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Saturday, June 12, 2021
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  • MUNCIE – As this pandemic hopefully winds down, it’s useful to think through the forecasts and analysis that economists got right, and what we got wrong. This is important because the U.S. has not ever been through such a deep, rapid, nearly simultaneous economic downturn. Never has our fiscal response been as rapid or comprehensive. Thus, economists have played an important and lingering role in this pandemic. I begin with what we got right. The pandemic’s effect on the economy was fast and furious. Nearly all the jobs lost during the downturn occurred before any government action to close restaurants and bars, enforce mask standards or limit gatherings. State governments responded with wildly different limitations, making it relatively easy to isolate the effect of disease and government action on the economy. Over the past several months a number of high quality studies have made clear that it was disease, not government, that delivered and sustained this recession. From the very beginning, the economics profession made it clear that fixing the economy meant ending the pandemic. 
  • MUNCIE – This month, nearly 2 million Americans will graduate from college with a bachelor’s degree. Roughly 800,000 will receive a master’s degree, and just over 200,000 will receive law, medical or doctoral degrees. Additionally, just over 1 million students will receive an associate’s degree. Some of these graduates will continue their education immediately; most of the rest will directly enter the labor force. This is an interesting time to think about what those labor markets hold for them. The unemployment rates for college graduates is unusually high right now, at 3.5%. This is somewhat expected, given we are near the tail end of a very difficult economic downturn. However, the unemployment rate for high school graduates is almost double that, at 6.9%. The unemployment rate isn’t the whole story. The labor force participation rate of college grads is 72.2%, while the rate for high school graduates only is 55.3%.
  • MUNCIE – With Mother’s Day upon us, it is time to do what any loving son and husband must, and write about that sentimental topic of labor force outcomes for women. Of course, this year we have to dwell heavily on COVID and what it means to American women. The experience of women has differed from that of men in some key respects, some better and some worse. To begin, it is useful also to set down some pretty straightforward facts. First, women engage in formal work at a lower rate than men, but it is not a spectacular difference. Men work at about a 10% higher rate than do women. Most of this is attributable to at-home childcare, which women do at higher rates than men. Second, women on average earn less than men, but nearly all of that difference is due to the choice of occupation, educational attainment and tenure on the job. None of these facts suggests there is not job discrimination; there surely is.

  • MUNCIE – Many businesses are reporting difficulty in finding workers. I hear this from business owners whose judgement I trust. I also read about it on social media, here in Indiana and around the country. These reports don’t square with the data that show very large numbers of unemployed. There are more than 130,000 fewer workers in Indiana than in February 2020. So, one would imagine there are plenty of available people to take open positions. There are a few possible explanations for the feeling that there is a labor shortage. One of the most popular arguments is that government benefits, especially the generous CARES Act supplementary unemployment payments, cause people to avoid work. That is surely true for some workers, but the notion that this is widespread is just not supported by the evidence. First, the benefits are generous, but temporary. There’s just not a lot of evidence that workers make long-term decisions about work based on short-term benefit programs.
  • MUNCIE – One feature of the past two or three decades is what economists call the polarization of labor markets. This is a fancy way of saying that we are seeing growth in high- and low-wage jobs, but a decline in middle-wage work. By any definition, the U.S. still has a large middle class, but three decades is a long time to be in decline, and there is no evidence that this trend is about to turn around. There is growing concern about this phenomenon, and much of the COVID relief and infrastructure proposals hold policies designed to bolster middle-wage jobs. Unfortunately, there’s little reason to hope that short-term spending policies will have much long-term effect on this trend. The reason for this is that the root cause of these problems is not likely to respond to direct subsidies or stimulus. Over the short run, say a few months or even a few years, an economy can experience too few jobs of one sort or another. For example, during COVID the declining demand for restaurants, hotels and recreation caused a big decline in low-wage work.
  • MUNCIE – We are now a year past the darkest days of the COVID recession. As the economy slowly begins to recover, we should recognize that Indiana has still lost six years of job creation. Total employment in Indiana is back at April 2015 levels, and there are only 1,500 more people working than we had back in the summer of 2000. This should be pretty sobering news. Still, as we ponder the pace and shape of the recovery, it is encouraging to consider what good might have come from this disaster. There are many little things we can point to. Household savings have spiked and many tens of millions of families made investment in the physical stock of their homes. As with any recession there is some of what economist Joseph Schumpeter called “creative destruction.” This is the closure of failing firms and a reallocation of their assets to more productive purposes. There are glimmers of hope on firm productivity growth, which languished over the past decade. But one of the biggest changes is a great leap forward on our use of communication technology in business, government and education.  It is hard to overstate this latter effect. A year ago, I didn’t know what Zoom was. Today, I have mastered several types of videoconferencing software and pre-recorded an entire graduate class on Open Broadcaster Software. 

