In a hearing last week, an exchange between Rep. Katie Porter (D-CA) and JPMorgan’s CEO Jamie Dimon caught my eye. Dimon was touting the bank’s new minimum wage of $16.50, increasing to $18 in high-cost areas, for entry level workers, often fresh out of high-school. That’s a decent minimum wage, above the $15 that most progressive plans call for (and those proposals typically include a phase-in of numerous years). According to recent EPI analysis, $16.50 is well north of the national 40th percentile wage of just under $15.
To be clear, I’m not suggesting the highly profitable bank—market cap about $380 billion; Dimon made over $30 million last year—is fairly compensating its entry-level workers (Dimon says such workers tend to just out of high school). My point is an empirical one: given the nation’s wage structure, its (ridiculously low) federal minimum wage of $7.25, and the weak bargaining clout of low-wage workers, especially those without a college degree, a minimum/entry-level wage of $16.50 is actually pretty high.
Rep. Porter, however, pointed out that in pretty much any part of America you choose, a single mom with one child can’t make ends meet on that wage. She’s unquestionably correct, as she demonstrated after the hearing in this tweet (full disclosure: I’ve met Rep. Porter; she’s all that and a big bag of chips; whip-smart, data-driven…one of those new members with just the right recipe of heart, brain, conviction, analytics, etc…).
You can read more about their exchange here, but it led me to ask why is the US wage structure so insufficient and what can we do about it? It’s a question that all of us should have at the top of our minds when listening to the proposals from those who would lead the nation.
What can we do about this mismatch between earnings and needs?
One answer is to work on two tracks, near-term and long-term. In the near term, we need robust wage supports in the form of fully refundable tax credits (i.e., you get the whether or not you owe any taxes), along with other work supports, including child care, health care, and housing.
Over the longer haul we must correct structural imbalances that have, over at least the last 40 years, reduced any bargaining clout for workers relative to employers. The power shift is a function of many forces, including the decline of unions and collective bargaining, but it also relates to the way we’ve handled globalization, the rise of hands-off economics, specifically the notion that progressive interventions are anti-growth (a line of thought that’s led to supply-side policies like cutting taxes for the rich and benefits for the poor), austere fiscal policy, and the many other aspects of what is often labeled the “rigged economy.”
It is, however, easy to write “correct a structural imbalance” and much, much harder to do so. This new piece by the Roosevelt Institute offers a resonant diagnosis and prescription to this structural power imbalance, but it took a long time to get here. Moreover, our uniquely toxic money-in-politics problem has allowed the narrow group of big winners to worm their way into entrenched power. It will take time, energy, resources, and commitment to reduce their hold. Derigging the economy is the right goal, but it’s one that’s going to take time and, relative to many of my fellow progressives, I’m less certain of the political support for this project. That doesn’t make it any less urgent, but it does raise the bar we must clear.
Which brings me to a more immediate solution to the problem Porter raised. It comes in the form of a bill introduced last week by four D senators (Brown, Bennet, Durbin, and Wyden), and given the forces swirling around that I just described, it’s a proposal that hits a sweet spot, accomplishing ambitious, long-held progressive goals in a way that is inviting to more moderate Democrats (at this moment, 46 Senate Democrats have signed on).
I’m talking about the Working Families Tax Relief Act (WFTRA), a proposal designed to raise the incomes of low-income and working-class households, with and without kids, by expanding two existing tax credits: the Earned Income and Child tax credits (EITC and CTC). For details, see here, but according to analysis by colleagues of mine at the Center on Budget and Policy Priorities (CBPP), a group with deep expertise on these types of tax credits, the bill would raise the incomes of 46 million low and moderate-income households, more than a third of American households. While it wouldn’t close the whole gap shown in Porter’s tweet, it would close part of it.
