Archive for the Category Supply-side economics


Where are people moving? And why?

Over at Econlog, I have a post discussing the slowdown in US population growth, to 0.6% in 2018 (the slowest growth rate since 1937.)  A WSJ article also had some interesting data on state growth rates:

Screen Shot 2018-12-20 at 7.49.53 PMThe footnote on Puerto Rico is rather striking, as its population fell by 4% last year.  That was partly due to hurricane Maria, but its population has been plunging for many years, down about 14% since 2010.  Who’s going to pay off that enormous debt, and will the last Puerto Rican please turn out the lights? Hawaii is also losing people, as are Mississippi and Louisiana.  So the “Sunbelt” phenomenon is more complex than advertised.

Other trends:

1.  Mormons have lots of kids.  The four fastest growing states are all in the top five in terms of percentage of the population that is Mormon, although only in Utah and Idaho are they numerous enough to dramatically impact population growth.  (The other top five Mormon state (Wyoming) is losing people.)

2.  Illinois has been losing about 40,000 people each year, while other Midwestern industrial states like Michigan and Ohio keep growing (albeit slowly).  What makes this surprising is that Illinois is dominated by one of the few Midwestern industrial cities to successfully reinvent itself.  Chicago has a thriving lakefront area full of high paying jobs, while Detroit, Flint, Cleveland, Akron and Dayton have languished.  This Illinois underperformance may reflect the extraordinary incompetence of the Illinois state government, which is driving the state toward a fiscal crisis.  Illinois is dominated by Cook County, which has a corrupt political culture.

3.  As recently as 2013, New York had more people than Florida.  Now Florida has 1.75 million more than New York.  Indeed 35% of US population growth now occurs in Florida and Texas.

4.  The sunny, oil-rich states that border Texas continue to do very poorly, either falling in population or growing much more slowly than the national average.  Texas probably benefits from a mixture of no state income tax, lax zoning, and business friendly regulations.  While other inland states also have cheap housing prices, Texas has cheap housing prices in big urban areas.

5.  It now seems like the lack of a state income tax doesn’t provide much gain to states without a big city, such as Alaska, Wyoming and New Hampshire.  The exception is South Dakota, which is doing modestly better than its neighbors.  In contrast, states with big cities and no state income tax (Texas, Florida, Nevada, Washington, Tennessee (on wages)) tend to grow faster than their neighbors.  I think that’s because the lack of a state income tax is especially attractive for the sort of high paid professionals that live in big cities.

6.  The recent federal tax reform will raise the effective top rate on the California state income tax from about 8% to 13.3%.  Many rich people (like me) will continue to choose California, due to its amenities.  But at the margin, a few more will make the switch to Austin or Seattle or Vegas.  California always used to grow faster than the US as a whole.  Even when whites started leaving for other states, the overall California population kept growing at a good clip due to international migration.  But now its growth rate (0.4%) has fallen below the national average.  Eventually, California may begin losing Congressional seats.

7.  Today, most of our population growth is in three areas.  The southeast (Raleigh to Miami), four big Texas metros, and the non-California west (the Denver/Seattle/Phoenix triangle.)

What are the odds that the world’s two richest guys would live in the same medium size city, in the only liberal state without a state income tax?


“Yes, we can” in a deterministic universe

If you make policy suggestions to Europeans, they’ll tell you that they can’t do that.

Consider the problems that the ECB is having raising the core inflation rate closer to 2%.

Why not do unlimited QE? — “We can’t do that”
Why not raise the inflation target? — “We can’t do that”
Why not level targeting? — “We can’t do that”

They can’t do anything that would actually work.

Consider the problem of sluggish growth.

How about injecting dynamism into France and Italy through supply-side reforms? — “We can’t do that.”

Consider the Brexit fiasco.

How about a better Brexit, say the Norway option? — “We can’t do that.”
How about another Brexit referendum? — “We can’t do that.”

There a sense in which the naysayers are right. In politics, the law of large numbers is very powerful. Things happen for a reason. Options are not chosen because there currently is not enough support for those options.

So what is to be done? One solution is to look for alternative solutions that are politically feasible. But those do not exist. For the moment, there is no hope for Europe. There is virtually no chance that Europe will snap out of its malaise in the next three days.  They won’t do any of the things that might work.

As we look further out into the future, however, things gradually become more hopeful. The longer the malaise continues, the greater the appetite for changes that currently are not politically feasible.

The solution is not to look for alternatives to sound economic policies; there are no alternatives. Fiscal stimulus will not get Europe to 2% inflation. Rather, the solution is to keep beating our heads against the wall, day after day and year after year, until the time is right for effective solutions to be adopted. NGDP targeting plus free market reforms. That’s what I’ll keep promoting. The zeitgeist determines the policy mix; there’s nothing I can do about that. The universe is deterministic. But I can affect the zeitgeist, at least a tiny bit.

You can too.

Investment bleg

Here’s Paul Krugman:

The political payoff, of course, never arrived. And the economic results have been disappointing. True, we’ve had two quarters of fairly fast economic growth, but such growth spurts are fairly common — there was a substantially bigger spurt in 2014, and hardly anyone noticed. And this growth was driven largely by consumer spending and, surprise, government spending, which wasn’t what the tax cutters promised.

