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This was in today's links:
Democracy vs. Inequality, by Daron Acemoglu and James Robinson: ... That ... widening gaps between rich and poor should be taking place in established democracies is puzzling. The workhorse models of democracy are based on the idea that the median voter will use his democratic power to redistribute resources away from the rich towards himself. When the gap between the rich (or mean income in society) and the median voter (who is typically close to the median of the income distribution) is greater, this redistributive tendency should be greater. ...
These strong predictions notwithstanding, the evidence on this topic is decidedly mixed. Our recent paper, joint with Suresh Naidu and Pascual Restrepo, “Democracy, Redistribution and Inequality” revisits these questions. ...
First, democracy may be “captured” or “constrained”. ... Elites who see their de jure power eroded by democratization may sufficiently increase their investments in de facto power ... to continue their control of the political process. ...
Finally, consistent with Stigler’s “Director’s Law”, democracy may transfer political power to the middle class—-rather than the poor. If so, redistribution may increase and inequality may be curtailed only if the middle class is in favor of such redistribution. ...
What about the facts? This is where the previous literature has been pretty contentious. ... Overall, our results suggest that democracy does represent a real shift in political power away from elites and has first-order consequences for redistribution and government policy. But the impact of democracy on inequality may be more limited than one might have expected. ...
The ... Director’s s Law is unlikely to explain the inability of the US political system to confront inequality, since the middle classes have largely been losers in the widening inequality trends.
Could it be that US democracy is captured? This seems unlikely when looked at from the viewpoint of our typical models of captured democracies. But perhaps there are other ways of thinking about this problem that might relate the increasingly paralyzing gridlock in US politics to capture-related ideas.
[There's quite a bit more in the original post.]
Posted by Mark Thoma on Friday, January 31, 2014 at 09:48 AM in Economics, Income Distribution, Politics |
Do "we now have a world economy destined to seesaw between bubbles and depression"?:
Talking Troubled Turkey, by Paul Krugman, Commentary, NY Times: O.K., who ordered that? With everything else going on, the last thing we needed was a new economic crisis in a country already racked by political turmoil. True, the direct global spillovers from Turkey, with its Los Angeles-sized economy, won’t be large. But we’re hearing that dreaded word “contagion”...
It is, in many ways, a familiar story. But that’s part of what makes it so disturbing: Why do we keep having these crises? And here’s the thing: The intervals between crises seem to be getting shorter, and the fallout from each crisis seems to be worse than the last. What’s going on?...
You may or may not have heard that there’s a big debate among economists about whether we face "secular stagnation"..., a situation in which the amount people want to save exceeds the volume of investments worth making.
When that’s true, you have one of two outcomes. If investors are being cautious and prudent, we are collectively, in effect, trying to spend less than our income,... the result is a persistent slump.
Alternatively, flailing investors — frustrated by low returns and desperate for yield — can delude themselves, pouring money into ill-conceived projects, be they subprime lending or capital flows to emerging markets. This can boost the economy for a while, but eventually investors face reality, the money dries up and pain follows.
If this is a good description of our situation, and I believe it is, we now have a world economy destined to seesaw between bubbles and depression. ...
The larger point is that Turkey isn’t really the problem; neither are South Africa, Russia, Hungary, India, and whoever else is getting hit right now. The real problem is that the world’s wealthy economies — the United States, the euro area... — have failed to deal with their own underlying weaknesses. Most obviously, faced with a private sector that wants to save too much and invest too little, we have pursued austerity policies that deepen the forces of depression. Worse yet, all indications are that, by allowing unemployment to fester, we’re depressing our long-run as well as short-run growth prospects, which will depress private investment even more. ...
So Turkey seems to be in serious trouble — and China, a vastly bigger player, is looking a bit shaky, too. But what makes these troubles scary is the underlying weakness of Western economies, a weakness made much worse by really, really bad policies.
Posted by Mark Thoma on Friday, January 31, 2014 at 12:24 AM in Economics, International Finance |
Posted by Mark Thoma on Friday, January 31, 2014 at 12:03 AM in Economics, Links |
Mobility and Inequality: More on Non-New Findings: Robert Samuelson is happy to tell us that contrary to what he hoped some of us believed, there was not much change in mobility for children entering the labor force between the first President Bush and second President Bush's administrations. Samuelson misrepresents the study to imply that it finds that there has been no change in mobility over the post-war period. ...
Samuelson ... notes the study's finding that there has been little change in mobility for workers entering the labor market in 2007 compared to 1990. The study then refers to earlier work finding no change in mobility prior to 1990. This study did not itself examine the period prior to 1990.
This is important since that is the period in which we might have expected growing inequality to have a notable impact on mobility. There was some divergence between quintiles of income distribution in the 1980s. In the years since 1980, there has not been much divergence between the bottom half of the top quintile and the rest of the income distribution. Most of the inequality was associated with the pulling away of the one percent from everyone else. This study made no effort to examine mobility into the one percent.
As far as mobility in the years prior to the 1990, contrary to the claim of this study, the research is far from conclusive. For example, an assessment published by the Cleveland Fed concluded:
"After staying relatively stable for several decades, intergenerational mobility appears to have declined sharply at some point between 1980 and 1990, a period in which both income inequality and the economic returns to education rose sharply. This finding is also consistent with theoretical models of intergenerational mobility that emphasize the role of human capital formation. There is fairly consistent evidence that intergenerational mobility has stayed roughly constant since 1990 but remains below the rates of mobility experienced from 1950 to 1980."
While it would be wrong to take this statement as conclusive, it is also wrong to take the assessment of the study cited by Samuelson as conclusive and it is a gross misrepresentation to imply that this study examined patterns in mobility over the whole post-war period. It did not even try to examine changes in mobility over the 1980s, the period when patterns in inequality would have most likely led to a decline in mobility.
Posted by Mark Thoma on Thursday, January 30, 2014 at 11:00 AM in Economics, Income Distribution |
Comments on today's GDP report for the 4th quarter of last year are generally upbeat:
Q4 GDP: Solid Report, Positives Looking Forward, by Bill McBride: The advance Q4 GDP report, with 3.2% annualized growth, was slightly above expectations. Personal consumption expenditures (PCE) increased at a 3.3% annualized rate - a solid pace. ...
Overall this was a solid report, and there are several positives going forward...
...the Federal Government subtracted 0.98 percentage points from growth in Q4, and residential investment subtracted 0.32 percentage points. Imagine no Federal austerity - Q4 GDP would have been above 4%. Luckily it appears austerity at the Federal level will diminish in 2014, and of course I expect that residential investment will make a solid contribution this year. ...
The drag from state and local governments appears to have ended after an unprecedented period of state and local austerity (not seen since the Depression). State and local governments have added to GDP for three consecutive quarters now.
I expect state and local governments to continue to make small positive contributions to GDP going forward. ...
Josh Bivens at EPI says there are things in the report to be "glum about":
Scratching Just One Level Below Surface, Growth Numbers Look a lot Less Impressive: The last six months of 2013 saw the headline GDP growth rate reach 3.7 percent. That’s a healthy number. Not gangbusters (we really have seen growth rates over 5 percent for a year or more in previous recoveries where there was slack in the economy comparable to what persists today), but undeniably healthy.
So what’s to be glum about?
Strip out the contribution of inventory investments and exports, and add in (rather than subtract) the value of imports. This is a measure of real “final sales to domestic purchasers,” or, what is sometimes called domestic demand. It’s a measure of how much demand from households, businesses, and governments is growing—and since the economy’s problem remains a huge shortfall of this demand relative to productive potential, it’s a key barometer of health.
Domestic demand growth for the last six months of 2013 was only half as fast as headline GDP growth (1.8 percent). ...
Are there any reasons to be less glum about 2014? For sure.
The big one is that federal fiscal policy will no longer be actively throttling growth. It knocked nearly a full percentage point off the fourth quarter growth rate. To be clear, fiscal policy won’t aid growth in 2014, instead it will provide a very slight drag rather than an anvil-heavy drag. This is what counts as progress in today’s fiscal policymaking. But, we’ll take what we can, I guess.
Posted by Mark Thoma on Thursday, January 30, 2014 at 09:54 AM in Economics |
And The Taper Continues, by Tim Duy: The FOMC meeting came and went with the expected result - the tapering process continued on schedule, undeterred by the current emerging market turmoil. Of course, the Fed doesn't want to be seen as reacting to every gyration financial markets. But even more importantly, the Fed wants out of the asset purchase business on the belief that a.) tapering is not tightening and b.) even if it was tightening, they could compensate via forward guidance. The global stumble, however, is challenging that thinking. Regardless of financial markets or US data, the Fed was not likely to launch into a new policy direction on the eve of incoming Chair Janet Yellen's coronation. It's her show now.
