagan era tax cuts and deregulation.

The interest rate paradox

Suppose the Trump administration’s growth forecast really does materialize: Tax cuts and deregulation fuel productivity-enhancing capital spending; some good fortune arises in terms of the labor force and total factor productivity; and economic growth returns to its pre-2000 norm of around 3 percent. That would be positive news for the economy. But it also would be likely to have other effects, particularly on interest rates.

Over time, interest rates tend to move in tandem with the nominal growth rate. Part of the reason interest rates have fallen sharply in the last decade is that low growth has translated into what economists call a low “natural rate” of interest and low inflation levels.

But the Trump administration projects similar interest rates to those envisioned by more cautious forecasters, despite projecting higher growth.

It implies something of an immaculate expansion: returning to pre-2000 growth rates without also returning to pre-2000 interest rates.

In the 1990s, for example, G.D.P. growth averaged 3.3 percent per year, and the 10-year Treasury bond yield averaged 6.7 percent. The administration projects economic growth nearly that strong, but rates peaking at 3.7 percent.

Even some who are on board with more optimistic forecasts of growth say that higher interest rates and inflation are likely to accompany it. Allen Sinai, a longtime forecaster, shares the administration’s view that businesses will invest in more capital because of the tax law, thus achieving higher productivity.

But in addition to that, he argues, the economy will be at risk of overheating. He sees inflation rising to between 2.5 percent and 3 percent by late 2019, which could send long-term Treasury bond yields up to 5 percent, well above the 2.9 percent today and the 3.1 percent the administration forecasts for 2019.

“At some point inflation gets high enough, and the market takes interest rates up,” said Mr. Sinai, the chief economist at Decision Economics. And higher rates, it’s worth adding, would raise the cost for the government to service the national debt, in turn making deficits higher.

Ms. Nordquist notes that the forecasts published Monday were developed in November, when interest rates were lower than they are now. “If we were to redo the interest rate forecast today, we would project higher rates,” she said.

The art of the forecast

Have some sympathy for those who build these forecasts. Predicting anything 10 years in advance is inherently hard, and no forecast is ever perfectly correct. As the last 10 years show, there is a lot that is just unknowable about the forces that will buffet the economy.

But you do want those forecasts to line up with what we already know about the economic and demographic forces that will shape the future. And a lot will have to go right for the Trump administration’s forecasts to come true.

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Article source: https://www.nytimes.com/2018/02/14/upshot/the-trump-administration-is-optimistic-about-economic-growth-be-skeptical.html?partner=rss&emc=rss

The Trump Administration Is Optimistic About Economic Growth. Be Skeptical.

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For its forecast to come true would require productivity improvements not seen in decades and an atypical policy on interest rates.

By

Feb. 14, 2018

President Trump has been nothing if not bold in his promises to generate supercharged economic growth.

When a report showed a strong 3.3 percent growth rate last fall, he said, “I see no reason why we don’t go to 4 percent, 5 percent, and even 6 percent,” and he has spoken wistfully of emerging economies where growth can reach higher than that.

Even if you treat those musings as presidential bombast, his administration is making detailed projections that the economy will expand much faster in the decade ahead than it has in recent years — a forecast that underpins the Trump policy agenda.

The administration forecasts growth in the neighborhood of 3 percent through the next decade, compared with around 2 percent projected by private forecasters and the economists at the Congressional Budget Office and the Federal Reserve. If the administration’s forecast comes true, it will imply an economy 12 percent bigger in 2028 than that projected by the more cautious forecasts — an extra $2.8 trillion in economic activity that year, in today’s dollars.

But when you look closely at the details of the forecast, not all of it quite adds up. To come true, it would require some of the strongest improvements in productivity seen in decades, yet also require that interest rates not react the way they have historically when growth strengthens.

To understand some of the Trump administration’s buoyant assumptions and the apparent contradictions buried within them, it helps to go step by step on where economic growth comes from and how it relates to interest rates, employment and inflation.

Capital spending can fuel higher growth, but not forever

Think of the simplest arithmetic on how a single company can produce more goods and services. There are three ways:

  • Workers can put in more hours of labor. If the company hires more people, or has current workers do longer shifts, it can increase production.

  • The business can invest in more capital to make workers more effective. The latest equipment or software can mean each hour of labor creates more stuff.

  • The business can adjust its management techniques and how it operates to try to get more productivity out of the same workers and equipment.

The same idea applies to the economy as a whole. Growth comes from either more hours being worked, or more capital for each worker, or the third, which is called “total factor productivity.”

The Trump administration leans heavily on the second of these — more capital — as justification for its optimism. With lower taxes on business, as well as regulatory policies that are more favorable to capital, the budget statement says, it will unleash “growth-enhancing policies” in terms of more capital in the economy per worker.

It is indeed plausible that these policies will encourage more capital investment in the next few years, said Joel Prakken, chief U.S. economist at Macroeconomic Advisers, with higher productivity growth as a consequence.

But that should be a one-time adjustment, after businesses increase their capital stock in response to more favorable policies. Once that process is complete and has resulted in higher productivity, there’s no reason to think that capital investment would keep rising as a share of the economy.

In other words, the benefits in terms of productivity growth and economic growth should fade over time, which the administration acknowledges.

