13 September 2017

Americans Were Making About $500 a Month More in 2016 than in 2014 (And How Income Growth Changes Voting)

Yesterday the Census Bureau released new data on household income from 2016. There are a variety of interesting things to come out of that and one really interesting thing about how changes in income change how Americans vote. First some data.

Incomes grew at an impressive rate. Earlier in the recovery, while unemployment remained high, income growth was slow. It has been a spectacular recovery. For 83 uninterrupted months now, the economy has created a jobs. A total of 16.4 million. But the economy started from a 10% unemployment rate. As the economy continued to create jobs, detractors continued to say, "Yeah, but wage growth ..." Well when you have 8 million people still standing out in the hallway hoping for a job, there is not much pressure to raise wages. Later in the recovery, as unemployment dropped below 5%, companies had to start offering higher wages. And they have.

Across all households, median income rose 3.2% to $59,039 and average income was up 3.6% to $83,143. Since 2014, average income is up $6,360. Think about that. That work out to $530 a month in extra income. (Median income is up nearly $400 a month.) This strikes me as a big deal. Car payments, an annual vacation, eating out, paying down debt .... $400 to $500 a month extra income makes a very real difference. This is simply great news and actually unsurprising. For years I've been predicting that the first half of the 2010s would be about lowering unemployment and the second half would be about raising wages.

One other bit of great news is that we're narrowing the gap between white men and women and minorities. Everyone's income grew but the incomes of women and minorities grew at an even faster pace. Median income for all households grew 3.2% but for Hispanics it rose 4.3%, for blacks it rose 5.7% and most impressive of all, for households headed by single women, it rose 7.2%. (For those of you alarmed at an erosion of white male privilege, rest assured that while incomes of white households rose at a lower rate - 2% - it is still higher than other groups.)

In all, this income report is great news. It also suggests the possibility that income growth can predict who Americans vote for.

The data reported goes back to 1967 and I used it to analyze how changes in income change how Americans vote. Since 1967, four Republican and three Democratic presidents have taken over from the previous party. (In 1968, 1980, 2000, and 2016 Nixon, Reagan, Bush and Trump took over from Democrats and in 1976, 1992, and 2008 Carter, Clinton, and Obama took over from Republicans.)

On average, Democrats inherit a worse economy than Republicans. The three Democrats were elected in years when median income was falling an average of nearly 1%. The four Republicans were elected in years when median income was rising by 1%. A difference of 2% is a pretty big deal.

What I make that mean is that whether households are more or less inclined to vote for someone who promises a safety net depends on whether they are feeling good about their income or threatened. When incomes are shrinking, Americans are seemingly more aware of the need for government help; when incomes are growing they are less aware. Good times are bad news for politicians who promise to help you through bad times and good news for politicians who tell you that people don't need much help. If that's right, it might not have been economic woes that caused people to pull the trigger on Trump but instead people who were feeling more secure because of higher incomes.



09 September 2017

Why Kim Jong-un Isn't Giving Up His Nuclear Arms and Trump Isn't Passing Tax Reform

Kim Jong-un of North Korea is not giving up his nuclear arms. The US demanded that Libya's Gaddafi and Iraq's Hussein give up or stop weapon development programs and then later helped their enemies kill them. Kim Jong-un isn't about to trust the US and will keep his nuclear arms in order to keep the US at (nuclear) arms length. If he gives it any thought - and it seems he has - he never give up the nuclear arms that force the US to take him seriously.

Assuming that Donald Trump is as thoughtful as Kim Jong-un, he won't pass tax reform. Why? Once Republicans have that, they will do far less to resist Mueller's investigation even if that investigation leads to impeachment. Right now the GOP doesn't want to risk losing a rare instance in which they have the House, Senate, and Presidency. At least until they get their very important tax cuts.