In contrast to the regressively targeted Trump tax cuts, this bill would lift 29 million people, including 11 million kids, above or closer to the poverty line, lowering the child poverty rate from 15 percent to 11 percent. Its CTC changes would raise the incomes of families with over 40 million children, lifting 1.3 million children out of deep poverty (income below half the poverty line, or about $10,000 for a single parent with two kids), and thereby reducing the deep child poverty rate from 5 percent to 3 percent.
To put all these percentages in a more concrete context, consider some of CBPPs examples of the bill’s impact of the incomes of some families playing by the rules, doing their best to makes ends meet in corners of our labor market where, even at low unemployment, wages are just too low.
Consider a mom with two kids, 4 and 7, who makes $20,000 as a home health aide. WFTRA would raise her CTC by $2,210 and her EITC by about $1,460, for a combined gain of about $3,670. For a married couple where one spouse makes a more moderate income of $45,000 and the other cares for their two young children, their EITC/CTC goes up by $3,460.
Low-income workers without kids get very little from the current EITC, and, in fact, can be taxed into poverty. CBPP looks at the case of a full-time, fast-food worker paid the federal minimum wage. She earns $14,500 and pays more than $1,250 in combined federal income and employee-side payroll taxes. As a result, CBPP points out, “the tax code pushes her below the poverty line. The bill would increase her EITC by about $1,530, so she would no longer be taxed into poverty.”
The WFTRA accomplishes these goals mostly by tweaking the parameters and eligibility standards of the two existing credits it expands (importantly, given how much families with very young kids need the money, it adds an addition credit for families with kids under 6). The fact that it builds off successful, existing programs that maintain some bipartisan support is a strong selling point and probably responsible for all those Senate sponsors.
I reiterate that when it comes to pushing back on decades of inequality and much weakened bargaining power of lower paid workers, it’s critical to think big and outside the box. Progressives have welcomed calls for universal coverage, Sen. Warren’s wealth tax, and Sen. Bennet and Brown’s proposal for a child allowance of the type that exists in most other social democracies. But WFTRA adds real and much needed progressivity to our tax code, and it does so in a way that gets a sign-on from both Senator Elizabeth Warren, a highly progressive Democrat from Massachusetts, and Senator Manchin, a moderate from West Virginia.
Still, the structure of the WFTRA is insufficient for some on the left. Matt Bruenig objects to the phasing in of benefits with earnings, as this approach provides more help to higher earning families. Fair point, but one that undervalues WFTRA’s proposed change to the CTC which goes the other way: it’s fully refundable even to families with no earnings. In fact, families with incomes so low that they get nothing under the current CTC would come away with a few thousand under WFTRA ($6,000 if they had 2 kids under 6 and no earnings), giving it characteristics of the more progressive child allowance. Bruenig also implicitly assumes something about which I’m skeptical: that there’s political support for delinking the highly effective, bipartisan-supported EITC, from work.
In sum, the pursuit of economic justice requires us to work on various tracts. The overarching goal of derigging the economy and righting structural imbalances require new rules of the road, trade agreements forged by workers, not just investors, big changes to anti-trust, corporate governance, patents, and labor standards. We must run full employment economies so there’s pressure on the private sector to create jobs and raise wages. We must raise worker relative to corporate power. And we must recognize that even at full employment, markets still won’t solve the problems of poverty, racial discrimination, and unequal opportunity, thus requiring a progressive tax and transfer system.
The WFTRA offers what looks to me like a timely, politically viable answer to that last part.
Good changes: I continue to recover from the brain hemorrhage I sustained on March 23. Today’s my first meds-free day and I’ve been blessedly headache free. Thanks again for the outpouring of support–it’s been really uplifting.
Neutral Changes: As I slowly rev up Ye Olde Analysis Shoppe, I found the figure below (by GS fiscal analyst Alec Phillips) to be worth a close look. It underscores a point that even seasoned budget analysts sometimes miss: the role of fiscal impulse.