The statement acknowledged the better tone of the data:
Information received since the Federal Open Market Committee met in December indicates that growth in economic activity picked up in recent quarters.
while at the same time giving a nod to weak job growth in December:
Labor market indicators were mixed but on balance showed further improvement.
Inflation is low, but that is offset by stable expectations:
Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.
Upside and downside risks are equally weighted:
The Committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced.
Low inflation is an issue they are assessing, but it is not sufficiently worrisome to alter the pace of the taper:
In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in February, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $30 billion per month rather than $35 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $35 billion per month rather than $40 billion per month.
At these rates, inflation is only a deterrent against higher interest rates, not tapering.
Despite the plunge in the unemployment rate, the combination of the Evans rule and enhanced forward guidance remains unchanged:
The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal.
I think we can be confident that much of the conversation centered around forward guidance, but there was not quite a pressing need to end or alter the Evans rule with unemployment still above 6.5%. Moreover, any change to the forward guidance needs to be owned by Janet Yellen, and she will not have that opportunity for another six weeks. Which will not be just her first meeting as chair, but also her first press conference as chair. Trial by fire.
The Fed did not, as some supposed they might, react to sliding overseas markets. This, combined with the tempered reaction to weak job growth and the absolute abandonment of the inflation target, speaks to the Fed's determination to end asset purchases. We will need to see the emerging market downturn lapping up more directly on US shores before the Fed reacts. The downturn in US equities is not yet enough. Not only does the Fed not react to every dip in the market, they probably would not be surprised by a correction in any event. The are inclined to believe that while not a bubble, stock prices were getting a little ahead of earnings.
Recent market action is very revealing, in my opinion. First and foremost is that fears that without the Fed "no one will buy US debt" have proved to be completely unfounded. Everyone knows that the Fed is eager to end asset purchases this year, and yet magically there are enough buyers to keep 10 year rates locked below 3%. Without much, much faster growth and a real threat of inflation, we are stuck in a low interest rate world. Get used to it. Indeed, even when the Fed starts raising interest rates, I expect most of the impact will be in the center of the yield curve. We need to jump to a higher equilibrium path to boost long rates sustainably higher.
Also evident is that regardless of the Fed's intentions, tapering is tightening, at least on a global scale. To be sure, emerging markets are under pressure from a number of directions. The yen's decline over the past year was eventually going to pressure emerging market currencies. Commodity prices are softer than expected. Remember just a few years ago when the global commodity super-cycle would propel prices ever higher? That story appears to have come to an end. The ongoing adjustment in the Chinese economy is not helping matters either. Arguably, the Fed is only the icing on the cake.
But it is a cake of their own making. Ambrose Evans-Pritchard reminds us that emerging markets spent years leaning into the Fed's low rate policies instead of leaning against. Now they are caught in the classic currency crisis trap - they try to raise rates to stem currency declines, but higher rates crush the local economy and, by extension, equity markets, which aggravates the currency decline. The process continues until the economy settles into a lower equilibrium. It isn't pretty. Never is.
Funny thing is that what the Fed sees as no tightening is evolving into a global tightening now as central banks rush to raise rates. Consequently, money surges into the global safe asset - US Treasuries. And, interestingly, I think that you can argue that this is much, much more disconcerting than last year's taper tantrum. This seems to me to be a pretty clear global disinflationary shock. And it isn't like inflation was on a runaway train to begin with.
Bottom Line: The Fed wants out of quantitative easing. Policymakers want to normalize policy by bringing it back to interest rates. That sets a high bar to delaying the tapering process. Moreover, the leadership transition at the Federal Reserve also left policy on autopilot from December until March, raising the bar even further. That seemed to sink in today. They lack of offsetting on the part of emerging markets to easy Fed policy is now exacerbating the impact of tapering, creating a more significant monetary tightening than expected by the Fed. It is not clear when this alters the path of Fed policy. But what seems more clear is that the US is about to be hit by another disinflationary shock. That deserves careful attention, because inflation, I think, is at this moment the most important variable to watch as far as Fed policy is concerned. The Fed is pushing forward with tapering on only the forecast of future inflation. That forecast appears under threat.
Posted by Mark Thoma on Thursday, January 30, 2014 at 12:24 AM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Thursday, January 30, 2014 at 12:03 AM in Economics, Links |
Greg Ip at The Economist:
No, micro is not the "good" economics: If asked to compile a list of economists’ mistakes over the last decade, I would not know where to start. Somewhere near the top would be failure to predict the global financial crisis. Even higher on the list would be failure to agree, five years later, on its cause. Is this fair? Not according to Noah Smith: these, he says, were not errors of economics but of macroeconomics. Microeconomics is the good economics, where economists by and large agree, conduct controlled experiments that confirm or modify established theory and lead to all sorts of welfare-enhancing outcomes.
To which I respond with two words: minimum wage..., ask any two economists – macro, micro, whatever – whether raising the minimum wage will reduce employment for the low skilled, and odds are you will get two answers. Sometimes more. (By contrast, ask them if raising interest rates will reduce output within a year or two, and almost all – that is, excepting real-business cycle purists – will say yes.)
Are there reasons a higher minimum wage will not have the textbook effect? Of course. ... But microeconomists are kidding themselves if they think this plethora of plausible explanations makes their branch of economics any more scientific or respectable than standard macroeconomics. ...
[There's quite a bit more in the original.]
Posted by Mark Thoma on Wednesday, January 29, 2014 at 09:25 AM in Economics, Macroeconomics |
Paul Krugman comments on the SOTU:
... I think the fading of the deficit both in reality and as an issue is important... Obama isn’t afraid of the big bad deficit any more, and he knows that there won’t be a Grand Bargain, so there’s nothing he can or should do on the front that absorbed so much of his energy for three years. ...
Glad thsi issue is falling off the political radar, but given how many households were hurt by the premature turn to deficit reduction endorsed by Obama, I have a hard time granting much credit to Obama for letting this issue fade.
Posted by Mark Thoma on Wednesday, January 29, 2014 at 09:13 AM in Economics, Fiscal Policy, Politics, Unemployment |
... Suppose, back before you were born, the Archangel Michael and offered you a deal: “There’s a 1% chance you will be in the top 1%, with about $1.5 million a year. There’s an 80% chance you will be in the bottom 80%, with less than $50,000 a year. How about we reduce your income if you happen to be in the top 1% by $75 thousand, and raise it if you happen to be in the bottom 80% by $900?”
The only argument against taking that deal is: “But I already chose the right parents! And I’m very likely to be in the top 1%!”
And I do not think that is a particularly good argument…
Posted by Mark Thoma on Wednesday, January 29, 2014 at 09:06 AM in Economics, Income Distribution |
Posted by Mark Thoma on Wednesday, January 29, 2014 at 12:03 AM in Economics, Links |
Money and Class: My post on Americans starting to recognize class realities has brought some predictable reactions, which I’d place under two headings: (1) “But they have cell phones!” and (2) it’s about how you behave, not how much money you have.
My answer to both of these would be to say that when we talk about being middle class, I’d argue that we have two crucial attributes of that status in mind: security and opportunity.
By security, I mean that you have enough resources and backup that the ordinary emergencies of life won’t plunge you into the abyss. This means having decent health insurance, reasonably stable employment, and enough financial assets that having to replace your car or your boiler isn’t a crisis.
By opportunity I mainly mean being able to get your children a good education and access to job prospects, not feeling that doors are shut because you just can’t afford to do the right thing.
If you don’t have these things, I would say that you don’t lead a middle-class life, even if you have a car and a few electronic gadgets that weren’t around during the era when most Americans really were middle class, and no matter how clean, sober, and prudent your behavior may be. ...
A lot of Americans — quite arguably a majority — just don’t have the prerequisites for middle-class life as we’ve always understood it. ...
The sad thing is that our fetishization of the middle class, our pretense that we’re almost all members of that class, is a major reason so many of us actually aren’t. That’s why the growing appreciation of class realities on the part of the public is a good thing; it raises the chances that we’ll actually start creating the kind of society we only pretend to have.
I've written about this in the past, e.g. in 2010:
...people who, because of their incomes, cannot participate fully in society are poor. A child getting enough to eat, and with clothes to wear, who cannot afford the toys needed to be part of the group of kids in the neighborhood is socially isolated and socially disadvantaged (we don't want to play at your house because you don't have a TV, you can't come with us because you don't have a bike, you didn't get my text message about baseball practice being moved?, etc., etc., etc.). Giving people, children in particular, what they need to participate in the society around them is an important element of how successful they will be in the future. It helps to determine their ability to give back to society as fully participating adults. ...