“The new tax law would be a one-time shift, spread out over several years, after which there would be a new steady state growth path for labor productivity,” DJ Nordquist, chief of staff at the White House Council of Economic Advisers, said in an email. “Nevertheless, in that new steady state, faster growth than we have seen in recent years can still be expected because of the elimination of excessive regulations, to which this administration is committed and because of our infrastructure plan. This deregulation will have enduring benefits to the rate of growth.”

Some private economists are not persuaded these effects are powerful enough to account for continued strong growth a decade from now. “I try to fit these numbers into a mainstream paradigm and I can’t make them fit,” Mr. Prakken said.

What about other sources of growth?

But even if higher capital investment can’t do all the lifting of generating 3 percent growth, there remain those other two possibilities, of hours worked or total factor productivity, that could help achieve the 3 percent growth forecast even after the lift from tax cuts and capital investment fades.

But demographic trends are putting a lid on potential growth from more hours of work. The retirement of the baby boomers and stabilization of the proportion of women in the work force mean that potential hours worked will rise only 0.4 percent a year in the coming decade, according to the C.B.O.’s forecast (compared with 1.3 percent a year from 1950 to 2016).

Moreover, the Trump administration’s immigration policies, if anything, would tilt that number in a negative direction, as deportations, tighter border security and more restrictive issuance of work visas reduces the potential supply of labor.

Ms. Nordquist argued that Trump administration policies would help increase the labor force, and hence growth potential.

“We think that labor force participation has dropped in the past decade in part because of government policies that discourage work,” said Ms. Norquist, including growth in Social Security disability insurance and the Affordable Care Act. “There is much room for the Trump administration to improve on those policies, for example through marginal individual income tax rate cuts,” citing evidence that older, near-retirement workers may be more likely to work when taxes are lower.

Then there’s total factor productivity, the black-box driver of growth. Economists don’t really understand it, and calculate it only as a residual — it is the number left over after calculating how much a rise in output comes from more hours worked or more capital.

It would be great for the long-term prospects for the economy — and for the Trump administration’s forecast — if total factor productivity started rising faster. But it’s hard to predict, and it doesn’t show much relationship with either corporate taxes or government regulation. For example, it was quite high from 1950 to 1973, when corporate income taxes were between 48 and 52 percent (they were recently cut to 21 percent). And it was quite low from 1982 to 1990, amid the Reagan era tax cuts and deregulation.

The interest rate paradox

Suppose the Trump administration’s growth forecast really does materialize: Tax cuts and deregulation fuel productivity-enhancing capital spending; some good fortune arises in terms of the labor force and total factor productivity; and economic growth returns to its pre-2000 norm of around 3 percent. That would be positive news for the economy. But it also would be likely to have other effects, particularly on interest rates.

Over time, interest rates tend to move in tandem with the nominal growth rate. Part of the reason interest rates have fallen sharply in the last decade is that low growth has translated into what economists call a low “natural rate” of interest and low inflation levels.

But the Trump administration projects similar interest rates to those envisioned by more cautious forecasters, despite projecting higher growth.

It implies something of an immaculate expansion: returning to pre-2000 growth rates without also returning to pre-2000 interest rates.

In the 1990s, for example, G.D.P. growth averaged 3.3 percent per year, and the 10-year Treasury bond yield averaged 6.7 percent. The administration projects economic growth nearly that strong, but rates peaking at 3.7 percent.

Even some who are on board with more optimistic forecasts of growth say that higher interest rates and inflation are likely to accompany it. Allen Sinai, a longtime forecaster, shares the administration’s view that businesses will invest in more capital because of the tax law, thus achieving higher productivity.

But in addition to that, he argues, the economy will be at risk of overheating. He sees inflation rising to between 2.5 percent and 3 percent by late 2019, which could send long-term Treasury bond yields up to 5 percent, well above the 2.9 percent today and the 3.1 percent the administration forecasts for 2019.

“At some point inflation gets high enough, and the market takes interest rates up,” said Mr. Sinai, the chief economist at Decision Economics. And higher rates, it’s worth adding, would raise the cost for the government to service the national debt, in turn making deficits higher.

Ms. Nordquist notes that the forecasts published Monday were developed in November, when interest rates were lower than they are now. “If we were to redo the interest rate forecast today, we would project higher rates,” she said.

The art of the forecast

Have some sympathy for those who build these forecasts. Predicting anything 10 years in advance is inherently hard, and no forecast is ever perfectly correct. As the last 10 years show, there is a lot that is just unknowable about the forces that will buffet the economy.

But you do want those forecasts to line up with what we already know about the economic and demographic forces that will shape the future. And a lot will have to go right for the Trump administration’s forecasts to come true.

Advertisement

Article source: https://www.nytimes.com/2018/02/14/upshot/the-trump-administration-is-optimistic-about-economic-growth-be-skeptical.html?partner=rss&emc=rss

Trump Tells Lawmakers He’s Mulling Limits on Imported Steel

That pushback, which has garnered the sympathy of many pro-trade Republicans, appears to have turned a trade action that the White House initially viewed as relatively straightforward into a more extended affair.

In speeches in May and June, Trump administration officials implied that action on steel would soon be forthcoming. But in the months that followed, little information emerged about the investigations. In September, the commerce secretary Wilbur L. Ross Jr., said that a decision on the steel measure would be delayed until after Congress approved a new tax law, because the administration did not want to “unnecessarily irritate” lawmakers.