One of the more important policy-driven determinants of near-term US growth is under debate right now: setting discretionary spending levels for 2020/21. Because of 2011 legislation that set caps for such spending, avoiding a sharp drop requires Congress to pass a bill approving spending above the caps. They’ve done so numerous times before and, while there’s a lot of squabbling going on about this both within and between the parties, it’s likely they’ll bust the caps again.
The point I wanted to underscore here is even were Congress to agree to keep the levels of discretionary spending stable over the next few years, the impact will be a fading of fiscal stimulus on real GDP growth, as the lines at the end of the figure below reveal. That’s because when it comes to fiscal impulse, it’s not the level that matters. It’s the change.
The last deal–the one that determined spending in 2018/19–went both well above the caps but, more important from an impulse perspective, went well above prior agreements. As far as I can suss out about what’s on the table in terms of the next round of spending, we’re unlikely to see numbers higher than the 18/19 deal (around $300 bill above the caps). Thus, Phillip’s projection of the fiscal impulse going forward under various scenarios if flat next year. Roughly speaking, that’s one reason to expect 2020 growth to be closer to 2 percent than 3 percent.
Source: Alec Phillips, GS Research
I don’t think the negative impulse forecasts from the WH or sequestration (“no caps deal”) are likely. And the House D’s line may get nudged up a bit based on proposals by the Progressive Caucus. But the larger point is that when you read analyses suggesting that these spending levels won’t drop, that doesn’t mean their impact on growth won’t drop. In fact, it will, as positive fiscal impulse downshifts to neutral.
As some of you know, on March 23 I had a brain hemorrhage, technically known as a subarachnoid hemorrhage. This is a very serious condition, often fatal or disabling.
But I appear to have been very lucky. After spending nine days in the ICU at Fairfax Hospital, I was discharged and am now recovering at home. The recovery period is likely to take quite a while, with good days and bad days. It could be a matter of months before I’m back to some version of my pre-hemorrhage self.
I’ve benefited immensely from a tremendous outpouring of love and support from family, friends and colleagues, for which I am enormously grateful. I’ve also benefited from excellent medical care.
I’m not sure when I’ll be posting or writing about the economy, but I plan to do so as soon as I am able.
Like everyone else who knew him, I’m in shock and despair over news of the death of the economist Alan Krueger. Alan was the best kind of colleague: always inquisitive, incredibly rigorous about what constituted facts and evidence in economics, and willing and able to talk about his work in ways that made sense to anyone who would listen.
I admired everything about Alan, but a few things stand out. He taught us a lot about creativity. Like the rest of us, he crunched numbers that were available from the usual sources. But he didn’t stop there. He believed that if you want to know the answer to something, sometimes you have to go out and get the data yourself, something very few economists do.
I can’t be the only one who’s been in meetings with Alan, scratching our heads about some policy outcome, only to have him show up at the next meeting with a survey he somehow fielded with the answer to the question.
It was this creativity that led to his path-breaking, minimum-wage work with David Card. Their book, Myth and Measurement, stands as one of the most muscular treatises not just on the facts of minimum wages–a national debate, btw, that Alan and David totally altered, to the benefit of millions of low-wage workers and their families (and how many of us can say that?…). The book is a shining example, one I’ve tried to emulate my own work, of how to test an economic assumption that everyone believes, but is wrong.
With his brain power, he could have been high-handed and haughty, but he was anything but. To the contrary, he went out of his way to be a kind and empathetic friend. Once, when we worked together in the Obama administration, a prominent Democrat publicly distanced himself from some something I’d written. Before I’d even heard about it, I got a sympathetic note from Alan reminding me that politics is one thing, but we don’t throw our friends under the bus (his words, which I remember to this day).
I simply can’t believe he’s not there for me to shoot an email off to, asking him some gnarly question that he typically answered for me in a clarifying sentence that completely unwound my confusion. Then, with that out of the way, we’d gossip a bit.
A terribly sad day…a huge loss. All any of us can take solace in is how lucky we are to have known him.
Got a late start this AM, so just highlights for now, with more analysis to come.
