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At Vox EU:
Are banks too large?, by Lev Ratnovski, Luc Laeven, and Hui Tong: Summary: Large banks have grown and become more involved in market-based activities since the late 1990s. This column presents evidence that large banks receive too-big-to-fail subsidies and create systemic risk, whereas economies of scale in banking are modest. Hence, some large banks may be ‘too large’ from a social perspective. Since the optimal bank size is unknown, the best policies are capital surcharges and better bank resolution and governance.
Posted by Mark Thoma on Saturday, May 31, 2014 at 11:01 AM in Economics, Financial System |
Posted by Mark Thoma on Saturday, May 31, 2014 at 01:31 AM in Economics |
Piketty's full response from Vox EU (see also Paul Krugman: Thomas Doubting Refuted and Simon Wren-Lewis: What the Financial Times got (very) wrong):
Response to FT, by Thomas Piketty, Vox EU: This is a response to the criticisms - which I interpret as requests for additional information – that were published in the Financial Times on May 23 2014 (see FT article here).1 These criticisms only refer to the series reported in chapter 10 of my book Capital in the 21st century, and not to the other figures and tables presented in the other chapters, so in what follows I will only refer to these series.
This response should be read jointly with the technical appendix to my book, and particularly with the appendix to chapter 10 (available here). The page numbers given below refer to the HUP edition of my book that was published in March 2014.
Let me start by saying that the reason why I put all excel files on line, including all the detailed excel formulas about data constructions and adjustments, is precisely because I want to promote an open and transparent debate about these important and sensitive measurement issues.
Let me also say that I certainly agree that available data sources on wealth inequality are much less systematic than what we have for income inequality. In fact, one of the main reasons why I am in favor of wealth taxation, international cooperation and automatic exchange of bank information is that this would be a way to develop more financial transparency and more reliable sources of information on wealth dynamics (even if the tax was charged at very low rates, which everybody could agree with).
For the time being, we have to do with what we have, that is, a very diverse and heterogeneous set of data sources on wealth: historical inheritance declarations and estate tax statistics, scarce property and wealth tax data; household surveys with self-reported data on wealth (with typically a lot of under-reporting at the top); Forbes-type wealth rankings (which certainly give a more realistic picture of very top wealth groups than wealth surveys, but which also raise significant methodological problems, to say the least). As I make clear in the book, in the on-line appendix, and in the many technical papers on which this book relies, I have no doubt that my historical data series can be improved and will be improved in the future (this is why I put everything on line). In fact, the “World Top Incomes Database” (WTID) is set to become a “World Wealth and Income Database” in the coming years, and together with my colleagues we will put on-line updated estimates covering more countries. But I would be very surprised if any of the substantive conclusions about the long run evolution of wealth distributions was much affected by these improvements.
I welcome all criticisms and I am very happy that this book contributes to stimulate a global debate about these important issues. My problem with the FT criticisms is twofold. First, I did not find the FT criticism particularly constructive. The FT suggests that I made mistakes and errors in my computations, which is simply wrong, as I show below. The corrections proposed by the FT to my series (and with which I disagree) are for the most part relatively minor, and do not affect the long run evolutions and my overall analysis, contrarily to what the FT suggests. Next, the FT corrections that are somewhat more important are based upon methodological choices that are quite debatable (to say the least). In particular, the FT simply chooses to ignore the Saez-Zucman 2014 study, which indicates a higher rise in top wealth shares in the United States during recent decades than what I report in my book (if anything, my book underestimates the rise in wealth inequality). Regarding Britain, the FT seems to put a lot of trust in self-reported wealth survey data that notoriously underestimates wealth inequality.
I will start by giving an overview of the series on wealth inequality that I present in chapter 10 of my book. I will then respond to the specific points raised by the FT.
Overview of the series on wealth inequality reported in chapter 10
The long run series on wealth inequality provided in chapter 10 of my book deal with only four countries: France, Britain, Sweden, and the United States.
Figure 10.1. Wealth inequality in France, 1810-2010 (p.340)
Figure 10.2. Wealth inequality in versus France 1810-2010 (p.341)
Figure 10.3. Wealth inequality in Britain, 1810-2010 (p.344)
Figure 10.4. Wealth inequality in Sweden, 1810-2010 (p.345)
Figure 10.5. Wealth inequality in the United States, 1810-2010 (p.348)
Figure 10.6. Wealth inequality in Europe versus the US, 1810-2010 (p.349)
The series used to construct figures 10.1-10.6, replicated in the book on p.340-348 are available in table S10.1, as well as in the corresponding excel file.
These wealth inequality series deal with much fewer countries and are substantially more exploratory than the empirical material provided in other parts of the book: income and population growth in chapters 1-2; wealth-income ratios in chapters 3-6; income inequality series in chapters 7-9. This follows from the fact that available data sources on wealth inequality are much less systematic than data sources on growth, wealth-income ratios and income inequality. In particular, we do have yearly income declarations statistics for dozens of countries, but we do not have yearly wealth declarations statistics for most countries. So we have to do with the diverse set of sources that I described above.
I believe that the data we have on wealth inequality is sufficient to reach a number of conclusions. Namely, wealth inequality was extremely high and rising in European countries during the 19th century and up until World War 1 (with a top 10% wealth share around 90% of total wealth in 1910), then declined until the 1960s-1970s (down to about 50-60% for the top 10% wealth share); and finally increased moderately since the 1980s-1990s. In the United States, wealth inequality was less extreme than in Europe until World War 1, but it was less strongly affected by the 20th century shocks, and in recent decades it rose more strongly than in Europe. Both in Europe and in the United States, wealth inequality is less extreme than what it was in Europe on the eve on World War 1.