The Commerce Department formally submitted the results of its investigations into steel and aluminum imports to the White House in January. The president now faces a deadline of April 11 for a decision on the steel case, and a deadline of April 20 for a similar decision on aluminum.

Republican and Democratic lawmakers who gathered at the White House on Tuesday are generally split along party lines on the restrictions. Most Democrats voiced support for the president’s action on metals, and Republicans, with the exception of Senator Rob Portman of Ohio, urged caution.

Representative Jackie Walorski, Republican of Indiana, warned that price increases could affect the recreational vehicles made in her district. Senator Gary Peters, Democrat of Michigan, noted that the auto parts industry relied on inexpensive metals. And Senator Lamar Alexander, Republican of Tennessee, said that past tariffs imposed in 2002 by President George W. Bush on steel had cost jobs for auto parts companies.

In a statement after the meeting, Representative Kevin Brady, Republican of Texas and the chairman of the House Ways and Means Committee, said that the Trump administration needed to hold China accountable for unfair trade practices. But he urged the president to “avoid any action” that could reverse what he described as the benefits of lower taxes and lighter regulation under the Trump administration.

“I committed to continuing to work with him to identify a narrow and targeted remedy that is balanced, effective, protects national security and economic interests across America, and addresses the root problem of China’s distortive practices,” Mr. Brady said.

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The president listened to their comments but occasionally offered some pushback, saying he believed foreign steel manufacturers would absorb the cost of the tariff, rather than raising their prices. “You may have a higher price, but you have jobs,” Mr. Trump said.

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Senator Patrick J. Toomey, Republican of Pennsylvania, suggested that the president focus specifically on countries that have unfair trading practices. “I would urge us to go very, very cautiously here,” he said.

Mr. Trump replied, “That’s all countries.”

The United Steelworkers, the country’s largest industrial union, and companies that forge steel and aluminum have united in pushing for import restrictions. But they have faced opposition from a broad array of industries that argue tariffs could hurt their ability to compete and cost more jobs than they would save.

On Monday, a collection of 15 trade associations representing more than 30,000 businesses that use steel to make products warned the White House in a letter that such restrictions could undermine their ability to manufacture goods in the United States.

The associations said that their member companies employed more than one million Americans, compared with just 80,000 jobs in basic steel production.

“Restrictions on basic steel imports will actually adversely impact national security, the economy and the steel industry itself, because it will undermine our competitiveness and limit our ability to make value-added products here,” the letter read.

The president received more support from the Democrats at the meeting. Senator Sherrod Brown, Democrat of Ohio, thanked Mr. Trump for recent tariffs imposed to protect American manufacturers of washing machines, and urged tough measures on steel imports.

Mr. Brown said he was hopeful that the administration’s renegotiation of Nafta would succeed, noting that if it was written in a way that supports workers, “we can deliver Democrat support.”

Senator Ron Wyden, Democrat of Oregon, urged the president to include “Buy America” provisions in his infrastructure plan, and asked the administration to publicly release reports that the Commerce Department had submitted last month to the White House.

“We’ve got to have a chance to see the analysis done by the secretary in order to make thoughtful recommendations,” Mr. Wyden said in an interview.

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Despite Mr. Trump’s support for the steel measure, he gave no indication of potential timing, Mr. Wyden added. “I didn’t feel that a decision had been made.”

Correction: February 13, 2018

An earlier version of this article misidentified the party affiliation of Senator Gary Peters. He is a Democrat, not a Republican.

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Article source: https://www.nytimes.com/2018/02/13/business/economy/trump-imported-metal-limits.html?partner=rss&emc=rss

Boom and Gloom: An Economic Warning for California

Mr. Brown’s statements highlight California’s distinction as a state of high highs and low lows. From the recession of the early 1990s to the 2001 dot-com crash to the housing collapse of a decade ago, downturns often end up being more pronounced in the state than elsewhere. The next recession, whenever it comes, will almost certainly land harder here than it does in the rest of the country. And that boom-bust pattern is especially tough on California’s budget — something that Mr. Brown, who was first elected governor more than four decades ago, knows well.

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California has accounted for about 20 percent of the nation’s economic growth since 2010, far more than its share of the population or overall output. Credit Monica Almeida for The New York Times

In 2009, as the last recession took hold, California state revenue fell 19 percent, versus 8 percent for state revenues nationwide, according to Moody’s Analytics. There has been a strong rebound since then, but the gains are unlikely to last. That is because California’s government relies on a heavily progressive income tax that generates most of its revenue from a relatively small number of wealthy taxpayers whose incomes are erratic.

Even a blip in the stock market can punch holes in the state’s budget. And because stock prices have more than doubled during Mr. Brown’s term, it seems like a good bet that whoever succeeds him will face challenges. If and when that day comes, any proposal to increase taxes will probably be unpopular. Mr. Brown already raised income taxes to address the state’s last budget mess, and California taxpayers took a further hit as a result of the new tax bill, which curbed the deductibility of state and local taxes on federal returns.

“His successor gets a world in which revenues are more volatile,” without the option of raising taxes, said David Crane, a lecturer in public policy at Stanford University and a former adviser to Mr. Brown’s predecessor, Gov. Arnold Schwarzenegger. “That’s a really tough world to operate in.”

Big Swings

The economy and job market are more volatile in California than in the nation as a whole. The state’s job losses are more severe in bad times, and the gains are more pronounced in good times.