  • MUNCIE – The chances are that folks learn most of what they know about economics in their late teens or 20s, in a high school or college class. It is also often the case that the person teaching that class learned most of their economics 30 or 40 years before that. So, it may easily come to pass that an adult nearing age 60 is attached to economic ideas that are really 75 years old. I am not the first to observe this. John Maynard Keynes noted that “practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.” Of course, there are abundant lessons to be had in the economic ideas of old. A person today could get on quite well in most professions knowing nothing more than economists knew about the world in 1946. Indeed, Keynes died in April of that year, and his influence lingers still today. But, as a profession, economists have come to learn more about the world in the past 75 years than in the 75 centuries before it. Some of those things have usefulness today. 
  • MUNCIE – In the coming months, the U.S. economy will appear as if it is returning to normal. That won’t really be the case, but the conversation about the economy will shift from stabilizing and relief to long-term growth. Midwesterners, particularly Hoosiers ought to be very nervous about the next decade. The last economic recovery left the region and our state in relatively worse condition than the Great Recession. There is every reason to believe the next recovery will again leave much of the Midwest farther behind the nation as a whole. The poor prognosis for the Midwest rests upon the long-term shifts, or what economists call ‘structural’ shifts, of our economy. Consumers spend a dwindling share of their earnings on goods, instead buying services such as recreation, travel, education and healthcare. That trend works against our strengths or comparative advantage. These shifting consumer preferences alter the calculus of producing goods and services. The demand for workers nationwide is overwhelmingly for college graduates. As I’ve repeated in this column, more than 8 in 10 new jobs created since 2010 went to college grads. Over the next decade, nearly all new jobs and most new wage growth will go to those workers with a four-year degree.
  • MUNCIE – On March 12, President Biden signed into law another stimulus bill to address the enormous damage done to our economy through COVID-19. There are principled arguments for and against most details of the $1.9 trillion bill. I feel Congress could’ve passed a much smaller bill, maybe half the size, and put in place an automatic second payment should the economy remain at risk through mid-summer. I’d have liked to see fewer regulations tied to spending and I’d have directed a greater share of money to poorer households, among many other concerns. I’m not alone in having these pretty reasonable objections. However, anyone arguing for a smaller stimulus must admit that one lesson of the Great Recession is the asymmetry of risk. Too little stimulus is far worse than too much. Moreover, at a time when the U.S. Treasury can borrow at a negative real interest rate, too much stimulus is a fairly low-risk affair. But, this is not a column about the stimulus, or good faith arguments about fiscal policy. Thankfully, many lawmakers are offering substantive criticisms of the bill. Still many are not, and I write today to call out the worst of the bad faith arguments. The most noxious version of anti-stimulus argument is some version of “the economy is recovering well, and this stimulus is nothing more than a bailout of badly run states.”
  • MUNCIE – With a minimum wage increase once again prominently featuring a policy debate, it seems wise to treat the issue a bit differently. Instead of outlining the positive and negative effects of a particular increase of the minimum wage, I’ll offer the best arguments for and against any minimum wage. In so doing I’ll attempt an ideological Turing test, making the arguments so clearly that a reader cannot discern my personal position. By explaining the best arguments on both sides, I hope to achieve two goals. The first is to make clear the need for compromise. The second is to maximize angry comments from readers. Wish me luck. The best argument for a minimum wage involves several labor market failures that affect low-wage workers. It begins with the fact that most low-wage workers are in a poor position to negotiate wages. They may be young, inexperienced, poorly educated or speak little English. Employers have enormous bargaining power over them in ways they do not with better skilled, better educated, more mature workers.
  • MUNCIE – Last week’s column on school funding in Indiana stirred a great deal of conversation around the state. I am glad it did, but cannot take credit for the interest. Most Hoosiers are keenly attentive to their local schools and concerned about the economic performance of their cities and towns. These issues are intimately linked, yet too few Hoosiers appreciate how fully they are connected. For example, more than one person tried to explain that we could not afford more money for schools because higher taxes would slow the economy. He was wrong. My column is not politically biased; a desire for a better economy is hardly a partisan position. I’m an economist, and insofar as I have anything useful to write about education, it is about its effect on the economy. Among the most repeatedly demonstrated facts in the social sciences is the link between educational attainment and economic performance. On average, better-educated people are more productive, which means they produce more per year in goods or services and earn a higher income. Likewise, better-educated counties are more productive and earn more income. This relationship holds for cities, states, nations and continents. This is no accident.