I believe that the data that we have is sufficient to reach these conclusions, but that it is insufficient to go much beyond that. In particular, our ability to measure the most recent trends in wealth inequality is limited, partly due to the huge rise in cross border financial assets and offshore wealth. According to Forbes-type wealth rankings, the very top of the world wealth distribution has been rising about three times faster than average wealth at the global level over the 1987-2013 period (see chapter 12 of my book, in particular Table 12.1. The growth rate of top global wealth, 1987-2013). This seems to be clear evidence than wealth inequality is rising, partly because the rate of return to very large portfolios is higher than the growth rate. This interpretation is consistent with what I find with the returns to large university endowments (see Table 12.2. The return on the capital endowments of US universities, 1980-2010). But we do not really know whether this holds only at the very very top or for bigger groups (say, above 10 millions $ and not only above 1 billion $). Let me make very clear that I do not believe that r>g is the only force that determines the dynamics of wealth inequality. There are many other important forces that could in principle drive wealth inequality in other directions. The main message coming from my book is not that there should always be a deterministic trend toward ever rising inequality (I do not believe in this); the main message is that we need more democratic transparency about wealth dynamics, so that we are able to adjust our institutions and policies to whatever we observe.
I now consider each of the four countries one by one and respond to the specific points raised by the FT. I start with Sweden (the first country for which the FT expresses concerns), and then move to France, the United States, and finally to Britain (arguably the country with the biggest data problems) and to the European average.
Sweden (see figure 10.4 here)
The FT does not point out any significant disagreement regarding Sweden. Their corrected figure looks virtually identical to mine (see their figure on Sweden here).
The FT argues however that my choice of years from raw data sources is not entirely clear. For instance, they point out that raw data for year "1908" for year "1910", year "1935" for year "1930", and so on. These issues are already explained in the book and in the technical appendix, but they probably need to be clarified. Generally speaking, when I present series on wealth-income ratios and wealth inequality (and also for some figures on income inequality), I usually choose to present decennial averages rather than yearly series. This is because wealth series often display a lot of short-run volatility (in particular due to sharp movements in asset prices). So in order to focus the attention on long-run evolutions, it is better to abstract from these short-run movements and show decennial averages. See for instance the wealth-income series presented in chapter 5: contrast figure 5.1 and figure 5.5. When full yearly series are available, the way decennial averages are computed in the book is the following: "1900" usually refers to the average "1900-1909", and so on. This is further explained in the technical paper "Capital is back..." (Piketty-Zucman QJE 2014) available here.
In the case of the wealth inequality series reported in chapter 10, the raw series are usually not available on annual basis, so I compute decennial averages on the basis of the closest years available. This is clearly explained in the chapter 10 excel file (see sheet "TS10.1"). For instance, "1870" is computed as the average for years "1873-1877", "1910" as the average "1907-1908", and so on. These choices can be discussed and improved, but they are reasonably transparent (they are explicitly mentioned in the excel table, which apparently the FT did not notice), and as one can check they have negligible impact on long run evolutions.
The FT also suggests that I made a transcription error by using the estimate for 1908 for the top 1% wealth share (namely, 53.8% of total wealth) for year 1920 (instead of the correct raw estimate for that year, namely 51.5% of total wealth). In fact, this adjustment was intended to correct for the fact that there is a break in a data sources in 1908: pre-1908 series use estate tax data, while post-1908 use wealth tax data, resulting into somewhat lower top wealth (as exemplified by year 1908, for which both data sources co-exist; see Waldenstrom 2009, Table 3.A1, p.120-121). This is standard practice, but I agree that this adjustment should have been made more explicit in the technical appendix and excel file.2 In any case, whatever adjustment one chooses to make to deal with this break in series is again going to have a negligible impact on long-run patterns.
France (see figure 10.1 and figure 10.2)
The FT does not point out any significant disagreement regarding France. Their corrected figure looks virtually identical to mine (see their figure on France here).
The FT argues however that no explanation is given for some of the data construction. Namely, the FT claims the following: “The original source reports data relative to the distribution of wealth among the dead. In order to obtain the distribution of wealth across the living, Prof Piketty augments the share of the top 10 per cent of the dead by 1 per cent and the wealth share of the top 1 per cent by 5 per cent. An adjustment of this sort is standard practice in this type of calculations to correct for the fact that those who die are not representative of the living population. Prof. Piketty does not explain why the adjustment is usually constant. But in one year, 1910, it is not constant and the adjustment scale rises to 2 per cent and 8 per cent respectively. There is no explanation.”
This is a surprising statement, because all necessary explanations are actually given in the technical research paper on which these series are based (see Piketty-Postel-Vinay-Rosenthal AER 2006) and in the chapter 10 excel file (see sheet "TS10.1DetailsFR"). Namely, the PPVR AER 2006 paper includes detailed, year-by-year estimates of how differential mortality affects wealth inequality among the living, and finds that the ratio between top wealth shares among the living and top wealth shares among decedents rises at the end of the 19th century and in the early 20th century. Intuitively, this is because differential mortality effects seem to become stronger around that time (namely, life expectancy rises quite fast among top wealth holders, but much less so for the rest of the population). One can see this explicitly in table A4 of the working paper version of the PPVR AER 2006 article; this is explicitly reproduced in chapter 10 excel file (see sheet "TS10.1DetailsFR", table A4 (2), ratios for top 1% shares). More recent research has also confirmed the changing pattern of differential mortality around that time. See in particular the appendix tables to Piketty-Postel-Vinay-Rosenthal EEH 2014. Differential mortality is a complex issue, and we do not have perfect answers; but we do our best to address this issue in the most transparent way. In particular, we put on line on this web site the large micro files that we have collected in French inheritance archives, so that everybody can reproduce our computations and use this data for their own research. We are currently collecting additional micro files in Parisian and provincial archives, and we will put new data files and updated estimates in the future.