Or, from 2008:
To me, being poor isn't just about stuff, it's about being able to participate fully in society. The things on the list that almost all households now have, refrigerators, stoves, TVs, and telephones, are things you have to have to function in this society... How do you make a doctor's appointment without a phone? Drop by in you spare time? A refrigerator and a stove are items a household has to have given how we bring food to the table in this society. I just don't see these things as doing anything more than providing the minimum necessary to function. Even something like a TV is necessary if you want to, say, keep up with the political debates (there's a presumption in our political discourse that you can watch campaigns on television and they are largely devoted to delivery over that medium - without a TV you cannot participate fully) or even talk to people around the water-cooler at work about the latest popular TV show. Yes, the poor might have been well-off in, say, 1821 given the societal standards of the time, or some other historical period one might choose to compare, but this isn't 1821 - things have changed and so have the minimum standards necessary to be part of the society. I'm sorry if there are people who don't want to share... Giving people the things they need to be a full part of the society they live in is the decent and right thing to do. As our society elevates itself and the requirements for full participation increase, when things like computers are as necessary as a stove, our standards of decency - what we are willing to accept as a minimum standard of living - must also rise. Just meeting physical needs - food and clothing - is not enough to be a full part of the society we live in today. We can and should do better than that.
Posted by Mark Thoma on Tuesday, January 28, 2014 at 09:56 AM in Economics, Income Distribution |
I have a new column on inequality:
Sharing the Gains from Economic Growth, by Mark Thoma: President Obama will make reducing inequality a major part of his State of the Union Address according to several reports. But to avoid being accused of waging class warfare, he will talk about creating “ladders of opportunity” instead of focusing directly on the inequality problem.
This shift in emphasis is a mistake because it misses a key part of the inequality problem. ...
The mechanism that distributes goods and services is broken.
Posted by Mark Thoma on Tuesday, January 28, 2014 at 08:02 AM in Economics, Fiscal Times, Income Distribution |
Posted by Mark Thoma on Tuesday, January 28, 2014 at 12:03 AM in Economics, Links |
Do you think this will work? I have my doubts:
Obama’s Plan to End Discrimination Against the Long-term Unemployed, by Jonathan Chait: In his State of the Union address tomorrow night, President Obama will announce that some of the largest firms in the United States have signed a pledge not to discriminate in hiring against the long-term unemployed, reports The Wall Street Journal. ...
Employers are simply using long-term unemployment as a heuristic, to weed out what they see as the weakest candidates. But this shortcut traps the unemployed in a cycle they cannot escape: The longer they’re unemployed, the progressively harder it becomes to acquire a job. ...
What Obama is trying to do in the State of the Union speech is to create a new kind of social norm in hiring. He’s arguing that employers should not let themselves use this kind of shortcut, and that more careful consideration can actually open up a wider pool of available talent. The administration has boiled down its recommendations to a series of best practices to avoid this form of discrimination. ...
This isn’t going to revolutionize the job market. And it’s not as good as getting Congress to pass, say, a new infrastructure bill. But discrimination against the long-term unemployed is a kind of cultural problem in and of itself. And precisely, because it is a cultural problem, it’s the sort of thing a high-profile speech combined with concerted jawboning with corporate leaders has a hope of actually changing.
Posted by Mark Thoma on Monday, January 27, 2014 at 02:31 PM in Economics, Politics, Unemployment |
How do we know if income inequality is getting worse? - Mark Thoma
I guess the editors didn't like my Dream of Gini title.
Posted by Mark Thoma on Monday, January 27, 2014 at 08:54 AM in Economics, Income Distribution |
Welcoming the hatred:
Paranoia of the Plutocrats, by Paul Krugman, Commentary, NY Times: ...billionaire investor Tom Perkins... in a letter to the editor of The Wall Street Journal,... lamented public criticism of the “one percent” — and compared such criticism to Nazi attacks on the Jews, suggesting that we are on the road to another Kristallnacht.
You may say that this is just one crazy guy and wonder why The Journal would publish such a thing. But Mr. Perkins isn’t that much of an outlier...
Now, just to be clear, the very rich, and those on Wall Street in particular, are in fact doing worse under Mr. Obama than they would have if Mitt Romney had won in 2012. ...
But every group finds itself ... on the losing side of policy disputes somewhere along the way; that’s democracy. The question is what happens next. Normal people take it in stride..., they don’t cry persecution, compare their critics to Nazis and insist that the world revolves around their hurt feelings. But the rich are different from you and me. ... They’re accustomed to being treated with deference, not just by the people they hire but by politicians who want their campaign contributions. And so they are shocked to discover that money can’t buy everything, can’t insulate them from all adversity.
I also suspect that today’s Masters of the Universe are insecure about the nature of their success. We’re not talking captains of industry here, men who make stuff. We are, instead, talking about wheeler-dealers, men who push money around and get rich by skimming some off the top as it sloshes by. They may boast that they are job creators..., but are they really adding value? Many of us doubt it — and so, I suspect, do some of the wealthy themselves, a form of self-doubt that causes them to lash out even more furiously at their critics.
Anyway, we’ve been here before. It’s impossible to read screeds like those of Mr. Perkins ... without thinking of F.D.R.’s famous 1936 Madison Square Garden speech, in which he spoke of the hatred he faced from the forces of “organized money,” and declared, “I welcome their hatred.”
President Obama has not, unfortunately, done nearly as much as F.D.R. to earn the hatred of the undeserving rich. But he has done more than many progressives give him credit for — and like F.D.R., both he and progressives in general should welcome that hatred, because it’s a sign that they’re doing something right.
Posted by Mark Thoma on Monday, January 27, 2014 at 12:24 AM in Economics |
David Warsh wonders if the WSJ is "changing things somewhat in the orientation of its editorial board":
A Tea Party Knight Is Out, by David Warsh: News, goes an old saw, is what happens near an editor. That’s what commenced last September when Wall Street Journal editors got hung up in lane closings at the George Washington Bridge.
Whoever they were, the editors passed along their displeasure and, perhaps, suspicions to the paper’s transportation reporter, Ted Mann. After a month of working the phones, Mann broached the possibility that the tie-up was deliberate, with a story on October 2: Port Chief Fumed Over Bridge Jam/Patrick Foyle Fired Off an Email Message after Learning of Lane Closure..., it was clearly the WSJ that first put Gov. Christie in play. ...
Aggressive WSJ reporting on a frontrunner for the next Republican Party presidential nomination is evidence that Rupert Murdoch hasn’t monkeyed with the longstanding culture of the news pages. ...
I mention it here because ... Murdoch may have an interest in changing things somewhat in the orientation of its editorial board. I refer to the departure of Stephen Moore to the Heritage Foundation.
Moore was the board’s chief economic commentator, a founder of the Club for Growth, enthusiast of Tea Party ideals, possessor of a master’s degree from George Mason University and a disciple of Arthur Laffer and Julian Simon. ...
The WSJ editorial page is a position of enormous influence... Depending on how Moore is replaced, the opportunity exists for Murdoch’s paper to play a constructive role... – perhaps even to modulate the spirit of intransigence that dates back to 1972, when editor Robert Bartley and Jude Wanniski initiated a new era of political economic discourse in US politics.
It was Bartley’s unrelenting attacks on Bill Clinton in the 1990s that established the predicate that presidents who are Democrats not only have bad politics, but are not legitimate. Much of the present-day animosity toward Obama got its start with Bartley’s over-the-top opposition to Clinton. ...
I plan to pay much closer attention to the editorial page of the WSJ in the months to come. Something is going on there.
Posted by Mark Thoma on Monday, January 27, 2014 at 12:15 AM in Economics, Politics, Press |
Posted by Mark Thoma on Monday, January 27, 2014 at 12:03 AM in Economics, Links |
Robert Reich tries to explain why "we don’t have a revolution in America":
Why There’s No Outcry, by Robert Reich: People ask me all the time why we don’t have a revolution in America, or at least a major wave of reform similar to that of the Progressive Era or the New Deal or the Great Society.
Middle incomes are sinking, the ranks of the poor are swelling, almost all the economic gains are going to the top, and big money is corrupting our democracy. So why isn’t there more of a ruckus?
The answer is complex, but three reasons stand out.
First, the working class is paralyzed with fear it will lose the jobs and wages it already has. In earlier decades, the working class fomented reform. ... No longer... No one has any job security. ... Besides, their major means of organizing themselves — labor unions — have been decimated. ...