03 September 2017

Why Even the Experts Vastly Underestimate the Impact of Trade Wars with Developed Countries


I harp on the prospect of a trade war for a host of reasons. For one thing, like the invasion of Iraq or the deregulation of financial markets that helped to set us up for the Great Recession, few people appreciate just how devastating this can be. A trade war has the potential to be as devastating as the Great Recession.

Expert economists worry about the magnitude of this. As someone who regularly works with product development teams in this and other countries, I think even they underestimate it.

A chip maker I worked with this year at a facility in Scotland represents the sort of trade reality that  a simple number like "China represents 4.4% of our trade" does not capture.

This chip company makes chips for cars - everything from the chips that help to control your air conditioner to chips used in self-driving cars. Chips in cars have become ubiquitous and every new car uses more than 100 chips. So what I'm about to describe could be multiplied by 100.

First, a single chip is designed with inputs from design and marketing people from Austin, TX, Germany, Scotland, China, India and Malaysia. Perhaps other sites I was not aware of.

Second, when the chip is physically made it literally travels around the globe in its production process. Value is added in Singapore, Austin, Tianjin, and then Kuala Lumpur.

Third, once the chip is made it still isn't a final product. For that it has to be integrated into a car. The cars it will be incorporated into are assembled in places like Bavaria, Detroit, Seoul, and Puebla.

Fourth, the cars these chips are incorporated into are not made at just one place. A tiny chip that is put into a car comes from half a dozen places. The same is true of the fuel injector, the axle, the pistons, the seat belts, etc. Final assembly just represents a final step in a series of complicated assembly steps for raw materials, intermediate products and final units that are then assembled into a car. Some variation of what I described for the single chip has occurred with most every discrete component in that car.

If you say that 4% of our trade is with China, that may naively refer to the fact that 4% of our products come from there. And that might accurately capture it but I suspect that reality is more like 8% of the value in 60% of our products have some input from China. What I believe the average person wildly underestimates and even expert economists probably somewhat underestimate is the massive complexity in product development and manufacturing and the extent to which any one finished product sitting in your garage, hand or kitchen has design inputs or parts that come from dozens of countries. One of the simplest examples of surprising complexity often used in introductory economics classes is the No. 2 pencil: at one point the lead for the graphite, the rubber for the erasure, and the wood for the pencil came from three different continents.

A trade war would disrupt millions or billions of complex product and design flows that result in the thousands or millions of products that we can buy here in the US. Even disrupting 4% of our GDP would be devastating but a ban on trade from China is likely to impact more than 4% of our GDP. (And of course China is not the only country that trades with North Korea.) If we ban trade with, say, a less developed nation like Cuba an estimate of our trade with them would probably be roughly accurate. Cuba is exporting cigars rather than complex technology made with inputs from knowledge workers scattered all around the globe. But if we ban trade with a country like China that has a complex trading pattern, the ripple effect is incredibly difficult to calculate and could quickly grow beyond casual, initial estimates.

We can only hope that Trump will be less effectual at implementing trade disruption than he was with the Repeal and Replace of Trumpcare. And given that most of Congress is less deluded about how independent we can be of other countries than Trump is, it is unlikely that a trade war will break out. That said, the probability is not zero and the probability is higher than it should be simply because so few people realize how complex are the trading patterns that define even some of our simplest products. It's good that people were outraged at Trump's comments after Charlottesville, but his ignorance there isn't going to cost millions of jobs. A trade war easily could.


01 September 2017

Progress, Sex, and the 24 Hour Workweek

About 90% of men had a job in 1900. (The Labor Force Participation Rate, or LFPR is the measure of this.)
The workweek was 60 hours.

Nearly the same percentage of men - 86% - had jobs in 1950.
The workweek was 40 hours.

Between 1900 and 1950, the workweek shortened and roughly the same percentage of men had jobs. Productivity gains translated into a shorter workweek rather than fewer jobs.

In 2017, about 63% of men have jobs.
The work week is about 34 hours.

Since 1950, productivity gains have translated into a slightly shorter workweek and a significantly smaller percentage of men with jobs.