What it find somewhat puzzling in this controversy is the following: (i) the FT journalists evidently did not read carefully the technical research papers and excel files that I have put on-line; (ii) whatever adjustment one makes to correct for differential mortality (and I certainly agree that there are uncertainties left regarding this complex and important issue), it should be clear to everyone that this really has a relatively small impact on the long-run trends in wealth inequality. This looks a little bit like criticism for the sake of criticism.
United States (see figure 10.5)
The FT does point out more substantial disagreements regarding the United States. Their corrected figure actually looks very close to mine regarding the long run evolution, but not for the recent decades, where the FT considers that I overestimate somewhat the rise in wealth inequality (see their figure on United States here). The FT also expresses concerns about some of the adjustments that are made for earlier periods, although they have little impact on the overall patterns.
As I explain in the book (chapter 10, p.347) and in the technical appendix to chapter 10 (available here), there are very large uncertainties regarding US historical sources on wealth inequality, and I certainly agree that the series that are provided in the book can be improved. I try to combine in the most consistent manner the information coming from estate tax statistics (which unfortunately only cover the top few percents of the distribution, and not the entire population like in France) and the information coming from household wealth surveys (fortunately the SCF is known to be of higher quality than most other wealth surveys). In particular, the estimate for year 1970 tries to combine the estimates available for top 10% and top 1% wealth shares for years 1960 and 1980 and the evolution of very top wealth shares between 1960, 1970 and 1980. This has little impact on the overall long-run pattern, but I agree that this is relatively uncertain, and that this could have been explained more clearly.
I should stress however that the more recent and more reliable estimates that were recently produced by Emmanuel Saez (Berkeley) and Gabriel Zucman (LSE) confirm the pattern that I find. See Saez-Zucman 2014. For the recent decades, they actually find a larger rise of top 10% wealth shares and especially top 1% and top 0.1% wealth shares than what I report in my book. So, if anything, my book tends to underestimate the recent rise in US wealth inequality (contrarily to what the FT suggests).
This important work was done after my book was written, so unfortunately I could not use it for my book. Saez and Zucman use much more systematic data than I used in my book, especially for the recent period. Also their series are constructed using a completely different data source and methodology (namely, the capitalization method using capital income flows and income statements by asset class). Now that this work is available, the Saez-Zucman series (which unfortunately the FT article seems to ignore) should be used as reference series for wealth inequality in the United States. In a recent survey chapter that will be published in the Handbook of Income Distribution (HID), we choose to use the Saez-Zucman series (rather than the series reported in my book) in order to describe the long-run evolution of US wealth inequality. See Piketty-Zucman 2014 (see in particular supplementary figure S3.5, p.91 for a comparison between the two series; as one can see, they look very similar).3
Britain (see figure 10.3)
The FT does point out substantial disagreements regarding the recent evolution in Britain. Their corrected figure actually looks very close to mine regarding the long run evolution, but not for the recent decades, where the FT considers that there was no rise at all in wealth inequality, and possibly a decline, whereas I report a rise (see their figure on Britain here). The biggest disagreement comes from the latest data point (c.2010): the FT considers that the right estimate for the top 10% wealth share is around 44% of total wealth (this comes from a recent household survey based upon self-reported data, namely the “wealth and assets survey”, which I believe underestimates top wealth groups significantly; see below); whereas I report an estimate with a top 10% wealth share around 71% (this comes from more reliable estate tax statistics). This is a very large difference indeed.
Let me make clear that although I think my estimate is more reliable and rests on better methodological choices, I also believe that this large gap reflects major uncertainties and limitations in our collective ability to measure recent evolution of wealth inequality in developed countries, particularly in Britain. As I explain above, I believe this is a major challenge for our statistical and democratic institutions.
The estimates that I report for wealth inequality in Britain rely primarily on the very careful estimates that were established by Atkinson-Harrison 1978 and Atkinson et al 1989 using estate tax statistics from the 1920s to the 1980s. I updated these series for the 1990-2010 period using official HMRC data that are also based upon estate tax records. I find a rising inequality trend, although a more modest one than for the United States. I think this is the most reasonable estimate one can obtain given available data, but this certainly should be improved in the future.
What is troubling about the FT methodological choices is that they use the estimates based upon estate tax statistics for the older decades (until the 1980s), and then they shift to the survey based estimates for the more recent period. This is problematic because we know that in every country wealth surveys tend to underestimate top wealth shares as compared to estimates based upon administrative fiscal data. Therefore such a methodological choice is bound to bias the results in the direction of declining inequality. For instance, as I note in the technical appendix to chapter 10 (available here), the recent wealth surveys undertaken by INSEE in 2004-2010 in France indicate a top decile share just above 50% of the total wealth, whereas fiscal data (inheritance and wealth tax) suggest a top decile share above 60% of the total wealth. The gap seems particularly large for the case of Britain, which could reflect the fact that the “wealth and assets survey” seems particularly bad at measuring the top part of the wealth distribution of the UK. Indeed, according to the latest report by the Office of national statistics (ONS), the response rate for this survey was only 64% in 2010-2012; this is an improvement as compared to the response rate of 55% that was observed during the 2006-2008 wave of the same survey (see ONS 2014, Table 7.1); but it is pretty clear that with such a low response rate, it is hard to claim that one can adequately measure wealth inequality, particularly at the top of the distribution. Also note that a 44% wealth share for the top 10% (and a 12.5% wealth share for the top 1%, according to the FT) would mean that Britain is currently one the most egalitarian countries in history in terms of wealth distribution; in particular this would mean that Britain is a lot more equal that Sweden, and in fact a lot more equal than what Sweden as ever been (including in the 1980s). This does not look particularly plausible.
Of course the estate records based estimates also raise significant methodological concerns, and I do not claim that the resulting estimates are perfectly reliable. In particular, they might also underestimate top wealth levels (because top wealth holders sometime escape the estate tax through sophisticated trust funds or offshore assets). But they definitely seem more plausible than the estimates based upon self-reported survey data.
