Why Does the Census Matter for State and Local Governments?

By and ·March 22, 2019
McCourt School of Public Policy, Georgetown University

Why Does the Census Matter for State and Local Governments?

The Issue:

The accuracy of the census has far-reaching implications. Not only does the decennial census determine how many representatives each state can elect to the House of Representatives, but it also determines how half a trillion dollars in federal funds will be distributed to state and local governments.

The

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How Fast Did the Economy Grow Last Year?

By and ·March 5, 2019
Fletcher School, Tufts University and George Washington University and The Hamilton Project, Brookings Institution

The Issue:

There can be big differences in GDP growth depending upon whether that statistic is calculated over a given year, such as from the end of the previous year to the end of the current year, or by comparing GDP in one calendar year to GDP in the previous year. The differences in these calculations can make, and have made, a sizable difference in reports of how the economy is performing.

The Facts:

  • When reporting GDP growth in a calendar year, say 2018, one could compare GDP in 2018 to GDP in 2017. This is known as annual average or Year-to-Year (Y/Y) GDP growth. This method is accurate for what it explicitly measures, growth from one calendar year to the next calendar year, but it can be misleading about how much the economy grew in a given twelve-month period. Suppose GDP was 100 in each of the first three quarters of 2017 but then rose to 104 in the fourth quarter and stayed at 104 throughout 2018. The average GDP for 2017 is 101, the average GDP for 2018 is 104, so the Year-to-Year calculation shows that GDP growth was about 3 percent. But there was, in fact, no change in GDP during 2018 since it started the year at 104 and ended the year at 104.
  • An alternative measure using quarterly data calculates growth by considering the level of GDP in a particular quarter compared to its level one year (four quarters) earlier. In that example above, the 2018 Q4/Q4 growth rate is 0 percent since the level of GDP is 104 in both the fourth quarter of 2017 and the fourth quarter of 2018.
  • The difference between the Year-to-Year and Q4/Q4 growth calculations is particularly large when the economy has a big change in the latter quarters of a year, as was the case in 2009 (see chart). But even small divergences can have political effects. Most recently, the 2018 GDP growth rate was 2.9 percent when calculated on a Year-to-Year basis, but 3.1 percent when calculated on a Q4/Q4 basis. The difference between 2.9 percent and 3.1 percent is statistically negligible (especially since the fourth quarter data will be revised) but politically important given that the Administration had predicted GDP growth of 3 percent.  

What this Means:

The discrepancies across the two main ways of calculating GDP growth do not reflect incorrect mathematics or the distortion of statistics, it is simply a reflection that these methods can yield different results. When discussing growth that took place during a given year, it is better to use Q4/Q4 statistics if possible, but in some cases, only annual data are available. As with any statistical methodology, it is important to know the way in which differences can arise across different types of calculations, to recognize that consistency of methodology across time allows for fair comparisons, and to make sure that changes in methodology are not undertaken purely for reasons of messaging or to distort results for political gain.

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Fed Policy: Is it Time to Take Away the Punch Bowl?

By ·February 18, 2019
Williams College

The Issue:

Beginning in December 2015, as the economic recovery from the Great Recession gained traction, the Fed began gradually raising the federal funds rate. The tightening of monetary policy after a prolonged expansion is consistent with the notion that central banks should “take away the punch bowl just as the party is heating up.” But President Trump said in December 2018 that raising interest rates “…was a terrible thing to do at this time.” Is it, in fact, time to take away the punch bowl? And how spiked is it?

The Facts:

  • The Federal Reserve has a dual mandate to “promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates.” In practice, this typically involves the twelve members of the Federal Open Market Committee (FOMC) deciding to raise the federal funds rate when there are concerns about rising inflation and to lower it when there are concerns about rising unemployment and a slowing economy.  
  • While the FOMC comes to its decisions through deliberation, it turns out that the federal funds rate usually tracks an estimate of the "Taylor Rule" calculated by the Federal Reserve Bank of St. Louis. Since the beginning of 2015, the Taylor rule rate has exceeded the federal funds rate by the largest amount seen over the past 30 years. The fact that the interest rate implied by the Taylor Rule exceeds the actual federal funds rate typically would indicate that monetary policy is currently expansionary, that the punch bowl has yet to be removed.
  • But the Federal Reserve had to resort to unconventional monetary policies in the wake of the financial crisis that began in September 2008, including quantitative easing. The unwinding of these policies may mean that monetary policy is slightly tighter than what is suggested by the difference between the federal funds rate and the rate estimated by the Taylor Rule.
  • There are other sources of uncertainty about the Taylor Rule. Some economists have hypothesized that some of the estimates underlying the calculation of the Taylor Rule have changed over time. In addition, monetary policy should anticipate future developments, of course, and not just respond to current conditions. One justification for the current loose monetary policy is the uncertainty and downside risks facing both the U.S. economy and economies of other countries.