Californias employment volatility,

relative to the U.S. average

INDEX: U.S. = 100

170

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150

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’00

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Californias employment volatility, relative to the U.S. average

INDEX: U.S. = 100

170

160

150

140

130

120

110

100

’80

’85

’90

’95

’00

’05

10

15

By The New York Times | Source: Moody’s Analytics

A recession would also further expose problems that have festered for decades. Across California, cities and school districts are having trouble keeping up with ballooning pension obligations, squeezing teacher salaries and state services. In warning about budget troubles to come, Mr. Brown was making a case for adding more of today’s surplus to the state’s rainy day fund to cushion the blow of the next downturn.

Mr. Brown’s final State of the State speech also included plenty of optimistic notes and pushes for big spending in the future on items mostly outside the state’s general fund. He talked about “setting the pace for the entire nation” and embracing big infrastructure projects like a high-speed rail line despite doubts about its viability as costs mount.

“You have all of these projects that he wants to do,” said Stephen Levy, the director of the Center for Continuing Study of the California Economy, an independent research organization. “He’s saying, this year may be rosy, but watch out, it ain’t going to continue. And I agree.”

Photo
Construction crews in Los Angeles reflect a boom in building hotels, shopping centers and high-rise condominiums. The question is how long it can last. Credit Monica Almeida for The New York Times

Even in prosperity, California has plenty of problems. The bulk of its recent gains have flowed to wealthier coastal cities, leaving inland areas behind, and a severe housing shortage has led to punishing rent increases and rising homelessness.

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Still, economists generally agree that the state’s long-term prospects are bright. It is home to many of the world’s most valuable and innovative companies, and it attracts an outsize portion of the skilled work force and venture capital financing, helping it create new industries as old ones slow down or fade away.

And recession forecasting is a tough business even for those whose livelihoods depend on it, like Ed Del Beccaro, a senior managing director in the Walnut Creek office of Transwestern, a commercial real estate brokerage. He manages a team of brokers and travels around the Bay Area giving speeches and forecasts to chambers of commerce and other business groups.

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“Two years ago I was predicting a recession in September of 2017, and in October I said we were going to have a recession at the end of 2018,” he said. “Today I think that unless we get bombed by North Korea, we will have a pretty amazing two years of growth.”

With a sudden spurt in demand for office space, Mr. Del Beccaro said, he is hiring new workers and spending more on marketing to prospective clients. “I was just authorized to go out and get more brokers and offer them incentives to hopefully get them to switch over from other companies,” he said.

But winter will come eventually, and when it does, Mr. Brown’s counsel about planning ahead may help shape how California weathers it.

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Article source: https://www.nytimes.com/2018/02/13/business/economy/california-recession.html?partner=rss&emc=rss

Economic Scene: Big Profits Drove a Stock Boom. Did the Economy Pay a Price?

What makes this particularly puzzling for scholars reared on the classical models of competitive economies is that all this happened despite a persistent decline in real interest rates. In a more orthodox economy, declining rates on corporate bonds would encourage a surge in corporate investment. As companies invested more and more capital, the returns on investments would gradually decline until companies’ returns matched their cost of capital: the interest rate they pay to borrow.

The Stock Market Isn’t the Economy. Here’s How They Can Shape Each Other

Stock markets have recently fallen over fears that economic growth is too strong. Here’s why, and one way how steep, sustained sell-offs could end up hurting the economy.

In the United States, neither has occurred. Investment has been stuck at stubbornly low rates. And even as interest rates have fallen, the average return on productive capital has stayed roughly constant.

In a nutshell, the United States has built an economy where businesses don’t invest even though it has rarely been cheaper to finance investment. Still, they reap spectacular profits that warrant runaway share prices.

“These are not your father’s growth facts,” wrote Gauti Eggertsson, Jacob A. Robbins and Ella Getz Wold of Brown University in an analysis published this week by the Washington Center for Equitable Growth. The puzzling facts of contemporary America suggest an economy poised to fail.

What happened? It turns out that there is one straightforward reason for the American economy’s unorthodox behavior. As Mr. Eggertsson and his colleagues argue, the standard economic theory based on competitive markets cannot apply when markets are not competitive. And competition, in the United States, is shriveling.

The scholars argue that the American economy is afflicted by “rents” — returns in excess of what investments would yield in a competitive economy, where fat margins are quickly whittled away by competition.

These rents don’t fall from the sky. Companies free of competitive pressures, with the power to set prices more or less at will, squeeze them from their customers and their workers. They pad corporate profits and send stock prices sky high.

Graphic

It’s an Unequal World. It Doesn’t Have to Be.

Global inequality, after widening for decades, has stabilized. The share of the world’s income captured by the top 1 percent has shrunk since its peak on the eve of the financial crisis.

Executives love it. The critical question is what these rents hold in store for the rest of us.

This doesn’t necessarily mean, by the way, that the corporate landscape has been taken over by evil monopolists that resort to illegal tricks to keep competitors out. High-tech titans like Google and Facebook may just have the ability and the deep pockets to out-innovate everybody — delivering wonderful new experiences to consumers along the way, and maintaining monopoly control over their latest innovations. One intriguing theory is that the globalized economy is reorganizing the business landscape, encouraging the rise of corporate superstars.