Note also that in recent years more and more scholars and statisticians have started to recognize the limitations of household wealth surveys and to upgrade the top segments of survey based wealth distributions using other sources. For instance, a recent study undertaken at the research department of the ECB attempts to upgrade in a systematic manner the top tail of the wealth surveys undertaken in Eurozone countries by using the Pareto coefficients that one can estimate using Forbes rankings and other lists of very high wealth individuals in each country. The results indicate that this can lead to very large increases (more than 10 percentage points) in top wealth shares (see Vermeulen 2014). In the United States, although the SCF wealth survey is generally regarded as a very high quality wealth survey, there has been some important work trying to upgrade the top tail by using Forbes ranking and estate tax data (see Johnson-Shreiber 2006 and Raub-Johnson-Newcomb 2010). This is definitely something that should be done for the British “wealth and assets survey”.
Regarding the 19th century estimates, the FT expresses concerns with the way I compute the top wealth shares for Britain in 1810 and 1870. Namely, I borrow the top 1% wealth shares estimates from Lindert (54.9% and 61.1%, respectively), and I assume that the next 9% shares shifted from 28% to 26%. Lindert does report a lower estimate for the next 9% share (about 16%). However this would indicate a relatively unusual pattern of Pareto coefficients within the top 10% of the distribution (as compared both to the French 19th century inheritance data, which is a lot more comprehensive than the British probate data, and to the British estate tax statistics for 1911-1913). Given that the probate records used by Lindert seem to provide a better coverage of the top 1% than of the next 9%, I use Pareto interpolation techniques to estimate the next 9% share. This is an issue that should have been explained more clearly and that would definitely deserve further research. This has a limited impact for the long run patterns analyzed here (the pre-World War 1 rise in wealth inequality would be even larger without this adjustment).
European average (see figure 10.6)
Finally, the FT also expresses the following concern: the European average series, which I computed by making a simple arithmetic series between France, Britain and Sweden, should have been computed using population weighted averages. I do agree that population (or GDP) weighted averages are generally superior to simple arithmetic averages. However I should stress that it really does not make much of a difference here, because all three European countries that I use follow fairly similar long run patterns. Namely, all three countries display high and rising top wealth shares during the 19th century and up until World War 1 (with about 90% of total wealth for the top 10% around 1910); then a sharp decline until the 1960s-1970s (with top 10% wealth shares down to 50-60%); and finally a modest rise since the 1980s-1990s. So whether one weights the three countries with equal weights or according to population or GDP does not make a big difference. But in case Britain did follow a markedly different pattern than the other countries in recent decades (with a decline in wealth inequality rather than a rise), then putting more weight on Britain than on Sweden becomes a significant issue. So we are back to the previous question: what happened to wealth inequality in Britain in recent decades? The FT seems to believe it has become more equal; however the way they use self-reported wealth survey data is not convincing. This is nevertheless an interesting debate for the future, and we should all agree that we know too little about it.
1 See also the other two articles published by the FT on May 23 2014: here and there. See also my short reponse published here in the FT. Unfortunately I was given limited time to submit this response, so I could not address specific points; here is a longer response.
2 Also note that the raw series display a decline in top 1% wealth share between 1908 and 1920, but a sharp rise in the share of the next 9% (resulting into a significant increase in the top 10% share). This does not look entirely plausible and might also be due to a break in raw data sources (unless this is due to sharp short-run variations in the relative price of assets held by these different wealth groups).
3 Note that this HID chapter also includes novel series about the evolution of the share of inheritance in total wealth accumulation. These new series use a different methodology and complement those reported in chapter 11 of my book.
Posted by Mark Thoma on Friday, May 30, 2014 at 03:08 PM in Economics, Income Distribution, Press |
Steve Waldman at Interfluidity:
Welfare economics: an introduction (part 1 of a series): Commenters at interfluidity are usually much smarter than the author whose pieces they scribble beneath, and the previous post was no exception. But there were (I think) some pretty serious misconception in the comment thread, so I thought I’d give a bit of a primer on “welfare economics”, as I understand the subject. It looks like this will go long. I’ll turn it into a series. ...
Posted by Mark Thoma on Friday, May 30, 2014 at 11:02 AM in Economics, Equity |
Hours Worked, No Change; Output, Up 42%: Here's one snapshot of how the U.S. economy evolved in the last 15 years: an identical number of total hours worked in 1998 and 2013, even though the population rose by over 40 million people, but a 42% gain in output. Shawn Sprague explains in "What can labor productivity tell us about the U.S. economy?" published as the Beyond the Numbers newsletter from the U.S. Bureau of Labor Statistics for May 2014. ...
A lot can be said about this basic fact pattern. Of course, the comparison years are a bit unfair, because 1998 was near the top of the unsustainably rapid dot-com economic boom, with an unemployment rate around 4.5%, while 2013 is the sluggish aftermath of the Great Recession. The proportion of U.S. adults who either have jobs or are looking for jobs--the "labor force participation rate"--has been declining for a number of reasons: for example, the aging of the population so that more adults are entering retirement, a larger share of young adults pursuing additional education and not working while they do so, a rise in the share of workers receiving disability payments, and the dearth of decent-paying jobs for low-skilled labor. ...
The more immediate question is what to make of an economy that is growing in size, but not in hours worked, and that is self-evidently having a hard time generating jobs and bringing down the unemployment rates as quickly as desired. I'm still struggling with my own thoughts on this phenomenon. But I keep coming back to the tautology that there will be more good jobs when more potential employers see it as in their best economic interest to start firms, expand firms, and hire employees here in the United States.
Posted by Mark Thoma on Friday, May 30, 2014 at 08:28 AM in Economics, Productivity |
The cost of taking action to reduce the threat from global warming isn't as large as you might be led to believe:
Cutting Back on Carbon, by Paul Krugman, Commentary, NY Times: Next week the Environmental Protection Agency is expected to announce new rules designed to limit global warming. Although we don’t know the details yet, anti-environmental groups are already predicting vast costs and economic doom. Don’t believe them. Everything we know suggests that we can achieve large reductions in greenhouse gas emissions at little cost to the economy.