Payrolls rose a mere 20K last month, a huge downside outlier given the recent trends as shown below in our monthly smoother. The average over the past 3-months of 186K is a much more reliable take on the current underlying pace of job growth. Consider, for example, that payroll jobs were up 311K last month, a value well above trend. So, at least for now, consider this downside miss payback for last month’s huge upside.
Of course, the 20K could be harbinger of a downshifting in the pace of payroll job growth. Such a downshift–though not of that magnitude–is not unexpected given a number of facts: job growth slows as we close in on full capacity in the labor market; US GDP is slowing as fiscal stimulus fades (the tax cuts were a sugar high; not a trickle-down miracle); global growth has slowed; the trade deficit–a drag on growth–has increased in recent quarters.
But one month does not a new trend make and it is too soon to tell whether a new trend is underway.
Then there’s the Household Survey
The survey of households, from which the jobless rate is derived, is telling a different story, one more consistent with the trend conditions in the job market (some of these results are bounceback from January’s gov’t shutdown). The unemployment rate ticked down to 3.8 percent and not because people left the labor market (the participation rate was unchanged) but because the unemployed got jobs (employment rose 255,000 in this survey). There was a large, shutdown-related reversal in involuntary part-time work; unemployment for high-school dropouts hit a near-all-time low of 5.3 percent (it was 5 percent last July), suggesting robust labor demand in the low-wage labor market (a key theme of my work in this area is the extent to which persistently tight labor markets help the least advantaged); and the broader underemployment measure (U-6) also fell to a cyclical low of 7.3 percent.
Finally, decent wage growth, nominal and real
The figures show annual changes in nominal hourly wages for all private-sector workers and for the 80 percent who are production, non-supervisors (think “middle-wage workers”), with 6-month moving averages. The story here is that after being stuck at 2.5 percent for a patch around 2017, the tighter job market began to deliver more bargaining power to wage earners, and firms have had to bid wages up, such that hourly pay is now rising about a point faster than it was back then.
Because topline inflation has been held back by low energy prices, the next figure shows a beneficent collision between faster nominal pay and slower price growth, the difference being real earnings growth. I estimate that the CPI for February rose 1.6 percent. If I’m right, real hourly pay for middle-wage workers is up almost 2 percent, a solid pace for real wages that will boost the buying power of working households.
I’m going to jump for now but will be back soon with some compelling figures (if one can say so ones self) showing how low unemployment is boosting wage growth, but faster wage growth is not juicing price growth.
The 2017 Trump tax cut committed at least two fiscal sins. By delivering most of its cuts to those at the top of the wealth scale, it worsened our already high-levels of pretax inequalities. And in so doing, it robs the Treasury of much needed revenues; based on our aging population, we’re going to need more, not less, revenues for the next few years.
Now, along comes an idea that pushes back against both of these problems (and one other one!): a small tax on financial transactions (FTT). Sen. Schatz (D-HI) and Cong. DeFazio (D-OR) are planning to introduce a tax of one-tenth-of-one-percent, or 10 basis points (100 basis points, or bps, equals 1 percentage point), on securities trades, including stocks, bonds, and derivatives, one that would raise $777 billion over 10 years (0.3 percent of cumulative GDP a decade), according to CBO (by the way, 10 bps on a $1,000 trade comes to a dollar).
Numerousarticles have gotten into the arguments for and against an FTT. I’ve got one from a few years back that covers similar ground. My colleague Dean Baker has long argued on behalf of FTTs as has Sarah Anderson of IPS. Importantly, FTTs exist in various countries, including the UK and France, with Germany considering the tax (also, Brazil, India, South Korea, and Argentina). The UK is a particularly germane example, where an FTT has long co-existed with London’s vibrant, global financial market (though we’ll see if Brexit changes that).
In fact, we have an FTT here too! The SEC funds its operating budget through a tiny FTT of 0.23 basis points on securities transactions and $0.0042 per transaction for futures trades.