Meanwhile, there’s no sign of the vast investment boom the law’s backers promised. Corporations have used the tax cut’s proceeds largely to buy back their own stock rather than to add jobs and expand capacity.

He’s right about GDP growth in 2014, but I’m not seeing data to support his claims about investment. Am I misinterpreting the investment data?

[BTW, in early 2014 Krugman thought the elimination of extended unemployment benefits would hurt employment growth.  I thought it would help.  It helped a lot.]

The Fred data site reports that both total investment and business investment are rising at a pace of about 8% per year, which is roughly 6% in real terms.  Isn’t that consistent with the corporate tax cut helping?  And job growth has been stronger than many (including me) expected, given the low rate of unemployment.  Of course it’s nothing like the miracle Trump promised when he suggested the real unemployment rate was 20% to 40% (and I expect growth to slow next year), but that’s a separate question from the issue of whether the corporate tax cut helped the economy.  The data suggest it has, unless I’m missing something.  This graph shows growth rates for business investment:

Screen Shot 2018-11-22 at 1.30.16 PMPS.  Why is Trump trying to drive down oil prices?  In the second half of this post, I showed that high oil prices now tend to boost industrial production—mostly due to fracking.  Doesn’t Trump want more industrial production?  Look at investment growth in late 2015 and 2016, when oil prices were low.

PPS.  The criticism of the Trump tax cuts that people should be making relates to the budget deficit.  But many on the left have lost credibility on that issue, and hence they tend to keep quiet.

PPPS.  Happy Thanksgiving everyone!

Growth in 2017

The 4th quarter GDP numbers were just released.  Here is how I’d summarize the data:

Growth from 2016:Q4 to 2017:Q4 = 4.4% nominal and 2.5% real

Growth from 2015:Q4 to 2016:Q4 = 3.4% nominal and 1.8% real

So what do we know about this data?

1.  Monetary policy was more expansionary during 2017.  That might explain both the increase in inflation and the increase in real growth.

2.  My hunch is that monetary policy alone does not fully explain the increase in real growth, just most of it.

3.  The rest of the increase in real growth is due to some combination of faster global growth and policy changes in the US.

Here’s my guesstimate.  Of the 0.7% rise in RGDP growth, I’d guess 0.4% was monetary stimulus (i.e faster NGDP growth), and 0.2% was global growth, 0.1% was deregulation, and o.1% was expectations of corporate tax cuts.  Yes, that adds up to 0.8%, but I think there was also a 0.1% drag on growth caused by the US approaching full employment.

I think corporate tax cuts will add about 0.2% to 0.3% to RGDP this year.

I don’t have high confidence that any of these numbers are precisely right (and the data itself may be revised), but I do think they are in the ballpark.

PS. I have a new post at Econlog pointing out that monetary policy in 2017 was nearly perfect.

PPS.  Hypermind currently forecasts 4.3% NGDP growth from 2018:Q1 to 2019:Q1.  My hunch is that it will come in just below 4%.  I’m sticking with my frequently made prediction that this will end up being  the longest expansion in US history.


Will the tax cut boost growth?

I am enough of a supply-sider to think the answer is “yes”, and enough of a realist to think the growth effects will be quite modest, maybe a couple tenths of percent per year over the next decade (mostly front-loaded).  Michael Darda recently provided a much better explanation than I can:

Our friend Scott Sumner often says “real economists don’t forecast, they infer market forecasts”. On this score, those who believe that the Tax Cut and Jobs Act will drastically ramp up growth typically point to the stock market gains YTD and then argue that a gush of capital will come flowing in as corporate tax rates fall. There are a few major problems here, in our view. First, we have had a global equity market boom in 2017, with markets in Europe and Japan up by similar magnitudes and emerging market equities up 30% YTD, outperforming the S&P 500 by 1000 bps. Surely, the TCJA cannot explain why emerging market equities are outperforming domestic equities as the latter are the ones supposedly being lifted by fiscal policy expectations. Moreover, if markets expected a “rush of capital” to come pouring into the U.S., why has the dollar basically done nothing as the tax bill’s chances of passage have become almost certain? Some argue that this is because the Fed is going to “accommodate” the tax cut, meaning that despite projections for higher deficits, they will not tighten more as a result. Well, this is very hard to square with the bond market, which shows no significant pop in real rates (which is consistent with the dollar story); hence, there is no big expected jolt to supply-side growth expectations and also very little movement in inflation breakeven spreads, which means no big expected pop to the demand side. If the tax cut were expected to be expansionary, and the Fed were expected to accommodate said tax cut, why is the yield curve continuing to flatten instead of steepening?  . . .

With all this in mind, why, you may ask, are we advancing a debt-funded tax cut at a time of near full employment, which will likely add at least an additional trillion to a net $10 trillion in cumulative deficits over the next decade (HT, Caroline Baum<>)? We do not know and no one in Congress has given a good explanation as to why.

I would add that the market forecast of the impact of new policies is the optimal forecast (pity we don’t have a RGDP futures market) and anything we observe subsequently will be less informative than the market prediction.  Recall my posts on how there is no “wait and see” with monetary policy initiatives.  You discover within 5 minutes almost everything you will ever know about the effectiveness of moves like QE.

I see the market response to the tax cut as being consistent with my view of “some effect, but modest”.  A lot like QE!