Just ask the United States Chamber of Commerce.
O.K., that’s not the message the Chamber of Commerce was trying to deliver in the report it put out Wednesday. It clearly meant to convey the impression that the E.P.A.’s new rules would wreak havoc. But if you focus on the report’s content rather than its rhetoric, you discover that ... the numbers are remarkably small.
Specifically, the report considers a carbon-reduction program that’s probably considerably more ambitious than we’re actually going to see, and it concludes that between now and 2030 the program would cost $50.2 billion in constant dollars per year. That’s supposed to sound like a big deal. ... These days, it’s just not a lot of money.
Remember, we have a $17 trillion economy..., and it’s going to grow over time. So what the Chamber of Commerce is actually saying is that we can take dramatic steps on climate ... while reducing our incomes by only one-fifth of 1 percent. That’s cheap! ...
And ... this is based on anti-environmentalists’ own numbers. The real costs would almost surely be smaller...
You might ask why the Chamber of Commerce is so fiercely opposed to action against global warming, if the cost of action is so small. The answer, of course, is that the chamber is serving special interests, notably the coal industry ... and also ... the ever more powerful anti-science sentiments of the Republican Party.
Finally, let me take on the anti-environmentalists’ last line of defense — the claim that whatever we do won’t matter, because other countries, China in particular, will just keep on burning ever more coal. This gets things exactly wrong. Yes, we need an international agreement... But U.S. unwillingness to act has been the biggest obstacle to such an agreement. ...
Now, we haven’t yet seen the details of the new climate action proposal... We can be reasonably sure, however, that the economic costs of the proposal will be small, because that’s what the research — even research paid for by anti-environmentalists... — tells us. Saving the planet would be remarkably cheap.
Posted by Mark Thoma on Friday, May 30, 2014 at 12:24 AM in Economics, Environment |
Posted by Mark Thoma on Friday, May 30, 2014 at 12:06 AM in Economics, Links |
Thomas Piketty's response to the FT:
Response to FT: ... I welcome all criticisms and I am very happy that this book contributes to stimulate a global debate about these important issues. My problem with the FT criticisms is twofold. First, I did not find the FT criticism particularly constructive. The FT suggests that I made mistakes and errors in my computations, which is simply wrong, as I show below. The corrections proposed by the FT to my series (and with which I disagree) are for the most part relatively minor, and do not affect the long run evolutions and my overall an alysis , contrarily to what the FT suggests . Next, the FT corrections that are somewhat more important are based upon methodological choices that are quite debatable (to say the least) . In particular, the FT simply chooses to ignore the Saez - Zucman 2014 study, which indicates a higher rise in top wealth shares in the United States during recent decades than what I report in my book (if anything, my book underestimates the rise in wealth inequality). Regarding Britain, the FT seems to put a lot of trust in self - reported wealth survey data that notoriously underestimates wealth inequality. ...
[This is just a snippet -- the full response is 10 pages long.]
Posted by Mark Thoma on Thursday, May 29, 2014 at 11:27 AM in Economics |
From Vox EU:
How highly educated immigrants raise native wages, by Giovanni Peri, Kevin Shih, and Chad Sparber, Vox EU: Immigration to the US has risen tremendously in recent decades. Though media attention and popular discourse often focus on illegal immigrants or the high foreign-born presence among less-educated workers, the data show that immigrants are drawn from both ends of the education spectrum. At the low end, immigrants grew from 5% of workers with a high school degree or less in 1970 to 20.8% in 2010. At the high end, the figure rose from 7.3% to 18.2% for those with graduate degrees over the same period.1
These trends suggest that it is important for economists and policymakers to understand the effects of highly educated immigrant flows. The canonical economic model, based on demand and supply, holds that, all else equal, an increase in labour supply should cause wages to fall. Thus, immigration should depress wages paid to natives. Evidence for such a downward effect in academic work is mixed. For example, Borjas (2003, 2013) find a negative impact of immigration on wages, while Card (2009) and Ottaviano and Peri (2012) do not. For the canonical model to fail and for immigrants to generate wage gains for natives, it must be the case that all else is not equal in the case of immigration. This is because the labour market is more complex than the market for typical goods. Adjustment mechanisms exist to allow natives and firms to respond to immigration without experiencing lower wages or fewer employment opportunities. Immigrants may also generate positive externalities that benefit native workers. This article provides a brief summary of the recent evidence for these phenomena in the context of the market for workers with a college degree.
Immigrants to the US specialise in STEM
The first step in understanding the peculiarities of the labour market is to recognise that native and foreign labour differ in their underlying characteristics. We do not think that the popular refrain claiming that “the US faces a skills shortage” is a useful way to approach this issue. Rather, we recognise the existence of important differences between natives and immigrants. Figure 1 provides a sense of this by describing the college majors of US bachelor’s degree recipients. Compared to natives, foreign-born workers are disproportionately likely to have obtained a bachelor’s degree in Science, Technology, Engineering, or Mathematics (STEM). 45.5% of college-educated immigrants in the labour force have a STEM degree, whereas only 28% of natives do. Conversely, natives are twice as likely as immigrants to have majored in education (12.2% versus 5.6%) or social sciences (9.5% versus 5%).
Figure 1. Primary degree share by nativity – workers with a bachelor’s degree or more education, 2009–2012
Source: American Community Survey.
These differences are crucial to understanding how natives might respond to college-educated immigrant flows. Figure 1 indicates that immigrants possess a comparative advantage and specialise in STEM. Thus, we might expect that natives respond to inflows of STEM-dominant immigrants by specialising in non-STEM work. Indeed, Peri and Sparber (2011) provide evidence of this phenomenon – inflows of highly educated immigrants cause natives switch to more communication-intensive occupations.