Second, students don’t dare rock the boat. In prior decades students were a major force for social change. ... But today’s students don’t want to make a ruckus. They’re laden with debt. ... To make matters worse, the job market for new graduates remains lousy. Which is why record numbers are still living at home.
Reformers and revolutionaries don’t look forward to living with mom and dad or worrying about credit ratings and job recommendations.
Third and finally, the American public has become so cynical about government that many no longer think reform is possible. ...
Change is coming anyway. ... At some point, working people, students, and the broad public will have had enough. They will reclaim our economy and our democracy. This has been the central lesson of American history.
Reform is less risky than revolution, but the longer we wait the more likely it will be the latter.
Apparently, Obama as "a little bit of FDR" might not be enough.
Posted by Mark Thoma on Sunday, January 26, 2014 at 10:03 AM in Economics, Politics |
Steve Rattner’s Manufacturing Muddle: ...Steve Rattner makes some good points about the state of US manufacturing ... but the argument is confusing and unconvincing due to a pretty egregious omission.
The good points are generally about the weak wage trends ... though here’s where the major omission comes in... If our manufacturing wages are so low relative to both their past levels and some of our advanced economy competitors (he mentions Germany), why are we not more globally competitive in the sector? ...
The key omission in Steve’s analysis is ... exchange rates. Dean Baker was all over this...
Rattner never once mentions the value of the dollar. This happens to be huge. [Data show]…that manufacturing employment first began to fall in the late 1990s, even as the economy was booming, after the dollar soared due to the botched bailout from the East Asian financial crisis. The run-up in the dollar had the equivalent effect of placing a 30 percent tariff on our exports and giving a 30 percent subsidy for imports. Under these circumstances, it is hardly surprising that manufacturing employment fell and the trade deficit soared.
...[I]t would be foolish to pin one’s hope for a full employment recovery on any one sector. ... The important question is: what distortionary factors are holding the sector back from achieving its potential? More technically, why does the US have both low growth in unit labor costs in manufacturing (compensation relative to productivity growth) relative to our competitors and persistent, large deficits in manufactured goods? ...
In this regard, it’s simply not credible to pontificate on manufacturing’s decline without acknowledging the role of the dollar, exchange rate manipulation, and our persistent trade deficits in manufactured goods. ...
Posted by Mark Thoma on Sunday, January 26, 2014 at 09:14 AM in Economics |
Obama and the One Percent: Another week, another outburst by a one-percenter comparing progressive taxation to Nazi atrocities. I particularly liked the end:
Kristallnacht was unthinkable in 1930; is its descendent “progressive” radicalism unthinkable now?
Because it’s just obvious that San Francisco progressives are the political heirs of fascism, right?
You do wonder why the WSJ published this screed. ...
Anyway, thinking about this sort of thing makes me realize that there’s a danger, especially for progressives, of confusing the proposition that Obama’s billionaire haters are stark raving mad — which is true — with the proposition that Obama has done nothing that hurts the plutocrats’ interests, which is false. Actually, Obama has been tougher on the one percent than most progressives give him credit for.
Start with taxes..., taxes on wealthy Americans have basically been rolled back to pre-Reagan levels ...
Meanwhile, financial reform looks as if it will have significantly more teeth than expected.
So the one percent does have reason to be upset. No, Obama isn’t Hitler; but he is turning out to be a little bit of FDR, after all.
Posted by Mark Thoma on Sunday, January 26, 2014 at 09:14 AM in Economics, Income Distribution, Politics |
Posted by Mark Thoma on Sunday, January 26, 2014 at 12:03 AM in Economics, Links |
Justin Fox on inequality:
We Can’t Afford to Leave Inequality to the Economists, by Justin Fox: ... Something really dramatic is going on up there in the top 5%, the top 1%, the top 0.01%. But while economists know some things about the impact of increasing overall income inequality, they still don’t know all that much about what this 1% stuff means....
It is one of the most dramatic economic developments of the past quarter century. And it seems like it might be bad thing. But conclusive economic evidence for its badness is hard to find.
Yes, there are theories: All that wealth sloshing around in the top 1% leads to more bubbles and crashes. Extreme wealth corrupts the political process. Income inequality may be slowing overall economic growth. And, as my colleague Walter Frick put it in an email when I brought this up, “given the diminishing marginal utility of income, it’s hugely wasteful for the super rich to have so much income.”
I happen to believe there’s some truth to all four of those. But there are also lots of counterarguments and some counterevidence, and big economic studies like the new one by Chetty & Co. don’t seem to be doing much to resolve the debate.
Which leads me to another theory: I think we’re eventually going to have to figure out what if anything to do about exploding high-end incomes without clear guidance from the economists. This is a discussion where political and moral considerations may end up predominating. And as Harvard’s Greg Mankiw made clear in his maddeningly inconclusive Journal of Economic Perspectives essay on inequality last summer, these are areas in which economists possess no comparative advantage.
Posted by Mark Thoma on Saturday, January 25, 2014 at 09:41 AM in Economics, Income Distribution |
Chris House defends macro:
Is Macro Giving Economics a Bad Rap?: Noah Smith really has it in for macroeconomists. He has recently written an article in The Week in which he claims that macro is one of the weaker fields in economics...
I think the opposite is true. Macro is one of the stronger fields, if not the strongest ... Macro is quite productive and overall quite healthy. There are several distinguishing features of macroeconomics which set it apart from many other areas in economics. In my assessment, along most of these dimensions, macro comes out looking quite good.
First, macroeconomists are constantly comparing models to data. ... Holding theories up to the data is a scary and humiliating step but it is a necessary step if economic science is to make progress. Judged on this basis, macro is to be commended...
Second, in macroeconomics, there is a constant push to quantify theories. That is, there is always an effort to attach meaningful parameter values to the models. You can have any theory you want but at the end of the day, you are interested not only in idea itself, but also in the magnitude of the effects. This is again one of the ways in which macro is quite unlike other fields.
Third, when the models fail (and they always fail eventually), the response of macroeconomists isn’t to simply abandon the model, but rather they highlight the nature of the failure. ...
Lastly, unlike many other fields, macroeconomists need to have a wide array of skills and familiarity with many sub-fields of economics. As a group, macroeconomists have knowledge of a wide range of analytical techniques, probably better knowledge of history, and greater familiarity and appreciation of economic institutions than the average economist.
In his opening remarks, Noah concedes that macro is “the glamor division of econ”. He’s right. What he doesn’t tell you is that the glamour division is actually doing pretty well. ...
Posted by Mark Thoma on Saturday, January 25, 2014 at 08:57 AM in Economics, Macroeconomics, Methodology |
Posted by Mark Thoma on Saturday, January 25, 2014 at 12:03 AM in Economics, Links |
Jobs and inequality are "closely linked":
The Populist Imperative, by Paul Krugman, Commentary, NY Times: “The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.”
John Maynard Keynes wrote that in 1936, but it applies to our own time, too. And, in a better world, our leaders would be doing all they could to address both faults.
Unfortunately,... we should count ourselves lucky when leaders confront even one of our two great economic failures. If ... President Obama devotes much of his State of the Union address to inequality, everyone should be cheering him on.
They won’t, of course. Instead, he will face two kinds of sniping. The usual suspects on the right will, as always when questions of income distribution comes up, shriek “Class warfare!” But there will also be seemingly more sober voices arguing that he has picked the wrong target, that jobs, not inequality, should be at the top of his agenda.
Here’s why they’re wrong.
First of all, jobs and inequality are closely linked if not identical issues. ...
Moreover, there’s an even stronger case to be made that high unemployment — by destroying workers’ bargaining power — has become a major source of rising inequality and stagnating incomes even for those lucky enough to have jobs.
Beyond that, as a political matter, inequality and macroeconomic policy are already inseparably linked. ... For example, two-thirds of the spending cuts proposed last year by Representative Paul Ryan, the chairman of the House Budget Committee, would have come at the expense of lower-income families.
The flip side of this attempt to use fiscal scare tactics to worsen inequality is that highlighting concerns about inequality can translate into pushback against job-destroying austerity, too.
But the most important reason for Mr. Obama to focus on inequality is political realism. Like it or not, the simple fact is that Americans “get” inequality; macroeconomics, not so much. ...
The point is that of the two great problems facing the U.S. economy, inequality is the one on which Mr. Obama is most likely to connect with voters. And he should seek that connection with a clear conscience: There’s no shame is acknowledging political reality, as long as you’re trying to do the right thing.