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Not everybody agrees that competition is waning. Hal Varian, Google’s chief economist, argues plausibly in a recent study that the case to worry about market concentration across the economy is weak. Even as concentration has increased in many sectors, there is plenty of competition in most industries and markets. Carl Shapiro, an antitrust scholar from the University of California, Berkeley, who served in President Barack Obama’s Justice Department, worries that the new populism infecting American politics could prompt antitrust policy to take aim at all big successful companies.

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Still, there are good reasons to worry about rising rents, no matter where they come from. Mr. Shapiro argues that while some measures of market concentration may not be meaningful, persistently high profits are of themselves a cause for concern.

Profits as a share of output have risen by half over the last 30 years. Combined with evidence that large corporations are accounting for an increasing share of revenue and employment, Mr. Shapiro writes, “it certainly appears that many large U.S. corporations are earning substantial incumbency rents, and have been doing so for at least 10 years, apart from during the depths of the Great Recession.”

This is particularly true in the tech sector, where a handful of dominant companies — you know the ones I’m talking about — have sustained spectacular profits for years. Their sky-high stock prices suggest that investors expect high profits to continue as well.

“They probably are geniuses; what they are doing is wonderful,” Mr. Shapiro told me. “Still, you would expect competition to erode away the excess profits over time.”

Photo
A handful of dominant tech companies, including Google, have sustained spectacular profits for years. Credit Roger Kisby for The New York Times

Here is why we should worry.

Mr. Eggertsson and his colleagues built an alternative model of the American economy by doing away with the assumption of perfect competition. They contend that there are barriers to entry that stop competitors and allow rents to persist.

In this economy, stock prices don’t just reflect the future stream of normal economic returns that would accrue to a company’s capital investment. They also include a claim to a stream of rents that generate “pure profits.” These profits can’t be replicated by another company’s capital investment. They are owned by a specific company.

So what features might an economy like this possess? Wages are unlikely to rise much in a job market dominated by a few big employers. As I speculated last week, markets dominated by a few businesses will most likely deter start-ups from appearing on the scene.

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Rising rents will take larger shares of the nation’s income. That will bolster the proportion of income that goes to corporate profits but squeeze the share that flows to workers — in wages and benefits — and to productive capital. This will discourage both work and capital investment. It will weigh on overall economic growth.

Rents interfere with incentives in a big way. Companies will spend more time and effort trying to preserve those rents — often by working to block rivals from their markets. Rivals will fight to grab a share of those rents for themselves, perhaps through lobbying. Amid all this jockeying, investment in productive capabilities will most likely be neglected as a secondary consideration.

And inevitably, inequality will rise: The owners of the shares in the powerful corporations capturing the economy’s growing monopoly rents will peel further and further away from the average Jane and Joe, who own little but their labor.

This is not the kind of economy proposed by classical economic theory. It is not the kind of country portrayed by evangelists of the American dream. But it looks as if we are stuck with it, regardless of what the stock market does tomorrow.

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Article source: https://www.nytimes.com/2018/02/13/business/economy/profits-economy.html?partner=rss&emc=rss

Liberals Wanted Fiscal Stimulus. Conservatives Delivered It.

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Left-leaning economists hate the timing and the composition. But the expansionary fiscal policy they sought is on the way.

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President Obama discussed fiscal stimulus in a meeting with governors in 2010. At the time, Republicans were typically more focused on the debt. CreditLuke Sharrett for The New York Times

By

Feb. 11, 2018

For years, many liberal economists have argued that a little more federal spending and a higher budget deficit would create a stronger economy.

Now, they’re getting their wish, or at least a fun-house mirror version of it. All it took was total Republican control of the government.

The fiscal austerity that drove the budget deficit from around 9 percent of G.D.P. in 2010 to 3 percent in 2016 has, for practical purposes, been abandoned. First, Republicans passed a $1.5 trillion tax bill in December that sharply cut rates on businesses. Then last week they made a deal to undo budget caps demanded by the Republican House in 2011. President Trump signed that bill on Friday.

This sudden reversal has the economists who have long argued we should run the economy a little hot — that is, stimulate it using the government’s power to tax and spend — in something of a quandary.

“It’s a very weird and conflicted feeling,” said Jared Bernstein of the Center on Budget and Policy Priorities, who worked in the Obama White House. “On some level I should be happy, and I am sort of happy right now, but with some nontrivial caveats.”

He and others in this boat don’t at all like the composition of this particular easing of fiscal policy. It is focused on tax cuts for businesses, rather than on investment in roads and bridges or worker training. The latter would be the kinds of steps more likely to have long-term payoffs and to benefit working-class Americans, they believe. (A big chunk of the additional spending will go toward the military.)

Liberal skeptics of this new age of anti-austerity also don’t like the timing. Mr. Bernstein, no one’s idea of a deficit hawk, notes that never in its modern history has the United States run deficits as large as those now on the horizon while the unemployment rate was as low as it is now. That creates the risk that the government will have less capacity to respond to future recessions.

But those misgivings aside, this mix of budget-busting policies will provide the best test in years of some ideas that have percolated among economists, especially but not exclusively on the left. The former Federal Reserve chairman Ben Bernanke, originally a George W. Bush nominee, spent years imploring Congress to spend more money in the near term to try to boost growth, to little avail.