The contribution of STEM to overall productivity
This comparative advantage and specialisation story is not unique to the market for college-educated labour. Peri and Sparber (2009) document similar behaviour among workers with a high school degree or less education. However, the fact that foreign college-educated immigrants tend to specialise in STEM has an additional implication of paramount importance. Economists have long recognised the significance of innovation in generating economic growth, and the role of scientists and engineers in fostering such knowledge production. The process of innovation generates positive spillovers for the economy as a whole. Thus, by increasing the country’s stock of knowledge, foreign-born STEM workers can increase the overall productivity of the economy.
A rather simplistic estimate of the contribution of foreign-born STEM to productivity in the US can be calculated from just two pieces of information. First, Jones (2002) estimates that 50% of US total factor productivity (TFP) growth in recent decades is attributable to scientists and engineers. Second, college-educated STEM workers grew from 2.9% of total employment in 1990 to 3.7% of employment in 2010, and foreign-born workers were responsible for 80% of this growth. By combining immigrants’ contributions to STEM growth with STEM’s contribution to TFP growth, we can deduce that roughly 40% of aggregate productivity growth may be due to foreign-born college-educated STEM workers.
This is an enormous figure and it is based on data at a very high level of aggregation. In Peri, Shih, and Sparber (2014), we assess whether more thorough economic analysis delivers comparable results. Using cross-city panel regressions to estimate wage and employment responses to foreign STEM, we find a rise in foreign STEM by one percentage point of total employment increases real wages of college-educated natives by 7–8 percentage points and those of non-college-educated natives by 3-4 percentage points. We find no statistically significant effects on native employment growth.
Instrumenting for the growth of foreign STEM workers
Causal identification is driven by three regularities. First, the presence of foreign STEM workers varied substantially across US cities in 1980. Second, the H-1B visa program – which has been the method of entry for highly skilled immigrants in the US since its inception in 1990 – produced national level changes in the number of skilled immigrants in the country that can be seen as exogenous from a city-level perspective. Third, new immigrants are attracted to locations where previous immigrant communities have already been established. By interacting 1980 city-level settlements with subsequent national-level policy, we can predict the number of new foreign STEM workers in each city. This H-1B-driven imputation of future foreign STEM workers is a good predictor of the actual increase in both foreign STEM and overall STEM workers in a city over subsequent decades. However it is not correlated, by construction, with the economic conditions in the city during the subsequent decades. It therefore makes an excellent instrument for the actual growth of foreign STEM workers to obtain causal estimates of the impact of STEM growth on the wages and employment of college and non-college-educated native-born workers.2
From the perspective of the canonical supply and demand model, the positive relationship between foreign labour supply and native wages may appear peculiar, but it is reasonable in the context of STEM-driven economic and productivity growth. The analysis in Peri, Shih, and Sparber (2014) uses an aggregate production model at the city level, to derive the productivity effect implied by the estimated wage and employment effects. We find that foreign STEM workers can explain 30% to 60% of US TFP growth between 1990 and 2010 – in line with the simple calculation cited above.
Discussion of results and policy implications
The large and positive wage and productivity effects from foreign-born STEM labour raise two important issues. The first concerns how, in the presence of these gains, studies sometimes find detrimental effects. Borjas (2013), for example, argues that immigration from 1990–2010 may have reduced wages paid to workers with a bachelor’s degree by 3.2%, and for workers with a graduate degree by 4.1%. Similarly, Borjas and Doran (2012) find that the post-1992 inflow of Soviet mathematicians pushed American mathematicians to lower quality institutions and reduced their academic productivity. To understand the conflict between these results and our own, it is important to recognise that our gains arise due to complementarities and positive externalities from innovation. Analyses that ignore occupational adjustment, understate complementarities across skill groups, fail to account for externalities, or analyse markets in which positive spillovers are small, are more likely to miss the gains associated with immigration.
The second is whether foreign STEM workers are truly needed since the US could presumably enact policies to produce its own STEM talent. This is true, but three qualifications are necessary. First, our analysis, as well as that of Kerr and Lincoln (2010), argues that foreign H-1B workers increase innovation and the productivity of US STEM workers without crowding them out. Thus it may be possible to increase both foreign and domestic STEM supply. Second, Hunt and Gauthier-Loiselle (2010) argue that immigrants are more entrepreneurial and innovative than natives, and this may add a further productive complementarity for natives. Third, native STEM development might require extensive and expensive investment, whereas immigration policy could be a more cost-effective way of building the country’s STEM workforce.
The comprehensive immigration reform proposed in the US Senate Bill 744 that would increase the annual number of H-1B visas allotted by 50,000 per year. In the light of the results above, it should be obvious that the provision would produce long-run positive effects on US wages and innovation.
Borjas, G J (2003), “The labor demand curve is downward sloping: reexamining the impact of immigration on the labor market”, Quarterly Journal of Economics, 118(4): 1335–1374.
Borjas, G J (2013), “Immigration and the American Worker: A Review of the Academic Literature”, Center for Immigration Studies, April.
Borjas, G J and K B Doran (2012), “The Collapse of the Soviet Union and the Productivity of American Mathematicians”, Quarterly Journal of Economics, 127(3): 1143–1203.
Card, D (2009), “Immigration and Inequality”, The American Economic Review, 99(2): 1–21.
Hunt, J and M Gauthier-Loiselle (2010), “How Much Does Immigration Boost Innovation?”, American Economic Journal: Macroeconomics: 31–56.
Jones, C I (2002), “Sources of US Economic Growth in a World of Ideas”, The American Economic Review, 92(1): 220–239.
Kerr, W R and W F Lincoln (2010), “The supply side of innovation: H-1B visa reforms and US ethnic invention”, Journal of Labor Economics, 28: 473–508.
