I noted a while back that the uptick in residential construction was a genuine bright spot in the economy, and one that would all else equal make one expect better GDP growth in 2013 than 2012. But just how much should we realistically expect from residential investment in driving growth?

Not much. Residential investment is only about 2.7 percent of the overall economy (as of the first quarter of 2013), so even extraordinarily fast growth in this sector would not be enough to drag the rest of the economy with it. As a demonstration, look at 2012—the most rapid growth of residential investment in the past two decades—in the figure below (which shows a rolling 4-quarter average of growth rates of residential investment since 1989).

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Here’s what we read (and watched) today:

• Austerity’s Spreadsheet Error (Part 2) (The Colbert Report)
  
• The University of Massachusetts Econ Department: How We Know Reinhart and Rogoff Were Wrong (CEPR)
• Baucus retires, a grateful nation cheers (Washington Post)
• Self-Defeating Austerity? (National Institute of Economic and Social Research)
• TCS, Infosys and Wipro abusing H-1B visa system (The Economic Times)
• 2013 Preventable Deaths: The Tragedy of 

  Workplace Fatalities (National Council for Occupational Safety and Health)

In conjunction with its April 23 quarterly earnings report, Apple issued a separate announcement that it is doubling its “capital return program” and will return $100 billion to shareholders by the end of 2015. This decision reflects the enormous size of the company’s existing cash reserve and, according to Apple’s chief financial officer, the fact that “We [Apple] continue to generate cash in excess of our needs….”

Missing from yesterday’s announcement, as well as from the last few months of discussion over what Apple should do with its cash reserve, was how those resources could also be deployed to make necessary improvements in the compensation and treatment of the workers making Apple’s products abroad, or selling its products in the United States. This neglect is unfortunate. These workers contribute directly to Apple’s enviable financial position, even though they frequently live and work under harsh conditions for meager pay. As I detailed in a previous analysis, Apple could also use its cash reserve to:

• Fulfill its promise to retroactively pay the factory workers making its products for previously uncompensated work time
• Boost the pay of the factory workers making its products to offset the reductions in excessive overtime Apple has (appropriately) helped spur
• Ensure that all the workers making its products are paid a livable wage, a step Apple is theoretically obliged to take as a member of the Fair Labor Association
• Reduce health and safety threats at the factories making its products
• Provide compensation for the labor rights violations the workers making its products have endured
• Narrow the gap between the pay of the workers at Apple stores and comparable college graduates

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Last year around this time, I wrote a blog looking at the behavior of the unemployment rate over and after the Great Recession. I found that relative to its past historical relationship with output growth, the overall unemployment rate rose too rapidly during recession and then fell too rapidly between 2011 and 2012. I then approvingly quoted Ben Bernanke, who noted: “further significant improvements in unemployment will likely require faster economic growth than we experienced during the past year.”

In last year’s blog post, I noted that going forward the historical relationship between output growth and unemployment suggested that two straight years of 2.7 percent growth would be needed to reduce unemployment by even 0.4 percentage points. The growth rate for 2012 came in well under this at 2.2 percent. And what happened to unemployment in 2012? It fell by 0.8 percentage points.

So, another year has passed where the overall unemployment rate significantly over-performed relative to most other economic aggregates. The figure below shows the two-year change in unemployment, both actual and what is predicted from a simple regression of the two-year change on the two-year difference in growth rates of actual gross domestic product versus potential gross domestic product as measured by the CBO.1 What this captures is that the economy must grow faster than underlying trend growth (or growth in potential GDP) in order for unemployment to decline. The figure confirms that the actual unemployment rate rose more rapidly than predicted during the Great Recession, but then fell more rapidly than predicted in 2011 and 2012. By the end of 2012, the actual unemployment was a nearly 1.5 percentage points below what it would have been had the simple Okun’s relationship between output growth and unemployment continued to hold.

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Here’s what our experts were reading today:

• Did a Spreadsheet Error Cost You Your Job? (Yahoo! Finance)
  
• Reinhart/Rogoff-gate isn’t the first time austerians have used bad data (Washington Post)
• Huzzah! The U.S. economy is 3 percent bigger than we thought. Thanks, George Lucas! (Washington Post)
• A Dose of Reality: Deficit-Cutting Right Now Is Extraordinarily Imprudent: Creating a Crisis Now To Forestall a Future Crisis That Is Unlikely To Come (Brad DeLong)
• Labor Force Participation and Monetary Policy in the Wake of the Great Recession (Federal Reserve Bank of Boston)

In a story headlined, “France Drowning in Rules and Regulations, critics say,” WaPo writer Edward Cody presents a caricature of a country with one of the highest standards of living in the world. Based on little more than interviews with disgruntled officials in one small town, Cody variously describes France’s regulatory regime as “strangling,” “smothering,” or “burying” the economy. For example:

“France and its southern European neighbors, such as Italy and Greece, are increasingly being buried in such norms, rules and directives. In the past two decades, the number of legal do’s and don’ts has become so great that businessmen and economists1 warn that it is smothering growth just as the continent tries to dig out of its worst slump in a generation.”

