Financial Markets and Financial Policy
Financial Markets and Financial Policy
·February 8, 2018
The volatility in the stock market in the first week of February 2018 stands in stark contrast to unusually low volatility throughout 2017. This volatility has raised concerns about the relationship between the value of stocks and household wealth, and, more generally, what these market gyrations mean for overall economic performance.
- Stock market indices have had a long positive run since the Great Recession. Viewed in the context of this long and sustained rise, the fluctuations of the past week are modest (see chart). The percentage change in an index is a better gauge of aggregate stock market performance than the changes in the index’s level or its “points”.
- Today’s stock prices reflect what investors are willing to pay for all of the expected future dividends that a company will pay to its shareholders. Even in the absence of news about future corporate profits, share prices can rise or fall purely on the basis of what investors today are willing to pay for those profits.
- There are many potential explanations for why investors could be changing their views about stock prices. For instance, an expectation of higher interest rates might impact stock prices in part because higher interest rates will raise borrowing costs for companies and tend to slow economic growth. But while these are reasonable explanations, no one can say for sure why stock prices first fell so much on Monday, and then recovered a large part of their losses the next day.
- “Price-earnings” (P/E) ratios, one measure of how “expensive” stocks are, are high by historical standards, exceeding their values during any historical episodes other than the period just before the 1929 market crash and during the technology boom of the early 2000s. However, during the dot-com boom, before they fell back market-wide, P/E ratios reached levels that are significantly higher than what we are observing today.
Stock markets are extremely useful for allocating capital to companies with investment opportunities, and for giving households tools for investing their money. But it is important to realize that the stock market, while it serves the economy, is not the entire economy. Moderate declines in stock price indexes are not a catastrophe and do not indicate an imminent downturn or recession. While stock prices are important, the extreme level of focus on the minute-to-minute performance of the stock market comes, at least in part, because these measures are available at a minute-to-minute frequency. Other measures of economic performance, for example unemployment, inflation, and national income, are only available at lower frequency. While these measures don’t seem to provide the same visceral stimulation as watching stock prices fluctuate at high frequency, they are equally important indicators of how our economy is doing.
·January 25, 2018
The recently enacted federal tax legislation levies a tax on the endowment income of colleges and universities with large endowments.
- The endowment income tax imposes a tax of 1.4 percent of the net investment income of institutions of 500 or more full-time equivalent students with large endowments.
- The ambiguity of the bill means that it is impossible to accurately determine which colleges and universities will pay the tax now and, say, over the next decade. But, with a few assumptions, one can get an idea of 23 institutions that are at highest-risk of paying the tax (see chart). Thirteen more fall into a high risk category and an additional 17 face moderate risk. (Click here for a full listing of schools).
- One stated rationale for the law is to encourage schools to lower their prices and offer more generous aid. The affected schools’ “sticker price” of upwards of $70,000 is clearly unaffordable for many, if not most, students and their families. But the schools already have generous financial aid policies and are unlikely to reduce their sticker price as a result.
- Another plausible rationale is to generate tax revenue that can help offset tax cuts introduced elsewhere. Yet the amount of tax that is likely to be collected is small. Over the next decade, the tax would generate perhaps $3 billion in revenue. This would offset 0.2 percent of the $1.5 trillion in total recently enacted tax cuts.
- The endowment income tax, like the cap on the deductibility of state and local taxes, has disproportionate effects on institutions located in states that have voted for the Democratic candidate in recent presidential elections (“blue states”).
(This is an interactive graph. Hovering over the dots reveals institution names.)
The effects of the endowment tax remain unclear given the ambiguity in its wording. But the likely revenues raised from this tax are minuscule when considered in the context of the overall reduction in tax receipts or the size of the federal budget. Also, the tax is unlikely to affect the sticker price of a college education or to alter financial aid offered by those institutions affected by the tax. When plausible economic justifications for a change in tax policy fail, political considerations become a more credible explanation for their enactment. This seems to be the case regarding the higher education endowment income tax.
·January 23, 2018
Queens College, City University of New York
There are approximately 3 million residents of the United States who were brought here as children and whose parents do not have legal residence. About 1.6 million of these individuals meet the eligibility requirements for DACA, the Deferred Action on Childhood Arrivals, and about 800,00 of them were granted, DACA status. One argument for DACA is that it provides important economic benefits through raising labor force participation and productivity among those it protects from deportation.
- Established in 2012 by President Obama through an executive order, Deferred Action on Childhood Arrivals (DACA) allows people brought to the United States illegally as children the temporary right to live, study and work in America.