Ottaviano, G I P and G Peri (2012), “Rethinking the Effect of Immigration on Wages”, Journal of the European Economic Association, 10(1): 152–197.
Peri, G and C Sparber (2009), “Task Specialization, Immigration, and Wages”, American Economic Journal: Applied Economics, 1(3): 135–169.
Peri, G and C Sparber (2011), “Highly-Educated Immigrants and Native Occupational Choice”, Industrial Relations, 50(3).
Peri, Giovanni, Kevin Shih, and Chad Sparber (2014), “Foreign STEM Workers and Native Wages and Employment in U.S. Cities“, NBER Working Papers 20093.
1 Summary statistics are based on Census and American Community Survey (ACS) data.
2 This methodology is not immune to criticism. Persistent city-specific shocks affecting immigration, employment, and wage growth, for example, would challenge the validity of our instrumental variable strategy. However, we perform a series of robustness checks that all point to the same result – foreign-born STEM workers increase wages paid to native-born workers, with larger effects for those with a college degree.
Posted by Mark Thoma on Thursday, May 29, 2014 at 09:45 AM in Economics, Immigration |
The Great Recession's "biggest policy mistake", by Mark Thoma, CBS News: Two recent books, Timothy Geithner's "Stress Test: Reflections on Financial Crises" and "House of Debt" by Atif Mian and Amir Sufi, have reignited a discussion over the Obama administration's policies and attitude on mortgage debt relief.
In contrast with the former New York Fed president and later Treasury Secretary's account about the efforts to save the U.S. economy from the collapsing housing market, others say the administration -- more particularly the Geithner-led Treasury -- did not push aggressively for mortgage debt relief .
As a result, very little was done to help households struggling with mortgage debt. Indeed, Mian and Sufi argue that "The fact that Secretary Geithner and the Obama administration did not push for debt write-downs more aggressively remains the biggest policy mistake of the Great Recession."
Who is correct? ...[continue]...
Posted by Mark Thoma on Thursday, May 29, 2014 at 08:16 AM in Economics, Housing, Policy |
Posted by Mark Thoma on Thursday, May 29, 2014 at 12:06 AM in Economics, Links |
I can't watch this, so have no idea how foolish I look, or not, or what parts of the interview they chose to include:
Posted by Mark Thoma on Wednesday, May 28, 2014 at 03:17 PM in Economics, Video |
Glenn Rudebusch and John Williams:
A Wedge in the Dual Mandate: Monetary Policy and Long-Term Unemployment, by Glenn D. Rudebusch and John C. Williams, Federal Reserve Bank of San Francisco: Abstract In standard macroeconomic models, the two objectives in the Federal Reserve's dual mandate -- full employment and price stability -- are closely intertwined. We motivate and estimate an alternative model in which long-term unemployment varies endogenously over the business cycle but does not a ect price in ation. In this new model, an increase in long-term unemployment as a share of total unemployment creates short-term tradeoffs for optimal monetary policy and a wedge in the dual mandate. In particular, faced with high long-term unemployment following the Great Recession, optimal monetary policy would allow inflation to overshoot its target more than in standard models.
I'll believe the Fed will allow *intentional overshooting* of its inflation target when I see it.
Posted by Mark Thoma on Wednesday, May 28, 2014 at 01:15 PM in Economics, Inflation, Monetary Policy |
From the NBER Digest:
Unemployment Insurance and Disability Insurance in the Great Recession: At the end of 2012, 8.8 million American adults were receiving Social Security Disability Insurance (SSDI) benefits. The share of the American public receiving SSDI has more than doubled since 1990. This rapid growth has prompted concerns about SSDI's sustainability: recent projections suggest that the SSDI trust fund will be exhausted in 2016.
SSDI recipients tend to remain in the program, and out of the labor market, from the time they are approved for benefits until they reach retirement age. This means that if unemployed individuals turn to disability insurance as a source of benefits when they exhaust their unemployment insurance (UI), the long-term program costs can be substantial. Some have suggested that the savings from avoided SSDI cases could help to finance the cost of extending UI benefits, but little is known about the interaction between SSDI and UI.
In Unemployment Insurance and Disability Insurance in the Great Recession, (NBER Working Paper No. 19672), Andreas Mueller, Jesse Rothstein, and Till von Wachter use data from the last decade to investigate the relationship between UI exhaustion and SSDI applications. They take advantage of the variability of UI benefit durations during the recent economic downturn. The duration of these benefits was as long as 99 weeks in 2009, remained protracted for several years, then was shortened substantially in 2012. The authors focus on the uneven extension of UI benefits during and after the Great Recession to isolate variation in the duration of these benefits that is not confounded by variation in economic conditions more broadly.
The authors find very little interaction between UI benefit eligibility and SSDI applications, and conclude that SSDI applications do not appear to respond to UI exhaustion. While the authors cannot rule out small effects, they conclude that SSDI applications do not respond strongly enough to contribute meaningfully to a cost-benefit analysis of UI extensions or to account for the cyclical behavior of SSDI applications.
The authors suggest that the tendency for the number of SSDI applications to grow when the economy is weak may reflect variation in the potential reemployment wages of displaced workers, or changes in the employment opportunities of the marginally disabled that influence the evaluation of an SSDI applicant's employability. These channels are not linked to the generosity or duration of UI benefits, and they imply that more stringent functional capacity reviews of SSDI applicants may not reduce recession-induced SSDI claims if these claims reflect examiners' judgments that the applicants are truly not employable in the existing labor market.
Posted by Mark Thoma on Wednesday, May 28, 2014 at 11:24 AM in Academic Papers, Economics, Social Insurance |
Policy Induced Mediocrity?, by Tim Duy: Why did the Federal Reserve lean against their optimistic 2014 forecast? It seems that monetary policy over the past year can be summarized as a missed opportunity to supercharge the recovery, thereby locking the US economy into a suboptimal growth path.