So I hope we’ll hear something about jobs Tuesday night, and some pushback against deficit hysteria. But if we mainly hear about inequality and social justice, that’s O.K.
Posted by Mark Thoma on Friday, January 24, 2014 at 02:56 AM in Economics, Income Distribution, Politics |
Posted by Mark Thoma on Friday, January 24, 2014 at 12:03 AM in Economics, Links |
On R-squared and economic prediction: Recently I've heard a number of otherwise intelligent people assess an economic hypothesis based on the R2 of an estimated regression. I'd like to point out why that can often be very misleading. ...
Here's what you'd find if you calculated a regression of this month's stock price (pt) on last month's stock price (pt-1). Standard errors of the regression coefficients are in parentheses.
The adjusted R-squared for this relation is 0.997. ... On the other hand, another way you could summarize the same relation is by using the change in the stock price (Δpt = pt - pt-1) as the left-hand variable in the regression:
This is in fact the identical model of stock prices as the first regression. The standard errors of the regression coefficients are identical for the two regressions, and the standard error of the estimate ... is identical for the two regressions because indeed the residuals are identical for every observation. ...
Whatever you do, don't say that the first model is good given its high R-squared and the second model is bad given its low R-squared, because equations (1) and (2) represent the identical model. ...
That's not a bad empirical description of stock prices-- nobody can really predict them. ... This is actually a feature of a broad class of dynamic economic models, which posit that ... the deviation between what actually happens and what the decision-maker intended ... should be impossible to predict if the decision-maker is behaving rationally. For example, if everybody knew that a recession is coming 6 months down the road, the Fed should be more expansionary today... The implication is that when recessions do occur, they should catch the Fed and everyone else by surprise.
It's very helpful to look critically at which magnitudes we can predict and which we can't, and at whether that predictability or lack of predictability is consistent with our economic understanding of what is going on. But if what you think you learned in your statistics class was that you should always judge how good a model is by looking at the R-squared of a regression, then I hope that today you learned something new.
[There's an additional example and more explanation in the original post.]
Posted by Mark Thoma on Thursday, January 23, 2014 at 12:22 PM in Econometrics, Economics |
Sticking with today's apparent theme of inequality and mobility, here's a rebuttal from Carter Price at the Washington Center for Equitable Growth to a recent claim that there is no relationship between inequality and mobility (also, on the "single motherhood" issue, see here):
A Mathematical Response to Scott Winship’s Analysis of The Great Gatsby Curve, by Carter Price, Washington Center for Equitable Growth: While we know today’s big inequality and mobility news is Raj Chetty, Emmanuel Saez, and others’ new paper on variance in mobility over time — which we’ll be discussing shortly — we wanted to take a moment to look at the math behind some analysis derived from some of the previous data they have collected from their Equality of Opportunity Project on variance in mobility over geography.
The “Great Gatsby Curve,” a term coined by Princeton economist Alan Krueger based on the work of Ottawa economist Miles Corak, shows that across developed countries, higher economic inequality is associated with lower mobility. This curve has sparked a great deal of debate particularly because the United States stands apart among the developed nations for its high inequality and low mobility.
In a recent foray into this debate, Manhattan Institute sociologist Scott Winship and Heritage Foundation research assistant Donald Schneider use data from the Equality of Opportunity Project to look at the relationship between inequality and mobility across U.S. “commuting zones,” which are groups of counties that form a common labor market. (The Equality of Opportunity Project assessed economic mobility by looking at the 2011-12 incomes of people born in 1980-82 and their parents’ incomes from 1996-2000.) Winship and Schneider conclude that this new data indicate that mobility is actually largely unrelated to economic inequality and that the core reason for low economic mobility is single motherhood.
I’ve reproduced their findings, but I don’t come to the same conclusions. Winship and Schneider don’t weight the data properly and ignore too much of the data. Thus, I do not conclude that they provide compelling arguments to ignore economic inequality when discussing economic mobility....
While analysis of multiple measures of inequality and multiple measures of mobility suggest that economic inequality is negatively associated with economic mobility, much more analysis needs to be done to fully understand these complex relationships. In particular, the mechanisms that drive these relationships should be understood. I hope that this dispels some of the faulty analysis and encourages more rigorous analysis of these data.
[See the article for regressions, graphs, and analysis supporting the conclusions.]
Posted by Mark Thoma on Thursday, January 23, 2014 at 10:46 AM in Economics, Income Distribution |
I'm a bit more sympathetic to the skill based technical change causing wage inequality arguments than Larry Mishel, technological change is at least part of the story in my view (but, importantly, not the whole story, unionization and relative bargaining power between workers and firms, political forces, etc. are also at work), but his arguments are certainly worth noting (and this extract may not fully reflect his views):
The Robots Are Here and More Are Coming: Do Not Blame Them for our Wage or Job Problems, , by Lawrence Mishel: The “robots are coming” narrative dominating discussions of the economy was popularized by Erik Brynjolfsson and Andrew McAfee in their 2011 book, Race Against the Machine. They have built on that theme in the richer, deeper The Second Machine Age (W.W. Norton, 2014). The first half of the book provides a valuable window, at least for a non-technologist like me, into past developments and the future trajectory of digitization. Their claim is that digitization will do for mental power what the steam engine did for muscle power—that is, quite a bit, transforming our lives at work and play.
The remainder of the book dwells on the role of digitization in generating both bounty (more consumer choice and greater output, wealth, and income) and spread (greater inequalities of wages, income, and wealth). In treating these topics, they heavily rely on the work of others. As in their last book, they do not provide much direct evidence of the connection between technological change and wage inequality. I study these issues and believe they are wrong to tightly link digitization and robots to wage inequality and the slow job growth of the 2000s. Although the authors claim “technology is certainly not the only force causing this rise in spreads, but it is one of the main ones” my fear is that this book, like their last one, will fuel the mistaken narrative that technology is responsible for our job and wage problems and that we are powerless to obtain more equitable growth. ...
On wage inequality, the authors offer “skill-biased technical change” or SBTC as the explanation. In fact, they offer two distinct SBTC narratives, both of which cannot be simultaneously true and neither of which aptly explains wage trends.
In general, SBTC narratives are weak because they cannot explain one of the key inequality trends, the remarkable wage and income growth of the top 1.0 and 0.1 percent. ...
Specifically, the authors’ first SBTC narrative, the “race between technology and skills,” falls short because it doesn’t square with recent trends. Under this narrative, technological change makes employers value education more, and the more education or skills one has, the better one fares. Despite the absence of prima facie evidence for this popular narrative for two decades, it barrels along anyway. For instance, the wage gap between middle and low-wage workers has been stable or falling since 1987 or so, meaning that those with the least skills have done at least as well or better than those in the middle. ...
The second narrative is that technology is eroding jobs and wages in middle-wage occupations but expanding opportunities and wages among low- and high-wage occupations. This “job polarization” narrative, which emerged around 2006, was designed to overcome the flaw in the education narrative’s explanation of wage trends in the 1990s, when low-wage workers fared as well or better than middle-wage workers. The accumulating evidence now shows that job polarization has not occurred in the entire 2000s...
So, again, these two SBTC narratives can’t both be true—either middle-wage workers are doing better than low-wage workers or they’re not. And neither one can explain the trends of the 2000s, the period where one would expect digitization’s impact to be most evident. The robots are here and more will be coming but they are not responsible for our employment or our wage problems. Read the first half of the book to learn about technology but take the second half with a grain of salt. For understanding wage inequality you should look elsewhere.
Posted by Mark Thoma on Thursday, January 23, 2014 at 10:11 AM in Economics, Income Distribution, Politics, Technology, Unions |
The topic of the day seems to be the new study on income mobility:
My take is similar to Kevin Drum's, who manages to separate the level of mobility (very low) to the rate of change (one study, the latest, says mobility is unchanged):
This response emphasizes the geographic variation -- where you are born appears to matter quite a bit:
Posted by Mark Thoma on Thursday, January 23, 2014 at 09:22 AM in Economics, Income Distribution |
Posted by Mark Thoma on Thursday, January 23, 2014 at 12:03 AM in Economics, Links |
A Note on the Political Economy of Populism: All indications are that President Obama will make inequality the central theme of his State of the Union address. Assuming he does, he will face two different kinds of sniping. One will come from the usual suspects on the right, shrieking “class warfare”. The other will come from a variety of people, some of them well-intentioned, arguing that while sure, inequality is an issue, the crucial thing now is to get the economy growing and create more jobs; these people will argue that populism is a diversion from the main issue.
Here’s why they’re wrong.