The pro-FTT argument focuses on the reversing the two fiscal sins noted above, along with raising the cost of high-frequency trading. In a Vox interview, Sen. Schatz was particularly motivated by this latter aspect of the tax: “High-frequency trading is a real risk to the system, and it screws regular people; that’s the main reason to do this. If in the process of solving that problem we happen to generate revenue for public services, that’s an important benefit, but that’s not the main reason to pass this into law.”
Because the value of the stock holdings is highly skewed toward the wealthy, the FTT is highly progressive: The TPC estimates that 40 percent of the cost of the tax falls on the top 1 percent (which makes sense as they hold about 40 percent of the value of the stock market and 40 percent of national wealth).
Finally, on the pro-side, there’s a certain justice in taxing the pumped-up transactions of a financial sector that not only played a key role in inflating the housing bubble that led to the Great Recession, but thanks to government bailouts, recovered from it well before the median household. In this expansion, corporate profits and the securities markets that rise and fall on such profitability have mostly boomed while workers’ wages have only recently caught a bit of a buzz.
So, as my grandma used to say, “What’s not to like?”
Opponents raise numerous concerns, some of which should be taken more seriously than others. The high-speed traders correctly note that even a small FTT would upend their business model. Unlike most such squawking of those effected by tax proposals, in this case I suspect they’re right. While a dollar on a $1,000 trade doesn’t sound like much, when your industry is running 4 billion trades a day, 10 bps can be a prohibitive increase in the cost of transactions.
But again, on this point, opponents and advocates agree. We just have different goals. Someone could make an argument that high-frequency trading improves capital allocation, but it would be a steep, uphill argument.
The more serious objection is that the FTT catches more than just the “flash boys” in its net, raising transaction costs for plain vanilla traders. This is, by definition, true, and because of this effect, FTTs tend to reduce trading volumes. But too often, opponents stop there, as if this is some sort of coup de grace for the tax.
That’s only the case, however, if current trading volumes are somehow optimal, or if diminished volumes create markets that are too thin to reveal price signals to buyers and sellers. But in markets where half the daily trades are high frequency, reduced volume does not necessarily translate into reduced liquidity or dampened price signaling. There’s such a thing, it turns out, as too much volume (you’ve heard heavy metal, right?).
In fact, work by economists Thomas Philipon and Rajiv Sethi have documented ways in which something unusual has occurred. As transaction costs have fallen—quite dramatically, given the rise of electronic trading and its diminished marginal transaction costs—financial markets have not become more efficient. One reason is that falling transaction costs have been offset by higher “intermediation costs,” meaning the incomes of the brokers and dealers in the industry (Sethi provides compelling examples of “superfluous financial intermediation”).
It is therefore plausible, as Sen. Schatz believes, that an FTT will reduce “rent seeking” in the finance sector (economese for excess profits beyond those they’d get under normal, competitive conditions), unproductive financial “innovation,” and speculative bubbles.
But it is also possible that both assets and trading volumes will be more negatively affected than I and other advocates of the tax believe to be the case. Design issues can help here. Sweden’s FTT worked badly as it was set at a high rate but with a relatively narrow base, so avoidance was rampant. The Schatz/DeFazio bill avoids this pitfall with a low rate and a broad base. It’s notable in this regard that the CBOs revenue estimate of a plan upon which the new proposal is modeled includes the budget office’s guesstimates of these dynamic responses (e.g., reduced volumes), and it still raises serious revenues.
Given the uncertainty, here’s what I think should guide our thinking regarding an FTT. First, there is no perfect tax. In every case, you can come up with stories, some of which will be true (most of which will be hugely exaggerated) about some person or sector who is going to get hurt. In this case, the tax is small and there’s a plausible argument that its sectoral impact could be benign or useful. Second, we need the revenues. Third, we need the progressivity.
In other words, if the Trump tax cuts committed fiscal and distributional sins, the FTT looks potentially corrective and meritorious. I’d say it’s time we give it a Schat(z).
