A First-Rate ERP
By David Henderson
When I was a senior economist for health and energy policy with President Reagan’s Council of Economic Advisers, I wrote parts of chapters in the 1983 and 1984 Economic Report of the President (ERP.) And so, like many former economists in that job, whether in a Republican or Democratic administration, I tend to read each year’s Economic Report carefully. I found this year’s report particularly good. (Although authors are not listed individually, I presume one of them is Joshua Rauh, a Hoover colleague who is the CEA’s Principal Chief Economist.)
I should add that I tend to judge an ERP generously. The reason is that the authors always need to pay attention to the views of their big boss, the U.S. president, and of their colleagues in other agencies of the federal government. So you won’t find this year’s Report being critical of Donald Trump’s policies on trade or immigration, two areas where he favors much more regulation and taxation than the median economist. But the economists who wrote the Report don’t blow kisses at those policies either. And in one footnote, to their credit, they take a risk by pointing out that Trump’s tariffs in 2018 and 2019 imposed a deadweight loss on the U.S. economy of 0.4 percent of GDP per year.
Where the Report’s authors can say good things about Trump’s economic policies and their effects, though, they do. And it turns out there are many good things to say: on the effects of the 2017 tax cut, deregulation, economic growth, unemployment, growth of real wages, increases in household income, and the shale oil revolution. They also have interesting sections on health insurance and health care, and on the threats to growth from too-vigorous antitrust enforcement, the opioid crisis, and housing unaffordability caused by regulation. These last I will deal with in a follow-on article.
These are the opening 3 paragraphs of my latest Hoover article, “A First-Rate Economic Report – I,” February 26, 2020.
Some fantastic data on wages and inequality:
There’s other good news for workers. Whereas the CBO had projected in 2016 that the number of jobs would increase by only 1.9 million by the end of 2019, job growth blew past that projection early. By the end of December, the number of jobs had grown by a whopping 7 million.
Why the big difference? The Report notes that the CBO had assumed that most of the job growth would be from the ranks of the officially unemployed (those who were out of work and looking for work) and little from people who were not in the labor force. But at least for the fourth quarter of 2019, the authors note, 74.2 percent of people getting jobs were those who entered the labor force rather than those previously unemployed. The other nice surprise was the unemployment rate. Whereas the CBO and the Federal Reserve had projected an unemployment rate of 4.5 percent or higher by the end of 2019, it had actually fallen by a whole percentage point more, to 3.5 percent. In 2000, the U.S. Bureau of Labor Statistics (BLS) started collecting data on job openings and compared them to the number of unemployed workers. In every month since then, up to early 2018, the number of unemployed people exceeded the number of job openings. But starting in early 2018, the relationship reversed. For the first time the number of job openings exceeded the number of people who were unemployed and, notes the Report, stayed that way for the next 20 months. A BLS news release from February 11 of this year shows that the streak has now extended to 22 months.
Because wages for workers at the low end of the wage scale have risen by a higher percentage than wages for workers at the high end, income inequality has fallen. Economists often use the Gini coefficient as a measure of income inequality: if all incomes are equal the Gini is 0; if one household has all the income, the Gini is 1. The Report mentions that the Gini coefficient has fallen, but, unfortunately, does not say by how much. A check of their source, a 2019 study by the U.S. Census Bureau, shows that it fell from 0.471 in 2017 to 0.464 in 2018, a drop of 1.5 percent.
Make sure you also read the really good news on the shale revolution and its good effects, including on CO2. I do criticize the authors’ idea that a good effect of becoming more energy independent is that there will be fewer constraints on U.S. foreign policy. There will be, but I don’t think that’s necessarily good.