The case for a more expansionary fiscal policy varies depending on the individual, but arguments have included:

For example, Larry Summers, the Harvard economist and former adviser to Presidents Obama and Clinton, has been a leading advocate of the idea that “secular stagnation” has taken hold. The idea is that the economy is in a self-reinforcing pattern of low growth, low inflation and low interest rates, and that overreliance on the Federal Reserve’s interest rate policies to try to spur growth has fueled financial bubbles.

To escape that trap, Mr. Summers urged government to make large-scale investment in infrastructure. That investment, he said, would create jobs for men, a demographic that has disproportionately dropped out of the labor force. And it would improve the long-term economic potential of the United States, taking the pressure off the Fed’s interest rate policies to achieve growth.

He argues now that the policies that the Trump administration and Congress have reached, while directionally the same as those he advocates, won’t get the job done and carry risks.

“Yes, I have favored more expansionary fiscal policy, and this is more expansionary fiscal policy,” Mr. Summers said. “But it’s the wrong kind of expansionary fiscal policy, and it’s at the wrong time, at the rare moment when fiscal policy is likely to be almost entirely crowded out.”

Expect to hear that term, “crowded out,” frequently in the economic debates of the years ahead.

In mainstream models of how the economy works, it’s the idea that if the government runs budget deficits when the economy is at full employment, its borrowing won’t spur new economic activity as desired. Instead, the borrowing will simply raise interest rates and squeeze out private-sector investment, resulting in no net improvement in the economy.

The decline in stock markets since Jan. 26, and the rise in Treasury bond yields, suggests investors are becoming wary of that happening in the coming years.

Advocates of fiscal stimulus during the 2008 recession and the slow recovery argued that crowding out wasn’t a valid fear during that time. Vast economic resources, including workers and machines, were sitting on the sidelines, so the government had room to stimulate without causing a rise in interest rates.

A common refrain — and the baseline for negotiations between the Obama administration and Republicans in the House — was that any short-term boost to spending had to be accompanied by longer-term deficit reduction. It was on those terms, for example, that stiff budget cuts known as “sequestration” were partly reversed — with offsets to avoid raising the deficit over the ensuing decade.

“Republicans were very tough about that,” said Jason Furman, who was chairman of the Council of Economic Advisers until President Trump took office and is now at Harvard’s Kennedy School. Now, a Republican Congress is agreeing to raise spending beyond those sequestration limits without other cuts to offset the increases. “This is very frustrating because it feels like one group of people are living by the rules, while another group is not living by the rules of economics or arithmetic.”

The frustration of facing resistance to more expansionary fiscal policy during a period of high unemployment wasn’t confined to liberals. As Fed chairman, Mr. Bernanke urged Congress to pair a higher short-term fiscal boost with long-term deficit reduction.

As recently as last year, he wrote that “there is still a case for fiscal policy action today,” but that it should focus on improving the economy’s productive capacity, “for example, through improved public infrastructure that makes our economy more efficient or tax reforms that promote private capital investment.”

Still, even if it isn’t designed as the stimulus that advocates would prefer, and even if its timing is the direct opposite of what Keynesian economics might recommend, this may be the best test of some of the theories on expansionary fiscal policy that will come along.

“This is a test of whether we’re at full employment or not,” Mr. Bernstein said. “ I think by knocking the unemployment rate down even further, we’re going to get more real economic activity, not just more inflation. But now we’re going to find out if I’m right.”

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Article source: https://www.nytimes.com/2018/02/11/upshot/liberals-wanted-fiscal-stimulus-conservatives-delivered-it.html?partner=rss&emc=rss

Where Did Your Pay Raise Go? It May Have Become a Bonus

In 1991, for example, spending on temporary rewards and bonuses for salaried employees, known as variable pay, accounted for an average of 3.1 percent of total compensation budgets, while salary increases amounted to 5 percent.

The Envelope, Please

Since the late 1980s, an increasing share of companies’ payrolls has gone toward one-time bonuses and awards, while the share devoted to salary increases has fallen, according to data collected by Aon Hewitt, a human resources consulting firm.

Company spending on one-time bonuses,

versus salary increases

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and awards

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Company spending on one-time bonuses, versus salary increases

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By The New York Times | Source: Aon Hewitt

In 2017, one-time payments consumed 12.7 percent to those budgets; raises amounted to just 2.9 percent.

“Pressure to increase productivity and minimize costs,” the report concluded, had pushed employers to forgo raises and rely more on short-term awards “as the primary means of rewarding for performance.”

Ordinarily, the jobless rate and wage growth are like two ends of a seesaw: When one drops, the other is supposed to rise. But that link seems broken, and like film-noir detectives, analysts have scrutinized hard-edge statistics and fuzzier psychological indicators for clues about why.

In the recession that began a decade ago, the businesses most likely to survive tended to be the most conservative spenders, said Douglas G. Duncan, the chief economist at Fannie Mae. That approach was rewarded and has now been reinforced, he said, helping to restrain the growth of full-time work forces and salaries.

Aon Hewitt’s annual surveys seem to bear that out. The practice of spending more on variable pay than on permanent raises took root in the 1990s, when growing competition from abroad increased pressure on companies to keep a lid on prices and production costs.

Pay-for-performance and other bonuses increasingly functioned as a release valve. Companies could offer more money to attract talent or when profits were strong, and pull back when business was slow.

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After the recession, the trend accelerated.