What this Means:

No mechanistic formula will ever be able to determine definitively whether monetary policy is excessively tight, given the uncertainty associated with estimates of the natural rate of interest, potential output, and the effects of the unwinding of Quantitative Easing. These caveats notwithstanding, the policy rule commonly used to evaluate the stance of monetary policy indicates that the current federal funds rate is not out of line with historical experience; if anything, the funds rate remains below where it would normally be, given current economic conditions. Concerns about an overly restrictive policy are therefore overblown — although a significant deterioration in economic conditions could change that assessment.

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Are Growing Federal Budget Deficits and Debt Cause for Concern?

By ·February 13, 2019
Brookings Institution

The Issue:

Over the next ten years, the United States is on course for routine trillion-dollar annual deficits in the federal budget and the highest debt-to-GDP ratio in its history. Beyond the next decade, large and rising projected annual deficits will push the national debt steadily upwards, reaching almost 200 percent of GDP by 2049 (up from 78 percent today) under plausible scenarios. The projections derive from rising spending on health care, Social Security, and interest payments and, as of yet, an unwillingness either to reduce such outlays or provide the revenues needed to finance them. The projections assume steady economic growth and relatively low interest rates, so they could be far worse under alternative scenarios. What are the implications?

The Facts:

  • The average full-employment deficit between 1965 and 2018 was just 2.7 percent of GDP. In contrast the full-employment deficit is projected to rise to a steady 4 percent of GDP under the CBO's current law assumptions. As the chart shows, this would be the first time in history that the U.S. maintained persistent, sizable full-employment deficits. Even worse, under our current policy assumptions, the full-employment deficit would rise to 7 percent of GDP by 2029.
  • Looking only at the next ten years gives an incomplete and overly optimistic picture of the fiscal outlook. Looking beyond 2029, we expect deficits to grow steadily as a share of the economy. If they occur as projected, the high annual federal deficits will add up, increasing the country's national debt. Debt rises from 78 percent of GDP in 2019 to 93 percent of GDP in 2029 under the CBO's "current law" projections and 106 percent under "current policy" assumptions. This would be the highest ratio in U.S. history. And it would continue to climb, rising to 193 percent under "current policy" by 2049.
  • The debt projections are different from previous high-debt episodes in U.S. history, which occurred mainly during wars or Depressions. In such episodes – the Civil War, World War I, and World War II – the debt-to-GDP ratio was cut in half roughly 10 to 15 years after the war ended. In the projections, however, the nation faces a built-in chronic imbalance between revenues and spending, due in considerable part to the aging of the population, rather than a temporary spike in spending due to a war or a temporary decline in revenue due to a Depression.

What this Means:

Not all debt is bad. When it finances government investment or anti-recession efforts, increased debt can boost the economy in the short-term and the long-term. But the debts we are accumulating do not involve these priorities. Indeed, federal investment in infrastructure and human capital is slated to decline as a share of GDP. As a result, the current level of government borrowing will likely reduce future national income. This can happen if the deficits lead to higher interest rates and crowd out future investment, reducing future production and income. But an increase in interest rates is not necessary to generate the decline in future national income. If a rise in deficits is financed by capital inflows (that are sufficiently large so that interest rates do not rise), future investment and production won’t fall, but Americans’ claims on that production will decline, as more of the proceeds of production will have to be directed to repay foreign creditors. Worse still, if we finance our current debt trajectory with capital inflows and interest rates do subsequently rise to exceed growth rates, the nation would be left with an enormous and expensive debt burden. As Keynes’s famous quote states: “The boom, not the slump, is the right time for austerity at the Treasury.” Well, this is the boom. If the future deficit path looked favorable, i.e., if our current primary deficits were thought to be temporary, the argument for simply letting them evolve would be stronger. But if policymakers do not address the fiscal imbalance now, it will only become a harder problem in the future, due both to the growing size of the problem and the increased economic costs and political difficulty of enacting spending cuts or tax increases in less favorable times. Addressing the fiscal imbalance now does not require sharp, immediate spending cuts or tax increases. Rather, the changes should be phased in over time. Nevertheless, the longer we wait to act, the larger and more disruptive the eventual policy solutions will need to be.