First of all, even on the straight economics inequality and job creation aren’t completely separable issues. ...
Beyond that, there’s the political economy.
It has been painfully obvious, to anyone willing to see (a group that unfortunately doesn’t include a large part of the press corps) that deficit obsession hasn’t really been about deficits — it has been about using deficits as a club with which to smash to welfare state, and hence increase inequality. ...
Conversely, talking about the need to help struggling families is ... a way to shift the focus away from deficit obsession, and pave the way at least for a relaxation of austerity, if not actual stimulus.
And I think we also have to face up to an awkward political reality: moderate populism has a broad popular constituency, Keynesian macroeconomics doesn’t..., the public doesn’t “get” macroeconomics; lines like “American families are having to tighten their belts, so the government should too” still resonate. You could blame Obama for not using the bully pulpit to teach the nation why this is wrong, and I wish he had made more of a stand. Still, the fact is that this is just a hard story to get across...
So if I were Obama, I’d do what he’s apparently doing: focus on inequality, which is a valid and popular issue, and use it indirectly to move macro policy in the right direction too.
To follow up on the previous post, capitalism is the best economic system yet discovered for producing economic growth, but it also concentrates risk and causes people to face hardship through no fault of their own (e.g. a recession that puts someone out of work, someone who shows up for work everyday and does their job well). The solution to this is for either the private sector or the government to provide insurance against these risks -- and market failures mean it is generally the government that must step in. Yes, that means transfers from the winners to the less fortunate, much as those with fire insurance who have good outcomes -- no fire -- find their insurance premiums transferred to those who do have the bad luck to experience a fire. But the risks inherent in the system that makes those at the top so wealthy, and those at the bottom so miserable must be attenuated through government provided insurance. Unemployment insurance is a good example of this, but more social insurance is needed to protect the vulnerable from risks they had no hand in creating (e.g. the financial crisis caused great pain for workers who had nothing at all to do with creating the problems that caused the Great Recession, while those who benefitted from the lead up to the crisis and had a hand in causing it, those who are doing very well now, whine incessantly if they are asked to help to reduce the hardship of the innocent).
Posted by Mark Thoma on Wednesday, January 22, 2014 at 10:46 AM in Economics, Income Distribution, Market Failure, Social Insurance |
I like this as far as it goes, but why not make the point that there is a role for government in solving the market failures that lead to the lack of job insurance for vulnerable workers (and *perhaps* for solving the inequality problem as well if it progresses beyond some threshold)?:
Inequality in Adam Smith’s World, by Chris House: Inequality is a fact of economic life and it is becoming more and more pronounced over time. ...
There are many forces in our economy that create income inequality. The most basic of these forces however, is tied to the nature of trade itself and can be traced all the way back to Adam Smith and the division of labor. If you read the Wealth of Nations (something I told you not to do a few blog posts back …) you will find that Smith begins by marveling at the incredible increases in productivity that can be obtained by exploiting the division of labor, that is, by specializing. ... A jack-of-all-trades is simply not valued in a market system. ...
The way you get the division of labor to work is by combining it with trade. ... A physician cannot consume only her own medical advice – she must draw on the productivity of the many other specialists in society. If you are willing to do trade, you can, by specializing, reach incredible levels of productivity. As populations grow, and as the ability to trade grows, you should see more and more specialization and higher and higher productivity. (Obviously the division of labor is not the only source of increases in productivity.)
However, there is a downside... Adam Smith’s plan exposes people to incredible variations in income and thus a market system possesses and important force which causes inequality. Specialization ties your entire wellbeing to a single industry. If you decide that you are going to become a web designer, your fate is very closely tied to the market for web designers. As a result, while Smith’s plan dramatically increases overall productivity, it also exposes us to incredible risk.
Of course, markets do have responses to risk. The typical response is for the market to provide insurance contracts to reduce risk. In this case however, the type of insurance needed is actually income or job insurance. These types of insurance contracts are not typically available. ...
I don’t mean to imply that all or even most of the alarming increase in inequality is due to the division of labor and trade. I would guess that modern technology (which allows people to leverage luck to extreme degrees by cheaply reproducing and transmitting ideas and information) and inheritance, both play a significant role in creating inequality. However, living with income inequality is an implicit part of the deal we made with Adam Smith and it will be with us in some form for a long time.
Posted by Mark Thoma on Wednesday, January 22, 2014 at 09:58 AM in Economics, Income Distribution, Market Failure |
As a follow-up to my recent article arguing that a combination of the minimum wage and EITC is the best approach to helping low income households:
Brookings EITC Proposal Mostly Moves in the Wrong Direction, by Shawn Fremstad, CEPR: [Shared via Creative Commons]: Isabel Sawhill and Quentin Karpilow of the Center on Children and Families at the Brookings Institution recently proposed what they call a “no-cost” way to reduce poverty and inequality. The proposal combines an increase in the minimum wage with some fairly radical and mostly unwise changes to the Earned Income Tax Credit.
It certainly makes sense to increase the minimum wage substantially. As economist Arindrajit Dube estimates in a new and very thorough working paper, such an increase would “reduce the number of non-elderly living in poverty by around 4.6 million, or by 6.8 million when longer term effects are accounted for.” It also makes sense to combine a minimum wage with increased social insurance. As Dube notes: “in the presence of [negative] incidence effects [of the EITC on wages] due to increased labor supply, the optimal policy calls for combining tax and transfers like the EITC with a minimum wage.”
At first glance, it may seem like the Brookings proposal follows Dube’s prescription, combining a minimum wage increase with expanded EITC benefits for certain workers, particularly:
- young adults (ages 21 to 39) who do not have dependent children and are working at least 1,500 hours a year (around 29 hours a week if working all 52 weeks),
- married couples that include two workers as long as the lower-earning spouse works at least 1000 hours a year (just under 20 hours a week if working all 52 weeks), and
- certain families with very young children.
At the same time, however, the proposal would cut EITC benefits for many workers in certain groups, including:
- those with more than one child,
- those with older children, and
- childless workers who are over age 39 or work less than 1,500 hours a year.
Although Sawhill and Karpilow aren’t as explicit as they should be about the extent of EITC cuts in their plan, they do acknowledge that it: “prioritizes full-time work over part-time employment, young children over big families, and young single adults over older ones.” It would be helpful for them to be even more transparent and explicitly quantify the distributional effects of their redesign. How many workers would see their EITC benefits cut and by how much, and how many would see increases?
The Sawhill/Karpilow proposal has a number of moving parts, but in the remainder of this post I’m just going to focus on the changes they propose to the childless worker credit. It would be a very good idea to increase the childless worker EITC (in conjunction with increasing the minimum wage and tying it to inflation or some other index). ...
But it would be a very bad idea to make the childless worker EITC, as well as the separate spousal credit Sawhill and Karpilow propose, contingent on working nearly 30 hours a week year-round (or nearly 20 hours a week for spouses). Given how far we are from full employment (current U-6 unemployment is 13.1 percent) and the extent of the decline in labor force participation over the last five years, it makes little sense to redesign the EITC in a way that (theoretically) increases incentives for workers to go from part-time to near-full-time employment, but reduces incentives for going from no employment to at least some employment.
Moreover, it makes little sense to penalize the many part-time workers who are working part-time for reasons that are quite sound and have positive externalities (caring for a family member with a disability or a child, going to school part-time, etc.) or for reasons beyond their control, such as a disability, illness, lack of available full-time work, etc. ...
Sawhill/Karpilow would also change age eligibility for the childless worker EITC (currently ages 25-64) by extending eligibility to workers age 21-24, but eliminating it for those age 40-64. They don’t provide any rationale for this cut, despite the extraordinary inequities it would create. A personal example: when my mother became a "childless worker" in her late 40s after the last of her children left the nest, she completed an A.A. degree with straight A’s, and then went on to work in a series of poorly compensated, dead-end jobs at K-Mart and in home health care, until serious health issues made even half-time work impossible. If the Sawhill/Karpilow proposal had been in place when she was still alive and working in her late 40s and early 50s, she would have lost eligibility for the modest EITC she received, while a 20-something worker doing the same work as her would have a received credit of around $1,600.
Finally, while “target efficiency” isn't a particularly big concern of mine ... it should be noted that the ... target efficiency of the Sawhill/Karpilow EITC proposal is unclear. They say that the combination of raising the minimum wage and their EITC proposal would lift 3.4 million people out of poverty, but they don’t explain how much of this is due to the EITC proposal by itself. The Dube estimate I noted about suggests that the vast majority of the anti-poverty effect could be due to increasing the minimum wage. And various elements of the Sawhill/Kapilow proposal would cut EITC benefits for workers with below-poverty income..., while increasing them for other workers.