“The response in 2009 was unlike any prior response to a recession or depression in that organizations actually reduced salaries, they didn’t just freeze them as a means of allegedly avoiding greater layoffs,” said Ken Abosch, a partner at Aon Hewitt. “I think there’s been a lesson learned from that.” That lesson: Stay nimble.

What Companies Are Doing With Their Savings From the Tax Law

The tax overhaul has prompted hundreds of employers, including at least 40 members of the Standard Poor’s 500-stock index, to pass on savings to workers.

The recessionary hangover encouraged employers to avoid adding fixed costs and to be as flexible as possible in staffing and compensation. The trend toward outsourcing work that was once handled in house as a way of saving money fits in with that story line.

The percentage spent on salary increases never returned to its pre-2009 levels, the Aon Hewitt surveys show, while the percentage spent on bonuses and other short-term rewards climbed to new levels. “I don’t believe we’ll see a long-term increase in real wage growth,” Mr. Abosch said.

So far, Wall Street has drawn a different conclusion, although several economists question whether the 2.9 percent jump in hourly average earnings in January from a year earlier signaled a turning point. Paul Ashworth, chief North American economist at Capital Economics, attributed wage pickup last month to unusually cold weather, which reduced the number of hours that low-wage workers clocked.

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The reasons for sluggish wage growth, of course, are a complex weave. Declining unionization, noncompete contracts, tepid minimum-wage increases, globalization and sluggish productivity have all played a role.

Whatever the cause, the consequences can be profound. Salary increases compound over time, offering greater financial security. Moreover, bonuses have not made up for wage stagnation. The inflation-adjusted median income of men working full time was lower in 2016 than it was in 1973. And their lifetime earnings — which include salary, wages, bonuses and exercised stock options — have mostly dropped since then.

Most bonuses still come in traditional forms: payoffs for executive-suite occupants and deal hunters, or sweeteners for newly hired employees. Certain industries, like finance and insurance, with their longer tradition of year-end and performance-based rewards, continue to have much bigger bonus budgets than sectors like retail.

But the practice has expanded. In 1991, fewer than half of companies that Aon Hewitt surveyed had a broad-based rewards program. Last year, 88 percent did.

“It’s now widespread across all industry sectors, even some that were holdbacks such as utilities, health care, not-for-profits and government,” Mr. Abosch said.

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Salaried workers, rather than hourly wage earners, remain much more likely to be the recipients of such extra payments.

In tracking compensation, the Bureau of Labor Statistics does not differentiate between hourly workers and those on a set salary. Still, Jesus Ranon, supervisory labor economist at the bureau, said, “You can see in terms of percent of compensation there is an increase in these bonus components.”

In March 2004, bonuses accounted for 1.6 percent of total compensation (including wages, salaries and benefits). In March 2017, they accounted for 2.6 percent. The wage and salary share of total compensation budgets fell by nearly 2 percent over the same period.

If given a choice, most workers would take a raise. When Aon Hewitt asked 2,079 American workers in a second, newly completed survey what they would like to see their employers do with their tax-cut windfall, 65 percent chose a pay raise — twice as many as any other option, including a bonus or a 401(k) contribution.

Takisha Gower, a passenger service agent for Envoy, the air carrier that was previously known as American Eagle and is owned by American Airlines, welcomed her recent $1,000 bonus, which the company credited to the “new tax structure.” She is much more concerned, however, about her base pay week to week, a subject of longstanding contract negotiations.

“It was appreciated, but it doesn’t fix the long term,” Ms. Gower said of the bonus. “We need a livable wage that we can support our families off.”

“A lot of employees qualify for government assistance,” she added. “Some have to work 60 hours a week to make ends meet.”

Follow Patricia Cohen on Twitter: @PatcohenNYT

Noam Scheiber contributed reporting.

A version of this article appears in print on February 11, 2018, on Page A1 of the New York edition with the headline: Where Did Your Pay Raise Go? It Might Have Become a Bonus.

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Article source: https://www.nytimes.com/2018/02/10/business/economy/bonus-pay.html?partner=rss&emc=rss

The Era of Fiscal Austerity Is Over. Here’s What Big Deficits Mean for the Economy.

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It depends on whether you look at the short, medium or long term.

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When he was running as a Republican vice-presidential candidate in 2012, Paul Ryan spoke in front of a national debt clock.CreditBrian Snyder/Reuters

By

Feb. 9, 2018

The last seven weeks amount to a sea change in United States economic policy. The era of fiscal austerity is over, and the era of big deficits is back. The trillion dollar question is how it will affect the economy.

In the short run, expect some of the strongest economic growth the country has experienced in years, and some subtle but real benefits from a higher supply of Treasury bonds in a world that is thirsty for them.

In the medium run, there is now more risk of surging inflation and higher interest rates — fears that were behind a steep stock market sell-off in the last two weeks.

In the long run, the United States risks two grave problems. It may find itself with less flexibility to combat the next recession or unexpected crisis. And higher interest payments could prove a burden on the federal Treasury and on economic growth. This is particularly true given that the ballooning debt comes at a time when the economy is already strong and the costs of paying retirement benefits for baby boomers are starting to mount.

It’s hard to overstate how abrupt the shift has been.

When the Congressional Budget Office last forecast the nation’s fiscal future in June, it projected a $689 billion budget deficit in the fiscal year that begins this coming fall. Analysts now think it will turn out to be about $1.2 trillion.