  • MUNCIE – The Next Level Teacher Compensation Commission released their report in mid-December. All Hoosiers should be interested in what it did and did not say about teacher pay, along with recommendations they offered. I begin with some stark observations about education finance. After adjusting for inflation, Indiana spending per student is down more than 7% since 2010, and Indiana dropped from 22nd nationally in school spending per student in 2004 to 36th by 2018. It wasn’t in the report, but school spending, as a share of Indiana’s Gross Domestic Product, dropped from 2.6% to 2.2% since 2010. That means by last year we spent roughly $1.3 billion less per year on education than we would have if we grew educational spending at the same rate as the overall economy in that same time period. The Commission figured that the actual cuts to K-12 spending works out to about $580 million per year. That is almost identical to the $600 million they claim it would take to bring teacher pay back to 2010 levels. In other words, almost 97% of the reduction in educational funding came out of teacher’s salaries. This should make clear two important facts. First, it is unlikely that there are excess savings hidden somewhere in school budgets. 
  • MUNCIE – The Next Level Teacher Compensation Commission released their report in mid-December. All Hoosiers should be interested in what it did and did not say about teacher pay, along with recommendations they offered. I begin with some stark observations about education finance.  After adjusting for inflation, Indiana spending per student is down more than 7% since 2010, and Indiana dropped from 22nd nationally in school spending per student in 2004 to 36th by 2018. It wasn’t in the report, but school spending, as a share of Indiana’s Gross Domestic Product, dropped from 2.6% to 2.2% since 2010. That means by last year we spent roughly $1.3 billion less per year on education than we would have if we grew educational spending at the same rate as the overall economy in that same time period. The Commission figured that the actual cuts to K-12 spending works out to about $580 million per year.  That is almost identical to the $600 million they claim it would take to bring teacher pay back to 2010 levels. In other words, almost 97% of the reduction in educational funding came out of teacher’s salaries. This should make clear two important facts. First, it is unlikely that there are excess savings hidden somewhere in school budgets. Second, the difficulty Hoosier schools have in recruiting teachers is not a supply-side problem. It is about pay. 
  • MUNCIE – I’ve spent several days over the past month providing economic forecasts on Zoom. In this pandemic year, I gave a forecast for the five states of the Great Lakes region and seven metro areas. This is a broad set of forecasts, but the pandemic makes the forecast easier to explain. The evidence is very clear that the disease caused a sharp, historically unprecedented decline in economic activity before any state took action to slow the virus’ spread. The states that are recovering better today are not those with the lightest government action, but those who suffered the least spread of the virus. I don’t yet know if it was government action or luck that reduced spread; that’s the work of epidemiologists. Still, the economic evidence is overwhelming. It was always the virus that caused the recession. The looming universal availability of the vaccine means that we face a potential end to the pandemic. So, the real start of the recovery is in the hands of vaccine distributors, not economic policymakers. Viewers of my forecast asked many questions, but two dominated every presentation. These were, quite predictably, concerning the size of the federal debt and the long-term consequences of COVID. These are big questions, worth answering. 
  • MUNCIE – The 2021 state legislative session is remarkable for a series of bills that limit the existing power of Indianapolis city government. One of these would remove the control of the police department from the elected mayor and city council. Another removes the city’s legal authority to provide bus rapid transit, and yet another would prevent the city from regulating the placement of 5G wireless devices. The state legislature also appears poised to override Gov. Holcomb’s veto of a city ordinance that provided extra protections for tenants. These are unusual issues for a state legislature to become involved in, but there’s more. One bill would prevent Indianapolis, or any other city, from changing its name. To be fair, that bill might be targeted at Russiaville, Toad Hop or Slab Town, not Indianapolis. Another would limit the powers of Indianapolis to undertake land-use authority within its city limits. A casual observer might conclude that some members of the General Assembly have abandoned federalism, that mainstay of conservative thought for the past 244 years. That couldn’t possibly be the explanation, though; it must be something else.
  • MUNCIE – A common belief I hear repeated often is that too many young people go to college, and that more should go into the trades where they can avoid the wasteful debt of college and still earn a good living. The problem with this argument is that the few parts that are true are largely benign, and the parts that are demonstrably false guide much of Indiana’s education policy. It is clearly true that a young person can earn a decent living in the trades or other careers that do not require a college degree. There are plenty of anecdotal examples of clever, industrious people enjoying a successful and financially secure life without a college degree. But, that is far from the typical experience. From 1992 to the end of 2019, the U.S. was a job creation engine. Among workers older than 25, we saw a cumulative growth of 39.8 million jobs. Of those, 31.7 million jobs went to workers with a bachelor’s degree or higher, and a further 11.4 million of those workers had been to college without earning a bachelor’s degree. 