  • Editor's note: William G. Gale is senior fellow at the Brookings Institution and author of Fiscal Therapy: Curing America's Debt Addiction and Investing in the Future (Oxford 2019).

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    Voting and Income

    By ·February 7, 2019
    University of California, Los Angeles

    The Issue:

    Voter turnout in the United States is vastly unequal: richer people are more likely to vote than poorer people. If the poor are less likely to vote then they have a lower probability of having their interests and preferences reflected in public policy.

    The Facts:

    • Voter participation increases with family income. During the 2016 presidential election, for instance, there was a clear positive association between family income and participation in voting (see chart). The 48 percent voting participation rate for families in the lowest income category in 2016 was a bit more than half of the 86 percent rate for families in the highest income category. The ratio of differences across income groups is qualitatively similar in other election years as well.
    • The fact that higher income is associated with greater voter turnout does not necessarily mean that having a higher income causes people to be more likely to vote. It is possible that other factors that tend to be associated with higher incomes — such as higher levels of education, for instance — underlie the association between higher incomes and voter turnout.
    • One way to try to isolate the effect of higher income on voter participation is to examine what happens to voter turnout after an external change in household income. In recent work my colleagues and I examine an unexpected and permanent increase in household incomes of the Eastern Band of Cherokee Indians in North Carolina. As a result of a casino opening, these households enjoyed a windfall increase in income that was unrelated to education, disabilities, income level, marital status or the presence of children. We find that the increase in income did not have an effect on parents' voting behavior. However, there was a marked increase in the voting behavior of children from the initially poorest families once they are eligible to vote as compared to groups of other children that were otherwise similar but did not receive that windfall.

    What this Means:

    Understanding what drives the relationship between higher incomes and voting could help address this form of political inequality and, more generally, provide insight into how to increase political participation in the democratic process. We find that a cash transfer program that increases household incomes has a positive effect on the voting behaviors of children from the poorest households. This suggests that income augmentation programs that help children may have other indirect (and long-term) benefits to society in the form of increased political participation and civic engagement as adults.

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    Big-Tech and the Resurgence of Antitrust

    By and ·January 28, 2019
    Tufts University

    The Issue:

    Should antitrust policy show deference to big firms that benefit consumers through lower prices, or is there an inherent “Curse of Bigness” (as Louis Brandeis argued in 1914)? This question has taken on a new urgency with the rise of companies like Amazon, Alphabet (the parent company of Google and some of its former subsidiaries), and Facebook. There are intrinsic reasons why these tech giants are large players in their markets. Would the public benefit from breaking them up, as was done with Standard Oil over a century ago, and, more recently, with AT&T?

    The Facts:

    • A populist antipathy to concentrated business power is a long-standing American political sentiment. In this perspective, concentrated business power is bad per se even if it results in lower consumer prices. But by the 1980s, economists began to question the antipathy towards market concentration with a focus on the benefits to consumers from aggressive price cutting.
    • Industrial concentration has risen persistently, albeit modestly, since the 1980s, and this has been accompanied by a rise in corporate profits as a share of national income. Some people argue that this has contributed to rising income inequality, and rising prices in more concentrated industries.
    • Other factors can also help to explain increased concentration and profits, especially with regards to the tech giants like Amazon, Apple, Facebook and Google. In particular, network effects create positive feedback loops for large companies. These network effects are particularly prevalent for companies that offer two-sided platforms, as in the way Google brings together advertisers and consumers on its search platform.

     

    What this Means:

    The goal of antitrust policy should be that consumers enjoy the benefits of healthy market competition. There is evidence to suggest that merger policy has been too lenient in the past and future policy should be more restrictive. But competition is dulled when antitrust policy is used to address broader social problems such as the political power of large firms, privacy concerns and income inequality – and there are alternative tools that are better targeted towards these ends. Jettisoning the goal of maintaining competition to benefit consumers in an effort to address broader social aims is likely to achieve neither objective.

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