But France is not Italy or Greece, and the truth is almost the opposite of Cody’s claim that, compared with the Scandinavian countries, France discourages business. In fact, the World Bank measures the nations of the world on the ease of starting a new business, and France ranks well above all four of the Scandinavian countries. France also ranks about 80 places ahead of Europe’s economic powerhouse, Germany.

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Paul Krugman has been writing (and linking to helpful pieces) about the “missing deflation” of recent years. Despite lots of hand-wringing that activist macroeconomic policy (especially the large degree of easing done by the Federal Reserve) is laying the powder for an explosion of inflation, it’s clear that this is the wrong worry and that the extraordinary degree of economic slack actually argues that disinflation is much more likely, and is actually a problem (by the way, Ken Rogoff is totally right about this one).

But Krugman notes it’s actually a puzzle that disinflation (a reduction in the rate of price-growth) has not been ongoing and has not pushed over into outright deflation (falling prices) like in Japan. And even in Japan, prolonged economic weakness has not led to accelerating deflation, instead their deflation has been slow and steady. So what’s happening?

Krugman and others have usefully pointed to downward nominal wage rigidity as the key reason—for whatever reasons, workers seem to really not like, and employers seem to indulge their preference for, outright nominal wage cuts. Wages holding steady while inflation reduces their purchasing power? That happens—and it’s happening a lot these days. But outright nominal wage reductions are rare, and this rarity could well be providing a (useful) floor to disinflation.

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Are we spending too much on seniors and too little on kids? Many will recognize this as a classic either-or fallacy (what about tax breaks for the wealthy…?) But with Ron Brownstein, Ezra Klein and Charlie Cook all repeating the Urban Institute statistic that federal spending on seniors is nearly seven times that on children, the idea that seniors are crowding out children’s programs is catching on in Washington. Meanwhile, Urban’s estimate that state and local governments spend nine times more on kids than on seniors hasn’t gotten the same attention. Overall, it appears that government spending on seniors is roughly double (or less) that on children, though this measure includes Social Security, which is almost entirely funded through worker contributions.

Few progressives would dispute the need to spend more on children, especially low-income children. This should be the take-away from the Urban Institute’s “Kids’ Share” reports, the latest of which was published last July but is still frequently cited. Unfortunately, its findings are used mainly to justify cuts to Social Security and Medicare rather than expanding worthy kids’ programs.

Reporters love the generational warfare angle, which Urban isn’t above exploiting. The report is rife with selective comparisons to federal spending on elderly and disabled adults, as if there were only three groups of recipients of government spending and the size of the government pie was, by necessity, fixed or shrinking.

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Three quick notes on the debate over the Reinhart and Rogoff kerfuffle.

First, in their response, they move far from what has been interpreted (often with their encouragement) as the key claim of their paper—that there exists a clear, well-defined threshold for a nation’s public debt (90 percent of total gross domestic product) above which debt exerts a “secular drag on growth.” In commenting on the Herndon, Ash and Pollin (HAP) paper which demonstrates that a few improvements to the paper’s methodology (including correcting a coding error) makes this well-defined threshold disappear, Reinhart and Rogoff (R&R, hereafter) point to the HAP finding that as debt ratios rise in their sample, growth rates are slightly (and not statistically significant) lower. R&R try to cast this as somehow supportive of their own original finding. But it’s really not. Nobody has denied that there could be a statistical association between high levels of debt and slow growth—the key argument was that the causality could easily run from slow growth to higher debt ratios. What R&R claimed, and more importantly what became crucially important in fiscal policy debates, was that 90 percent was a bright line of debt that policymakers dare not flirt with. In some arenas they have been more judicious than that, but in others they wrote things like:

“…we find that very high debt levels of 90% of GDP are a long-term secular drag on economic growth.”

This 90 percent line has been hugely influential—fears of debt stabilizing at some higher ratio essentially drive the now-ubiquitous calls for aggressive 10-year deficit reduction targets.

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Over the next several days and weeks, I’ll be reviewing the provisions of the 844-page comprehensive immigration reform bill, the Border Security, Economic Opportunity, and Immigration Modernization Act, with an eye on those elements that will particularly affect the operation and outcomes of the labor market.

Let’s start with the most important provision first. Secure Borders delivers on its most important goal: granting legal status to almost all of the eleven million immigrants currently here without authorization to work. Every undocumented immigrant who came before January 2012, who passes a criminal background check and pays $500 will be given a provisional status that will allow them to work.

That single, dramatic step will change their lives for the better, improve the labor market prospects of every other legal resident with whom they compete for jobs, and free their employers from the taint and guilt of an illegal employment relationship. It won’t make these immigrants full citizens or give them the full rights of other residents of the United States, but it will remove them from the precarious status of working illegally, with the terrifying threat of discovery and deportation always hanging over their heads. They will be free to join unions, to ask for, demand, or strike for higher pay, and will be free to quit and look for a better job with another employer. The job lock and fear that keep so many of the undocumented underpaid or underemployed will end immediately.

For that, I take my hat off to the Gang of Eight.