Just a quick comment on this recent NYT piece that scratches its head about an ongoing, simultaneous rally in both stock and bond prices. “Stock and bond prices are not supposed to rise and fall in tandem,” claims the writer.
Consider the grid below. I don’t have the relative frequencies for each box but I’ve seen them, and while the boxes on the diagonal get fewer hits than the others, my recollection is that periods with price movements in those boxes isn’t that unusual (bond yields move inversely to their prices). But correct me if I’m wrong about that.
The Times piece focuses on the upper left box. In the near term, being there is largely a function of the Fed deciding to pause, mixed with an argument between stock and bond investors. The former expect at least trend growth (maybe not 3% real GDP, but at least 2%), solid corporate profitability, and perhaps even a truce in the trade war with China (Trump’s weekend decision to suspend the start date of higher Chinese tariffs is a point for this team). The latter are more focused on predictions of slower GDP growth; e.g., they may be looking at the Atlanta Fed’s GDPNow estimate for Q4 of 1.4%. And, of course, many of these investors are the same person, buying bonds as a hedge in case the equity market loses this argument.
The next box over (B+, S-) typically signals weak expected growth, leading to an equity sell off and flight to the safety of bonds.
B-, S+, conversely, implies positive growth news (flight from safety), and the other diagonal (B-,S-), implies a Fed that’s more hawkish than it should be from the markets perspective. Equity markets, in particular, have come to disdain a hawkish Fed, in no small part because it is, in recent years, a very unfamiliar creature to them.
One thought I had about this has to do with the intersection of the upper-left box (B+, S+), “secular stagnation” (the notion that without monetary or fiscal stimulus, economies won’t achieve their potential in expansions), and inequality. In a piece I’ve got in today’s WaPo, I note that it took just a pretty small increase in the Fed funds rate and the forthcoming withdrawal of fiscal stimulus (along with a bunch of other stuff, of course, but there’s always other stuff) to significantly downgrade expectations about the strength on the U.S. economy. As I wrote, we’re too much like a bike that cruises along at a decent clip until it hits the slightest hill, and then, without a push, starts to wobble.
Even at low growth, however, corporate profitability has remained solid and boosted equity markets. This, in turn, is a symptom of the weak bargaining clout of labor such that even at low unemployment, workers have a harder time than they should claiming more of the growth they’re helping to generate (to be clear, we’ve definitely started to see some real wage gains; the pressure of full employment still works!). And that’s just another way of talking about inequality.
So, I wonder if part of what we’re seeing when we see a bullish stock market amidst a low, falling bond yields is not just an argument between equities and fixed incomes about the near-term data flow, but a longer-term debate about structurally slow growth and high inequality.
Readers know I’m a huge booster of the impact of low unemployment rates on wage gains, especially for middle and low-wage workers. This dynamic is alive and well in current data and those of us on team Full Employment should elevate and tout it!
But, when it comes to real wage gains in “high frequency data,” which have been notable of late–as in, beating productivity growth–it’s important to also parse out the role of low energy prices.
The most recent CPI report showed a low topline inflation rate of 1.6 percent over the past 12 months (core CPI inflation rose 2.2 percent). The main factor pushing down on price growth was energy, down 5 percent, with gas prices (a sub-category of energy), down 10 percent.
In my recent write-ups of the jobs and other reports with wage info, I’ve mentioned the role of low energy prices in real wage growth, but here I’d like to formalize the analysis a bit to try to get a more accurate feel of the importance of this factor.
The first figure below shows recent trends in real hourly wages of mid-level workers (the production, non-sup series from the Establishment survey) deflated by both the topline CPI and CPI less energy. Of course, given volatile energy prices, wages deflated by the sans-energy deflator are smoother and have been gradually climbing since 2015, hitting 1.3 percent last month. The other series hit 1.8 percent, suggesting the difference–0.5 percent–is due to low energy prices.