  • MUNCIE – We approach a full year since the start of the COVID recession. So, it is timely to assess where the recession has turned out differently than seemed likely at the start. Some of the developments are happy, while others are not. I begin by noting that employment in Indiana fell throughout 2019. For much of the Midwest, 2019 was effectively a recession year, even if that downturn was masked by the cataclysm of COVID. However, the forces that slowed our economy in 2019 were entirely different from the COVID effects of 2020, and these forces befell a different set of people and businesses. Most economic forecasts in March and April projected the deep GDP losses in second quarter and rapid recovery in third quarter. I think these forecasts were right enough about the depth and dynamics of the COVID downturn to have been helpful for policymakers and businesses. It appears now that we’ll end 2020 with a downturn that ranks in the top five to seven worst years since the 1920s.
  • MUNCIE – The end of Mr. Trump’s presidency is a good time to review the policy landscape of the past four years. As with any president, there are successes and failures as measured against his own standards of success. The rest of us might offer judgements as well. In the case of our 45th president, I am tempted to call this the good, the bad and the ugly. I review them in order. First, the good. Mr. Trump’s successes include sweeping removal of many of Mr. Obama’s executive orders, and regulatory expansion. Regardless of your feelings about the wisdom of any of these orders, Mr. Trump demonstrated the fleeting nature of non-legislative policy maneuvers. Of course, these are likely to disappear in the coming weeks as well. Mr. Trump successfully attacked ISIS, and dismantled a deeply flawed Iranian nuclear deal. He also attacked individual Iranian terrorists, sending a stark message to that regime. His policies led to a modest improvement of relations between nations in the Middle East who fear the spread of Iranian terror.
  • MUNCIE – The essential basis of an economy is trust. As the founding father of economics, Adam Smith noted, an economy “. . . can seldom flourish in any state in which there is not a certain degree of confidence in the justice of government.” Our modern world subsists almost wholly on a high degree of trust in the justice and capacity of government, business and households. Thus, among the many crimes committed by the insurrectionists of Jan. 6, 2021, was a full-fledged attack on the American economy. It was an assault upon the ‘confidence in the justice of government’ not only by a few tens of thousands of protestors, but among far too many elected officials, including members of Congress and the president. It is they who must reckon with an event whose lawlessness demands terse retelling. On Jan. 6, our Congress and vice president met to fulfill a solemn, if mostly symbolic, constitutional duty to certify election results from states. Outside, on the streets of our Capitol, the president caused to assemble a crowd of many tens of thousands. This angry crowd was fueled by dozens of political groups and members of Congress. These people had been carefully groomed for weeks to believe the Big Lie, that the 2020 election was fraudulent or stolen.
  • MUNCIE – The holidays are an indulgent time, so I spoil myself here with a bit of political economy. By way of background, I think it is now obvious that significant changes to our economy have wreaked havoc with our political coalitions. While this itself isn’t necessarily a bad development, it is something we will reckon with for years to come, so deserves some reflection. I’ll focus primarily on the conservative coalition, because it experiences the most disruption. To be a conservative in America means something different than it does anywhere else. The differences are so profound that what we call conservatism is referred to in Europe as classical-liberalism. The reason for this is simple. Those ideals American conservatives wish to preserve remain the most radical in history. Their essence lies in that one sentence George Orwell said could not be translated into newspeak. It begins, “We hold these truths to be self-evident . . .” Even today, it is radical to believe we must be equal before the law, free to think, worship and speak as we wish and that governments exist to protect individual rights that transcend human design. The American conservative movement has long held these ideas as central to their philosophy. I am unabashedly that kind of conservative.
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  • Mayor McDermott eyes challenge to Sen. Young
    "To me, when we are attacked, our nation's capital is attacked — it was — and the Republican Party is refusing to even open an investigation into it, it's a disgrace. It's about loyalty to our country, and I think that's missing right now in America. I'm troubled by where we are in America. I think that people like Todd Young should have been pulling people together and trying to work across the aisle, and I don't really see that. And Sen. Young knows better. He knows what the right thing to do about the Jan. 6 insurrection is. He knows what the right thing to do is, he knows what the political thing to do is, and he chose political. And it's not a patriotic vote." - Hammond Mayor Thomas McDermott Jr., on his "Left of Center" podcast saying he is considering a challenge to U.S. Sen. Todd Young in 2022 McDermott is a five-term mayor and also a former Lake County Democratic chairman. He lost a 1st CD primary race to U.S. Rep. Frank Mrvan in 2020.
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