One major reason is the tax law that passed on Dec. 20, which is estimated to reduce federal revenue by about $1.5 trillion over the next decade, or $1 trillion when pro-growth economic effects modeled by the congressional Joint Committee on Taxation are factored in. A budget deal passed in the early hours of Friday morning includes $300 billion in new spending over the next two years for all sorts of government programs and $90 billion in disaster relief, without corresponding cuts elsewhere in the budget.

It is a stark reversal from 2010 to 2016, when congressional Republicans insisted upon spending cuts and the Obama administration insisted on raising taxes (or, more precisely, allowing some of the Bush administration’s tax cuts to expire). Those steps, combined with an improving economy, cut the budget deficit from around 9 percent of G.D.P. in 2010 to 3 percent in 2016.

The Near Term: Strong Growth in 2018

In almost any economic model you choose, the new era of fiscal profligacy will create a near-term economic boost. For example, Evercore ISI, the research arm of the investment bank Evercore, estimates that the combination of tax cuts and spending increases will contribute an extra 0.7 to 0.8 percentage points to the growth rate in 2018, compared with the policy path the nation was on previously.

Economists generally think that these policies will have a lower “multiplier” than these policies would have if they took place during a recession, when there is more spare capacity in the economy. But that doesn’t mean the multiplier becomes zero.

“Some people assume that because this was a bad process and the tax bill is really regressive that it won’t have a short-term growth impact, but I think that’s wrong,” said Adam Posen, president of the Peterson Institute for International Economics. “We shouldn’t confuse whatever distaste one has for the composition of the package for totally overwhelming the multiplier effects.”

Put a different way, it would be very hard for the government to pump an extra half-trillion dollars into the economy in a single year without getting some extra economic activity out of it.

Another potential near-term positive for the global financial system could be the effect of billions of dollars in bonds issued by the Treasury. For years the world has experienced what some analysts call a “safe asset shortage,” too few government bonds and other investments viewed as reliable relative to demand.

This has arguably been a factor in depressed interest rates and sluggish growth across much of the advanced world. More Treasury bonds floating around might reduce those pressures.

The Medium Term: Depends on Economic Slack, and the Fed

Over the next two or three years, things get more murky. What happens will depend on how the economy responds to the additional fiscal stimulus, and how the Fed responds to that.

The big question is whether the economy has the room to keep growing without higher inflation emerging. The unemployment rate is already low at 4.1 percent, so there aren’t exactly hordes of jobless people available to be put back to work. That means there is a chance that all this extra money flooding into the economy doesn’t go toward more economic output but just bids up wages and ultimately consumer prices.

If that happens, the Federal Reserve would almost certainly raise interest rates more than it now plans, essentially engineering an economic slowdown to try to keep inflation from accelerating. In that scenario, the apparent benefits of tax cuts and spending increases would be short-lived.

But there’s no certainty that will happen. It may be that the United States has more growth potential than standard models suggest. Perhaps corporate income tax cuts and looser regulation on business will unleash more capital investment and higher productivity, as conservatives argue. Maybe some of the millions of prime-age adults who have dropped out of the labor force in recent years will come back in, creating more economic potential.

“The really big question mark we have is how much slack there really is in the economy,” said Donald Marron, a scholar at the Urban Institute who was once acting director of the Congressional Budget Office. “If you look at conventional measures, unemployment looks really low, but on the other hand if you look back to what we used to think of the potential of the economy a few years ago, we may have some room to grow.”

The Long Run: Higher Debt-Service Costs and Less Room to Maneuver

The public debt was already on track to rise relative to the size of the economy before the new tax and spending deals; now it will probably rise faster. The Congressional Budget Office projected last June that the nation’s debt-to-G.D.P. ratio would rise to 91 percent in 2027, from 77 percent in 2017.

The C.B.O. hasn’t updated those numbers to reflect the new tax and spending legislation, but the Committee for a Responsible Federal Budget estimates that it will turn out to be between 99 and 109 percent, depending on whether provisions of the tax law are allowed to expire as they are scheduled to.

But those numbers are just an abstraction. The question is what effects higher debt loads might have for Americans in 2027 and beyond.

Higher debt service costs are one big one. Taxpayers in 2027 were forecast to pay $818 billion a year in interest costs even before the tax cuts and spending increases, or 2.4 percent of G.D.P. That will presumably be higher, because taxpayers will be paying interest costs on more debt, and probably at higher interest rates.

And there is probably some point at which the amount of debt the government takes on crowds out private investment; to the degree that the supply of funds to borrow is finite, every dollar the government borrows is not available to be lent to a homeowner taking out a mortgage or a business looking to expand. That said, in practice, the supply of loanable funds is not finite — households may save more with higher interest rates, for example, and foreign capital might flow in.

The bigger costs of a high national debt may come in how much flexibility policymakers have to respond to a future recession or crisis. If the United States finds itself in a major war or a deep recession, its starting point in terms of debt load will be much higher than it was at the onset of the Iraq War or the 2008 financial crisis.

“It’s about risk management,” Mr. Posen said. “We may need that fiscal capacity for something else.”

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Article source: https://www.nytimes.com/2018/02/09/upshot/the-era-of-fiscal-austerity-is-over-heres-what-big-deficits-mean-for-the-economy.html?partner=rss&emc=rss