To keep the same percentage of men employed would have meant a workweek of 24 hours instead of 34 (or 40).



Let me briefly digress onto the topic of sex.

Reading history made me deeply sympathetic to people who we would today call prudes. Pregnancy and childbirth could easily kill a woman a century ago. What people today may consider, "regular, healthy sex" could mean supporting a dozen children, a woman's life metaphorically lost to the logistics of child rearing if her life isn't first quite literally lost in the act of childbirth. To find sex alarming a century or two ago seems to me a wildly rational impulse. There was nothing casual about sex in this time, fraught as it was with sobering consequences.

The Pill - and more broadly, a variety of safe contraceptives - has changed sex. Technically speaking, given the rate at which women died in childbirth, a healthy sex life 100 years ago probably meant celibacy. Today, with contraceptives, a healthy sex life can mean sex throughout the week. Sex has been largely separated from childbirth and even when childbirth follows, it is much safer for mother and child. Casual sex is no longer an oxymoron.

The separation of sex from the natural consequence of childbirth caused a sexual revolution. For one thing, premarital sex has become fairly common in the West for the simple reason that sex no longer has to mean pregnancy. Everyone has to find and define their own morality in this time of easy contraception but the consequences of casual sex are far less dire than they were a century ago. This has forced people to rethink what they consider moral. You may have traditional or modern views on sex but whatever drives them it no longer has to be wrestling with the inevitability of childbirth.

Now let me return to the topic of work.

There was a time when 90-some percent of the population had to work simply to feed everyone. To have someone in your group slacking off could translate into starvation or malnutrition after harvest. In this period it made sense to be harsh with folks who weren't working. Today, though, productivity advances mean that we can feed everyone with just 2% of the workforce. No one is going to starve because a few guys in the corner are playing solitaire.

Technology has made it easier to be productive. We have a traditional definition of work ethic that includes - among other things - a 40 hour workweek. Technology and management enhancements have challenged that model in the same way that contraceptives have challenged notions of morality. 4 six-hour days could be to us what 5 eight-hour days were to our grandparents. Proof that we don't need everyone working 40 hours a week is that only 73% as many men are working as did in 1950. It's a fact that we don't need as many hours worked to enjoy our current level of prosperity; the question is whether we adjust to that by having fewer men work 40 hour weeks or having the same percentage of men work 24 hour weeks.

Gains in productivity, like the Pill, have challenged traditional notions of morality and ethics. You may have traditional or modern views on work but whatever drives them, it no longer has to be worry that if someone slacks off we won't have enough to eat.

If we were to lower the workweek to 24 hours, it could result in labor force participation rates of over 80% (assuming the same total number of hours worked as we do now with 63% of men working nearly 40 hour weeks).

How could this help? For one thing, it would result in a broader distribution of wages, a correction to growing income inequality. For another, people working 24 hours a week could have time to engage in creative endeavors that are high-risk and high-return. Pursuit of art, music, business startups or any of a number of efforts that are likely to fail but - should they succeed - have the potential to make the individual rich or gratified and positively change society.  More time outside of work could result in more binge watching of Netflix shows but also more socializing, exercise, startups, sex, and creativity. More people with jobs could even translate into lower incarceration rates.

Having sex need not mean facing the risk of childbirth. Cutting back on hours worked need not mean facing the risk of starvation. Progress has broken old linkages and given us choices that previous generations did not have.

What a 24 hour workweek would mean, of course, is a change in the definition of work ethic. That's not a tough thing, though. There was a time just a century ago when we thought it normal to work 6 ten-hour days. Why not change that again to 4 six-hour days? It could be fascinating to see what might happen.


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Quick acknowledgement.
One reason LFPR for men has dropped is because the LFPR for women has gone up. It might not make sense for men's LFPR to remain closer to 90% when women's LFPR has nearly doubled (rising from 32.4% in 1948 to 57.3% in 2017, roughly 70 years later). Still, the general principle of shorter workweek as a means to sustain higher LFPR holds.