Econofact

Monetary Policy

What Information Does the Yield Curve Yield? (UPDATED)

By Michael Klein·December 6, 2018
Fletcher School, Tufts University

The Issue:

An inverted yield curve — when interest rates on short-term Treasury bonds exceed those on longer-term Treasury bonds — has in the past proven to be an indicator of an oncoming recession. As of early December, the difference in yields between shorter- and longer-term Treasury bonds had inverted for ...

Labor Force Participation

Understanding Trends in U.S. Labor Force Participation (VIDEO)

By Karen Dynan and Jay C. Shambaugh

Economic Growth

What Explains Slow Productivity Growth in the United States? (VIDEO)

By Karen Dynan and Jay C. Shambaugh·November 25, 2018
Harvard University and George Washington University and The Hamilton Project, Brookings Institution

The Issue:

Productivity growth, a measure of how efficiently goods and services are produced and a key determinant of economic growth, has been slow in the U.S. since the early 2000s. Karen Dynan at Harvard University, Jay Shambaugh at George Washington University and The Hamilton Project at The Brookings Institution, and Eduardo Porter of The New York Times look at some of the reasons for the slowdown.

What this Means:

Productivity growth is notoriously hard to measure and to predict. But there are a few factors that could be contributing to the slowdown in the U.S. Historically, a large part of productivity growth has come from new, fast growing firms hiring workers away from older, less productive firms. With declining dynamism and fewer start-ups in the economy, this mechanism is much less pronounced today. A slowing rate of capital accumulation – as well as the fact that the education differential between generations is not growing as quickly – could also be contributing factors.

Inequality

Policy Implications from Rising Economic Inequality

By Kimberly Clausing and Hilary Hoynes·November 13, 2018
Reed College and University of California, Berkeley

The Issue:

Progressive tax policy and the social safety net play a role in mitigating inequality in the United States. However, policy has not reacted to the widening gap between rich and poor with countervailing responses in these areas. In fact, changes to the tax system and to the safety net over the past couple of decades have, in many cases, gone in the opposite direction.

The Facts:

In the previous 35 years, the United States has faced both increasing income inequality and wage stagnation for many workers. It was not always so (see chart).
On the whole, taxes and transfers make the distribution of income in the United States more equal. These policies together reduce the poverty rate by 13 percentage points for all persons and 11 percentage points for children.
But the social safety net for children has changed substantially in the past 20 years. More programs and spending have become contingent on work. As a result, an increasing share of assistance is going to children near and above the poverty threshold, while a decreasing share is directed to the poorest children living below the poverty threshold.
Similarly, the tax system reduces inequality a bit less than it did in the past: The federal tax system did less to reduce a standard measure of income inequality (the Gini coefficient) in 2013 than it did in 1980.
More recently, the Tax Cuts and Jobs Act is a clear move toward a less progressive tax system. Most economic evidence indicates that the vast majority of the benefits from these tax cuts accrue to those at the top of the distribution.
So far, the main effects of the TCJA have been large increases in deficits, which make it more difficult to fund the safety net. In addition, our high levels of debt will make it difficult for policy-makers to respond to the next recession by buttressing the safety net or cutting taxes. This could make the next recession far more painful for American workers.

What this Means:

The recent era of increasing income inequality and wage stagnation for those in the bottom two thirds of the income distribution mean that both a robust safety net and a progressive tax system are more important than ever. Unfortunately, recent policy changes have moved in the opposite direction.

Required reading

No Free Lunches: The Hard Arithmetic of Economics

by Dan Sichel

Why are Coal and Nuclear Power in Trouble?

by Stefan Koester

How Do Occupational Licensing Rules Affect the Health Care Sector?

by Kathleen Adams, Sara Markowitz and Ryan Nunn

Health Policy

Health Insurance Without the Individual Mandate: Can a Three-legged Stool Stand on Two Legs?

By Daniel Sacks and Kosali Simon·November 7, 2018
Indiana University

The Issue:

The individual mandate — a key element of the Affordable Care Act (ACA) which required that Americans obtain insurance coverage or pay a tax-based penalty — was effectively repealed with the Tax Cuts and Jobs Act of 2017. To what extent will the absence of a tax penalty lead to higher premiums and to an increase in the uninsured?

The Facts:

The ACA included three main sets of provisions to expand access to health insurance coverage through the individual market. Collectively, these provisions became known as a three-legged stool, because people believed the individual market could collapse without any one of them.
The first leg included regulations to make it easier for people with pre-existing conditions to acquire insurance. But, if as a result, healthy people have to pay the same price as unhealthy people, then they might not buy insurance coverage. Premiums might increase and coverage generosity might decline.
To avoid these problems, the ACA included a second leg of the stool: the individual mandate, which requires that Americans obtain insurance coverage or pay a tax penalty. If healthy people have to pay a penalty for going without coverage, they may be willing to be covered at a higher price than they were initially willing to pay. For 2019, the mandate penalty was set to zero by the 2017 Tax Cuts and Jobs Act, effectively repealing it.
Finally, a coverage mandate could be unfair to low income Americans, if it is difficult for them to afford insurance coverage. A third provision of the ACA addressed this concern: the premium tax credit, which offsets the cost of insurance purchased through the Health Insurance Marketplaces.
Recent economic research has examined the validity of the three-legged stool metaphor. New thinking is giving greater importance to the role of the tax credits in keeping the market functioning. For one thing, the dollar value of the premium tax credit is vastly larger than the mandate penalty. Moreover, economists have found that the premium tax credit played a much more important role than the mandate penalty in explaining the declines in the uninsured population following the passage of the ACA. And research suggests that, while a greater mandate penalty causes more people to obtain insurance coverage, the effect is not very strong.
This evidence suggests that, at current insurance premiums, mandate repeal might not have an enormous effect on coverage in the individual insurance market. Since the premium tax credit rises dollar-for-dollar with premiums, even if some people drop coverage and list prices increase, many remaining enrollees won’t actually see a premium increase, because their tax credit will rise to the cover the difference.

What this Means:

Both existing research and economic theory suggest that of the three legs of the individual market, the most important is likely the premium tax credit, and the mandate likely the least important. The individual market will most likely not completely collapse in the absence of an individual mandate, because the premium tax credit will probably shoulder most of the burden the mandate bore. However mandate repeal will have consequences, especially for relatively high income Americans, who are ineligible for premium subsidies. For subsidy-ineligible Americans — those who purchase insurance from the individual market and whose incomes are above 400 percent of the poverty line — rising premiums represent a very real increase in the cost of coverage. And rising premium tax credits also represent a cost to society, since they must be paid for by taxpayers.

Immigration Policy

Do Economists Agree on the Impact of Immigration? (VIDEO)

By Jennifer Hunt·November 2, 2018
Rutgers University

The Issue:

What impact does immigration have on the employment prospects and wages of native workers? As the political debate over immigration continues, Jennifer Hunt at Rutgers University and Eduardo Porter of the New York Times give an overview of where economists agree, and disagree on the impact of immigration in the U.S.

What this Means:

While most economists agree that immigration does not affect the overall rate of employment, or the average wage among native workers, there are winners and losers. Those who stand to lose are most often high school dropouts, who find themselves competing for similar jobs with unskilled immigrants. At the same time, immigration brings with it changes in the kind of jobs demanded by the economy, opening up new opportunities that natives can move in to more easily. But, there are transitional costs which the native-born population can face in changing jobs--and these costs are often ignored.