- Undocumented status contributes to lower productivity, due to mental stress and job mismatch, resulting in lower wages. More than half of DACA recipients moved to a better job, more in line with their skills, when granted DACA status. DACA also raises the proportion of DREAMers who are working. Our analysis suggests that DACA increased national income by $7,454 per employed DACA recipient. About 75 percent of this increase in income is due to productivity gains and 25 percent to increases in employment among DACA beneficiaries. Overall, this amounts to a GDP increase of $3.5 billion per year.
- Compared with permanent legal status, granting undocumented youth temporary permits reduces the incentive to stay in college due to the temporarily improved labor market outcomes, making it difficult to get back to college and graduate at a later point in time. Instead, the certainty of permanent legal status allows for better planning of long-term investments in education. In fact, the conditions stipulated in the DREAM Act raise the incentive for DREAMers to attend college by making it one of the conditions to gain lawful permanent residence.
Research shows that there are economic benefits of DACA, even though this only affords temporary status. Passing the DREAM Act would likely result in even greater benefits to the economy. By providing a path to legal permanent residence, DREAMers’ educational plans would not be distorted, as may be the case with temporary permits.
·January 22, 2018
Together, Medicaid and the Children's Health Insurance Program (CHIP) have become an integral source of health insurance for children in the United States, providing coverage for more than one in three children in 2016. While there is bipartisan support for CHIP, the funding for the program must be renewed by Congress periodically for states to continue its provision, raising uncertainty.
- Since Medicaid initially only covered children from the very poorest families, coverage rates across the income distribution had a “U” shape: the poorest children were eligible for Medicaid, and children in high-income families received coverage through a parent’s employer-sponsored coverage, while children in families with incomes between 50 and 200 percent of the poverty line had a considerably higher probability of being uninsured.
- CHIP was an effort to fill in the gap of coverage for children from low-income families who are above the income threshold that would make them eligible for Medicaid. The clear improvement in coverage rates between 1997 and 2012 provides support for the argument that CHIP, along with expansions of Medicaid, increased the health insurance rates among children (see chart).
- Research has found that children who become eligible for public insurance through expansions in Medicaid or CHIP are more likely to see a doctor at least once a year, are more likely to be in better health as teenagers and as adults if they were eligible for public insurance as young children, and have lower mortality as teens and adults.
CHIP is a key provider of health insurance for low-income children and has been an important contributor to the achievement of near-universal health insurance coverage for children in the United States. There has been a clear improvement in child well-being as result of Medicaid and CHIP. However, the renewable block-grant nature of CHIP funding leads to periods of uncertainty for families and states when the program comes due for renewal, threatening the health insurance coverage of large numbers of children. The threat of coverage losses for children arising from failure to address the program’s funding suggests that if recent policy proposals to make Medicaid a block-grant program were to be implemented, this could introduce additional periods of uncertainty and instability for children’s health care coverage.
·January 16, 2018
Harvard Kennedy School and Harvard Graduate School of Education
Employment growth in high-paying jobs has slowed since the year 2000, and this has been particularly true for jobs in science, technology, engineering and mathematics (STEM). One possible explanation is that rapid advances in artificial intelligence and robotics are making it possible for a wider range of technically demanding jobs to get automated. High-paying jobs increasingly require skills that are more difficult to automate, such as those that involve significant interpersonal interaction.
- In the 1990s, computers replaced and changed jobs requiring routine tasks such as bookkeeping and clerical work. Yet computers also made higher skilled workers more productive, leading to a “hollowing out” of the labor market and increased polarization and inequality.
- Since 2000, growth in the share of workers employed in high-skill "cognitive" occupations slowed down. I find that the changing trend is driven by a decline in the share of jobs in science, technology, engineering and mathematics — the so-called STEM fields — which shrank by a total of 0.12 percentage points as a share of the U.S. labor force between 2000 and 2012, after growing by 1.33 percentage points over the previous two decades. While the share of workers employed in some STEM occupations such as computer science and programing rose, it declined in many others such as engineering, architects, and physical scientists (see chart).
- Jobs requiring social skills have experienced strong relative employment and wage growth. Between 1980 and 2012, jobs requiring high levels of social interaction — those to the right of the vertical bar in the chart below — grew by nearly 12 percentage points as a share of the U.S. labor force. During the 1980-2012 period, wages for jobs requiring both high math and high social skills grew by 26 percent while those that required only high math skills grew only by about 5.9 percent.
Over the last three decades, jobs that combine both social and math-intensive skills have seen strong wage growth. They have also grown as a share of all U.S. jobs. In contrast, many STEM occupations that require high math skill but very little social skills have fared poorly. There is growing demand for workers who are flexible and adaptable and who are skilled at working in team-based settings. All of these skills are still difficult to automate.