REAL WAGE GROWTH, YR/YR, DEFLATE BY CPI AND CPI-SANS-ENERGY
How important is this energy-price effect? Well, a year ago, real wage growth for this series was 0.4 percent, meaning real growth has accelerated by 1.4 percent. But back then, rising energy prices were pushing the other way, i.e., slightly crimping real wage growth. Thus, the change in the energy effect–the difference in difference between the values in the two series above over the past year–is 0.8 percent. That means that 56 percent of the acceleration in real wages over the past year is due to falling energy prices. (See note for details)
That’s a sizable impact, but look back at 2015 to see even bigger effects. In Jan, 2015, energy prices were 20 percent below their year-ago level. That month, real wages were up a strong 2.2 percent, and acceleration of 1.5 percent over their year-ago level. The energy price effect more than explains that change.
Such findings do not undercut the longer-term full employment/wage growth connection, as both nominal and real gains are correlated with tighter job markets (I’ve argued non-linearities are in play but others find that not to be the case). Note, again, the smooth acceleration in real wages since 2015 using the non-energy deflator in the figure above.
But they’re also a reminder of the important role of energy prices in near-term, real wage trends. For what it’s worth, which isn’t a lot, the general consensus is that oil prices, while not expected to fall further, should stay roughly around where they are going forward, as strong global supply meets middling demand. However, there are some noises about OPEC constraining supply, so stay tuned.
Data note: What I’m calling the “energy effect” here is: d_rw_c – d_rw_ne, where the first term is the 12 month log change in the real wage deflated by the top line CPI and the second term is the 12 month log change in the real wage deflated by the CPI less energy. The acceleration calculations first difference d_rw_c and d_rw_ne with their values one year ago and then difference those differences to get the change in the energy effect.
I remember when foreign ownership of U.S. government debt amounted to very little, as shown on the left end of the figure below (the share of total publicly held debt owned by foreigners).
Source: US Treasury
I next remember that this share was growing rapidly, closing in on half about a decade ago. What I didn’t know was that the share has been falling back a bit. In fact, it’s about 10 percentage points off of its peak.
I discovered this because I went to look at the data as part of the broader conversation I’ve been engaged in regarding the lack of attention to and concern about our growing fiscal imbalances, an unusual dynamic what with the economy closing in on full employment.
In the course of that conversation, some have raised the concern that because a significant share of our debt is held be foreign investors, we face risks that were not invoked in earlier decades.
There’s the “sudden stop” scenario that’s been deeply damaging to emerging economies, when foreign inflows quickly shut down, slamming the currency and forcing painful interest rate hikes.
There’s a less pressing but still concerning risk that foreign investors’ demand for US debt would fall at a time like the present, when the Treasury needs to borrow aggressively to finance our obligations in the face of large tax cuts and deficit spending. That scenario could lead to “crowd out,” as public debt competes with private debt for scarce funds, pushing up yields.
At the very least, it leads to more national income leaking out in debt service than when those shares in the figure were lower.
How serious are these concerns?
In contemplating this question, I see the WSJ has an interesting piece out this AM on this very question. One factor in play they note is that China’s share of our sovereign debt has fallen by half, from 14 to 7 percent. That reflects both China’s decline in dollar reserve holdings, and more internal investment. Also, the piece notes the role of the stronger dollar and the resulting increased price of holding dollar assets.
But the key point re our own debt and rate dynamics is this one:
“Deficit hawks have suggested government bond yields could jump if foreign investors shed their holdings of U.S. debt, which in turn could push up the cost of other debt throughout the economy, such as mortgages and business loans. Those warnings haven’t come to pass.”
The fact that Treasury yields remain low confirms that part of the story. Also, as Krugman and others have maintained, it just doesn’t make a ton of sense that countries with large dollar holdings would undertake actions, like dumping US debt, to debase their holdings. And, if they did, the cheaper dollar would make our exports more competitive.
So, while I worry more about our weird, upside-down fiscal stance right now than most progressives, the declining trend at the end of the figure above doesn’t give me too much pause.