We should increase the EITC, especially for workers without dependent children, and the minimum wage as a way to reduce poverty and inequality. But the Brookings plan is not the way to do it.
Posted by Mark Thoma on Wednesday, January 22, 2014 at 09:03 AM in Economics, Income Distribution, Social Insurance |
Posted by Mark Thoma on Wednesday, January 22, 2014 at 12:03 AM in Economics, Links |
Tyler Cowen: Teen employment and the minimum wage: sixty years of experience
Cowen's Bottom line: “Is there any other issue where the data conforms so strongly to basic economic intuition, and yet is widely written off as a coincidence?”
And a response from Kevin Drum: Teen Employment Isn't Really Very Well Correlated With the Minimum Wage
Drum's bottom line: Maybe there's a correlation there, but it sure isn't easy to see. Whatever's happening [to teen employment], the minimum wage seems to be a pretty small part of it.
Posted by Mark Thoma on Tuesday, January 21, 2014 at 12:21 PM in Economics |
The Week That Was, by Tim Duy: Plenty of data and Fedspeak to chew on last week, the sum total of which I think point in the same general direction. Economic activity is on average improving modestly, the Federal Reserve will push through with another round of tapering next week, and low inflation continues to hold back the threat of rate hikes.
After stripping out the auto component, retail sales were solid in December:
I think we are at or nearing the point where auto sales will generally move sideways and thus induce some additional volatility in the headline number. Consequently, it will be increasingly important to focus on core sales ("core" meaning less autos and gas). Looking at the three-month change, we see a modest acceleration in the back half of 2013:
Likewise, industrial production accelerated in the final months of 2013:
The initial read on consumer sentiment was modestly disappointing but not a cause for worry. In general, consumer sentiment has been weaker than what would be suggested by the pace of spending since the recovery began:
Housing starts stumbled in December after surging the previous month:
Housing activity continues to grind higher, with plenty of room left to climb. Increasingly, the gains seem likely to be coming from the single family side of the equation; multifamily has already experienced a solid rebound:
None of the above is meant to imply that we are experiencing runaway growth. Instead, the Beige Book probably sets the right tenor:
Reports from the twelve Federal Reserve Districts suggest economic activity continued to expand across most regions and sectors from late November through the end of the year. Nine Districts indicated the local economy was expanding at a moderate pace; among these, the Atlanta and Chicago Districts saw conditions improve compared with the previous reporting period. Boston and Philadelphia cited modest growth, while Kansas City reported the economy held steady in December. The economic outlook is positive in most Districts, with some reports citing expectations of "more of the same" and some expecting a pickup in growth.
The JOLTS report showed an uptick in the quits rate, something that will likely warm the heart of incoming Federal Reserve Chair Janet Yellen:
It's another quadrant of that chart that is showing improvement, which probably gives Fed officials confidence that they are moving in the right direction by slowly ending the asset purchase program. That said, inflation prevents the Fed from putting their foot on the brakes:
Until we see meaningfully higher inflation numbers, the Fed will be hesitant to deviate from their current expected rate trajectory. Putting aside any financial stability concerns, I am thinking the risk is that unemployment drops to closer to 5.5% when inflation starts to pick up, and policymakers respond with a steeper rate increase fearing they are behind the curve.
Dallas Federal Reserve President Richard Fisher offered-up another colorful speech stressing financial stability concerns. He also revealed he wanted to see the Fed cut asset purchases by $20 billion a month:
I was pleased with the decision to finally begin tapering our bond purchases, though I would have preferred to pull back our purchases by double the announced amount. But the important thing for me is that the committee began the process of slowing down the ballooning of our balance sheet, which at year-end exceeded $4 trillion. And we began—and I use that word deliberately, for we have more to do on this front—to clarify our intentions for managing the overnight money rate.
For all the concerns that the hawks will be persistent policy dissenters, Fisher does not appear to be a likely dissent just yet. For him, it is important just to know the program will end this year.
On the other side of the coin is Minneapolis Federal Reserve President Narayana Kocherlakota. In an interview with Robin Harding at the Financial Times, Kocherlakota makes clear his disappointment with the current policy trajectory:
“We’re running the risk of being content with inflation running consistently below our target. That’s inappropriate,” said Narayana Kocherlakota, who votes on Fed monetary policy this year, in an interview with the Financial Times. “Right now we’re sitting with an outlook for inflation that even by 2016 . . . is not getting back to 2 per cent.”
Importantly, he offers an alternative to the defunct Evans rule:
“We would say we intend to keep the Fed funds rate extraordinarily low in that interval between 6.5 and 5.5 per cent as long as the medium-term outlook for inflation stays sufficiently close to 2 per cent,” he said. “I definitely feel it is important to be numerical about it. Words are always subject, I think, to multiple interpretations.”
The idea of an "interval" gives some insight into the general consensus at the Fed. There does not seem to be considerable support for changing the threshold to 5.5%. Kocherlakota knows this and hopes that he can disguise changing the threshold by calling it an interval. But once you cross 6.5%, the idea of an interval is irrelevant. 5.5% becomes the focus, just as if the threshold has been changed.
Moreover, notice also the change in the inflation threshold from 2.5% to "sufficiently close" to 2%. My sense is that such a change would be interpreted hawkishly. But I think also reveals why policymakers are opposed to changing the unemployment threshold. I am thinking that below 6.5% unemployment, they are less willing to tolerate 2.5% inflation because they worry about falling behind the curve.
I think it is easier to see Kocherlakota dissenting than any of the hawks. It is clear that policy is moving fundamentally in the wrong direction in his opinion:
Mr Kocherlakota said he would not refight the Fed’s decision to taper asset purchases by about $10bn a month. “My point is simply we need to do more. If the committee chose to do that through more asset purchases that’d be fine with me. But we have to be doing more.”
The hawks might want a more rapid end to asset purchases, but at least for them policy is heading in the right direction.
San Francisco Federal Reserve President John Williams questioned the role of asset purchases as part of the Federal Reserve toolkit. Victoria McGrane at the Wall Street Journal has the story here. Williams highlights the uncertain impacts of quantitative easing:
Mr. Williams, who has been supportive of the Fed’s three rounds of bond purchases, said the measures “have proven a potent but blunt tool, with uncertain effects on financial markets and the economy.” The Fed’s bond-buying program, also known as quantitative easing, or QE, aims to lower long-term interest rates in hopes that will spur borrowing, hiring and investment.
Surveying the body of research on such bond purchases, Mr. Williams found that studies consistently find that the purchases have a significant impact on long-term bond yields but it’s harder to tell if they’re doing much to help the overall economy.
“Estimating the effects of large-scale asset purchases on the economy – as opposed to financial markets – is inherently much harder to do and is subject to greater uncertainty,” he said.
WIlliams also acknowledges the difficulties of implementing forward guidance:
“Experience has shown that it is impossible to convey the full reach of factors that influence the future course of policy. As a result, forward guidance ends up being overly simplified and prone to misinterpretation,” Mr. Williams said in his paper. What’s more, markets may not believe promises about policy made several years in advance since the policymakers making those statements could leave, he noted.
Again, isn't the Evans rule something of an oversimplification that has resulted in confusion? Perhaps a simpler target is needed:
A new framework such as nominal GDP-targeting could, in theory, could work better at communicating the Fed’s policy plans than the current approach, he said, but it might have costs as well.
And then comes the third rail of central banking:
Finally, Mr. Williams also said new research should address whether the Fed and other central banks with a 2% inflation target should aim higher. “[D]oes the 2 percent inflation target … provide a sufficient cushion to allow monetary policy to successfully stabilize the economy and inflation in the future?” he asked in his paper.
All of which sums up to: We are still learning from the crisis and thus we will see consideration of even more innovations to central banking going forward.
And last but not least, Federal Reserve Chairman Ben Bernanke made another victory lap at the inaugural event of the new Hutchins Center on Monetary Policy at the Brookings institute (also where Williams presented). For those of you with four hours to set aside, video is here.
Bottom Line: The US economy is grinding forward. Policymakers are generally comfortable with the pace of tapering at $10 billion per meeting. That could be reconsidered if we see sustained weakness in future data, but I don't think that should be the base case. Not everyone is happy at the Fed, however, and arguably the center has shifted toward the hawks as the doves are clearly not pleased that both asset purchases are ending and the Evans rule does not have an heir apparent. I think it is reasonable to believe the primary conflict at the next FOMC meeting is not over asset purchases, but on the communications strategy. The direction and nature of "enhanced forward guidance" is becoming a contentious issue now that the unemployment rate is just a breath away from the 6.5% threshold.
Posted by Mark Thoma on Tuesday, January 21, 2014 at 12:24 AM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Tuesday, January 21, 2014 at 12:03 AM in Economics, Links |
What's the best way to help the poor?, by Mark Thoma
Minimum wage, the EITC, or some combination of the two?
Posted by Mark Thoma on Monday, January 20, 2014 at 08:25 AM in Economics, Income Distribution |
The rise in inequality is being met with "a determined campaign of statistical obfuscation":
The Undeserving Rich, by Paul Krugman, Commentary, NY Times: The reality of rising American inequality is stark. ... While we can and should have a serious debate about what to do about this situation, the simple fact — American capitalism as currently constituted is undermining the foundations of middle-class society — shouldn’t be up for argument.
But it is, of course..., class warfare is already underway, with the plutocrats on offense. The result has been a determined campaign of statistical obfuscation. ... The story goes like this: America’s affluent are affluent because they made the right lifestyle choices. They got themselves good educations, they got and stayed married, and so on. Basically, affluence is a reward for adhering to the Victorian virtues.
What’s wrong with this story? Even on its own terms, it postulates opportunities that don’t exist. For example, how are children of the poor, or even the working class, supposed to get a good education in an era of declining support for and sharply rising tuition at public universities? Even social indicators like family stability are, to an important extent, economic phenomena: nothing takes a toll on family values like lack of employment opportunities.
But the main thing about this myth is that it misidentifies the winners from growing inequality. White-collar professionals, even if married to each other, are only doing O.K. The big winners are a much smaller group. ...
And who are these lucky few? Mainly they’re executives of some kind, especially, although not only, in finance. You can argue about whether these people deserve to be paid so well, but one thing is clear: They didn’t get where they are simply by being prudent, clean and sober.
So how can the myth of the deserving rich be sustained? Mainly through a strategy of distortion by dilution. You almost never see apologists for inequality willing to talk about the 1 percent, let alone the really big winners. Instead, they talk about the top 20 percent, or at best the top 5 percent. These may sound like innocent choices, but they’re not, because they involve lumping in married lawyers with the wolves of Wall Street. ...
Again, I know that these realities make some people, not all of them hired guns for the plutocracy, uncomfortable, and they’d prefer to paint a different picture. But even if the facts have a well-known populist bias, they’re still the facts — and they must be faced.
Posted by Mark Thoma on Monday, January 20, 2014 at 12:33 AM in Economics, Income Distribution, Politics |
Posted by Mark Thoma on Monday, January 20, 2014 at 12:03 AM in Economics, Links |
The benefits of income supplements for the poor:
What Happens When the Poor Receive a Stipend?, by Moises Velasquez-Manoff, Commentary, NY Times: ...in 1996, the Eastern Band of Cherokee Indians in North Carolina’s Great Smoky Mountains opened a casino, Jane Costello, an epidemiologist at Duke University Medical School, saw an opportunity. The tribe elected to distribute a proportion of the profits equally among its 8,000 members. Professor Costello wondered whether the extra money would change psychiatric outcomes among poor Cherokee families. ...
The poorest children tended to have the greatest risk of psychiatric disorders, including emotional and behavioral problems. But just four years after the supplements began, Professor Costello observed marked improvements among those who moved out of poverty. The frequency of behavioral problems declined by 40 percent, nearly reaching the risk of children who had never been poor. Already well-off Cherokee children, on the other hand, showed no improvement. ...
Minor crimes committed by Cherokee youth declined. On-time high school graduation rates improved. ... The earlier the supplements arrived in a child’s life, the better that child’s mental health in early adulthood. ...
Randall Akee, an economist at the University of California, Los Angeles, and a collaborator of Professor Costello’s, argues that the supplements actually save money in the long run. ... But contrary to the prevailing emphasis on interventions in infancy, Professor Akee’s analysis suggests that even help that comes later — at age 12, in this case — can pay for itself by early adulthood. ...
[I]f giving poor families with children a little extra cash not only helps them, but also saves society money in the long run, then, says Professor Costello, withholding the help is something other than rational. ...
[There's quite a bit more in the article.]
Posted by Mark Thoma on Sunday, January 19, 2014 at 09:19 AM in Economics, Social Insurance |
Rational Agents: Irrational Markets: Bob Shiller wrote an interesting piece in today's NY Times on the irrationality of human action. Shiller argues that the economist's conception of human beings as rational is hard to square with the behavior of asset markets.
Although I agree with Shiller, that human action is inadequately captured by the assumptions that most economists make about behavior, I am not convinced that we need to go much beyond the rationality assumption, to understand what causes financial crises or why they are so devastatingly painful for large numbers of people. The assumption that agents maximize utility can get us a very very long way. ...
In my own work, I have shown that the labor market can go very badly wrong even when everybody is rational. My coauthors and I showed in a recent paper, that the same idea holds in financial markets. Even when individuals are assumed to be rational; the financial markets may function very badly. ...
Miles Kimball and I have both been arguing that stock market fluctuations are inefficient and we both think that government should act to stabilize the asset markets. Miles' position is much closer to that of Bob Shiller; he thinks that agents are not always rational in the sense of Edgeworth. Miles and Bob may well be right. But in my view, the argument for stabilizing asset markets is much stronger. Even if we accept that agents are rational, it does not follow that swings in asset prices are Pareto efficient. But whether the motive arises from irrational people, or irrational markets; Miles and I agree: We can, and should, design an institution that takes advantage of the government's ability to trade on behalf of the unborn. More on that in a future post. ...
Posted by Mark Thoma on Sunday, January 19, 2014 at 08:52 AM in Economics, Financial System, Methodology |
Posted by Mark Thoma on Sunday, January 19, 2014 at 12:03 AM in Economics, Links |
The Rationality Debate, Simmering in Stockholm, by Robert Shiller, Commentary, NY Times: Are people really rational in their economic decision making? That question divides the economics profession today, and the divisions were evident at the Nobel Week events in Stockholm last month.
There were related questions, too: Does it make sense to suppose that economic decisions or market prices can be modeled in the precise way that mathematical economists have traditionally favored? Or is there some emotionality in all of us that defies such modeling?
This debate isn’t merely academic. It’s fundamental, and the answers affect nearly everyone. Are speculative market booms and busts — like those that led to the recent financial crisis — examples of rational human reactions to new information, or of crazy fads and bubbles? Is it reasonable to base theories of economic behavior, which surely has a rational, calculating component, on the assumption that only that component matters?
The three of us who shared the Nobel in economic science — Eugene F. Fama, Lars Peter Hansen and I — gave very different answers in our Nobel lectures. ...
Posted by Mark Thoma on Saturday, January 18, 2014 at 12:34 PM in Economics, Methodology |
Paul Krugman & the nature of economics: Paul Krugman is being accused of hypocrisy for calling for an extension of unemployment benefits when one of his textbooks says "Generous unemployment benefits can increase both structural and frictional unemployment." I think he can be rescued from this charge, if we recognize that economics is not like (some conceptions of) the natural sciences, in that its theories are not universally applicable but rather of only local and temporal validity.
What I mean is that "textbook Krugman" is right in normal times when aggregate demand is highish. In such circumstances, giving people an incentive to find work through lower unemployment benefits can reduce frictional unemployment (the coexistence of vacancies and joblessness) and so increase output and reduce inflation.
But these might well not be normal times. It could well be be that demand for labour is unusually weak; low wage inflation and employment-population ratios suggest as much. In this world, the priority is not so much to reduce frictional unemployment as to reduce "Keynesian unemployment". And increased unemployment benefits - insofar as they are a fiscal expansion - might do this. When "columnist Krugman" says that "enhanced [unemployment insurance] actually creates jobs when the economy is depressed", the emphasis must be upon the last five words.
Indeed, incentivizing people to find work when it is not (so much) available might be worse than pointless. Cutting unemployment benefits might incentivize people to turn to crime rather than legitimate work.
So, it could be that "columnist Krugman" and "textbook Krugman" are both right, but they are describing different states of the world - and different facts require different models...
Posted by Mark Thoma on Saturday, January 18, 2014 at 07:20 AM in Economics, Macroeconomics, Methodology |
Posted by Mark Thoma on Saturday, January 18, 2014 at 12:03 AM in Economics, Links |
Travel day -- will post as I can, which may not be much. For now, quickly between flights, people upset with David Brooks include:
Posted by Mark Thoma on Friday, January 17, 2014 at 07:21 AM in Economics, Income Distribution |