Last week's speech by New York Federal Reserve President William Dudley noted the reasons monetary policymakers expected the economy to improve this year:
Since the downturn ended in mid-2009, real GDP growth has averaged only 2.2 percent per year despite a very accommodative monetary policy. This performance reflects three major factors—the significant headwinds resulting from the bursting of the housing bubble, the shift of fiscal policy from expansion toward restraint, especially in 2012 and 2013, and a series of shocks from abroad—most notably the European crisis.
The good news is that all three of these factors have abated. With respect to the headwinds resulting from the financial crisis, they are gradually becoming less severe. In particular, the sharp decline in household wealth due to the decline in housing prices and the weakness in equity prices has been largely reversed...On the fiscal side, the amount of restraint has diminished sharply. For 2014, the projected drag is about ½ percent of GDP, roughly half the level of 2013. Moreover, much of this restraint was frontloaded into the beginning of the year...In terms of the outlook abroad, the circumstances are more mixed.
The Federal Reserve could have chosen to lean into this generally upbeat forecast. Yet instead they chose to lean against it by turning to tapering and setting the stage for interest rate hikes. And the data so far suggests that once again the turn toward policy normalization was premature. The weak first quarter report is more suggestive of holding the recent pace of growth over the next year rather than an acceleration of activity. What is remarkable is that the Federal Reserve understood that their forecasts have tended toward optimism. Dudley again:
But, there remains considerable uncertainty about that forecast and, given the persistent over-optimism about the growth outlook by Federal Reserve officials and others in recent years, we shouldn’t count our chickens before they hatch.
Yet they choose to act prior to data confirmation. Why? I really don't quite know. Sure, we can tell a story about the declining unemployment rate and expected subsequent inflation pressures, but ultimately the turn toward less policy accommodation never made sense in the context of the Fed's own forecasts and questions about the degree of slack in the economy. It makes me wonder how seriously the Fed is truly interested in closing the output gap:
It seems reasonable to believe that if the economy regains potential output by the end of at best 2016, it will be attributable only to further downward revisions to potential output. And I even wonder whether the Fed would act to achieve their current growth forecasts or ultimately be content to continue along the current trend. The economy appears to be already molding itself around the lower output path. Despite the housing troubles and related weak rebound in construction, and the declines in government hiring, job growth is, on average, plugging along at a rate roughly consistent to that during the housing boom:
With that growth labor slack gradually steadily declines by any measure, the Fed appears reasonably comfortable with the resulting path. To be sure, arguably there still remains substantial slack. The failure of wage gains to accelerate is consistent with that story. But the Fed seems content to use that story only to justify its current policy path rather than justify an even easier policy to more quickly reduce slack.
Given the generally consistent overall reaction of the labor market to the current growth path, it is reasonable to believe that the faster pace of growth in the Fed's forecast would accelerate the pace of labor utilization and thus place upward pressure on inflation forecasts. In this case, we would expect the Fed to pull forward and steepen the pace of rate hikes to moderate the pace of activity. Thus, ultimately the Fed's commitment to regaining potential output could be even less than we have come to believe.
But even more telling would be the monetary policy reaction if growth continues along its current path. The weak first quarter results already place the forecast at risk, and the housing recovery is not progressing as smoothly as initially believed. Yet neither event prevented the Fed from continuing to cut asset purchases at the last FOMC meeting. Moreover, I still can't see any reason to expect the Fed will slow the tapering process unless the economy falls decisively off its current path. It could be that by the time they are sufficiently convinced growth will continue to fall short of forecast, asset purchases will be almost complete anyway. And I think the bar to restarting asset purchases would be very high. They want out of that business.
And if neither fiscal or monetary policy makers are interested in accelerating the pace of growth, should we really expect the pace of growth to accelerate? In other words, it appears to me that monetary policy largely amounts to setting expectations that reinforce the current growth path. Which was a recent topic of Bloomberg's Rich Miller who, reporting on the Fed's diminished expectations, quotes me:
By lowering its assessment of how fast the economy can expand and conducting policy accordingly, the Fed runs the risk of locking the U.S. into a slow-growth path, said Tim Duy, a former Treasury Department economist who is now a professor at the University of Oregon in Eugene...
...“They offset fiscal austerity on the downside but then arguably also offset the upside,” Duy said. “They seem to have lost interest in speeding the pace of the recovery.”
Bottom Line: The Federal Reserve has set reasonably clear expectations that rates will remain low for a long time. That path, however, seems to be a consequence of doing too little now to ensure a stronger recovery. In other words, the Fed seems to be taking a lower-rate future as a given rather than as a result of insufficient policy. Instead of acting to ensure a stronger forecast, they seem more interesting in acting to lock-in the lower path of activity. And that in turn will tend to lock in a low level of long-term rates. This, I think, is the best explanation for the inability of markets to sustain higher rates. It is simply reasonable to expect that the conditions which justify higher long rates will be met with tighter policy sufficient to contain growth to something closer to the current path of output than to current estimates of potential output.
Posted by Mark Thoma on Wednesday, May 28, 2014 at 12:15 AM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Wednesday, May 28, 2014 at 12:06 AM in Economics, Links |
Don't buy the 'sharing economy' hype: Airbnb and Uber are facilitating rip-offs: The "sharing economy" – typified by companies like Airbnb or Uber, both of which now have market capitalizations in the billions – is the latest fashion craze among business writers. But in their exuberance over the next big thing, many boosters have overlooked the reality that this new business model is largely based on evading regulations and breaking the law. ...
This downside of the sharing needs to be taken seriously, but that doesn't mean the current tax and regulatory structure is perfect. Many existing regulations should be changed, as they were originally designed to serve narrow interests and/or have outlived their usefulness. But it doesn't make sense to essentially exempt entire classes of business from safety regulations or taxes just because they provide their services over the Internet.
Going forward, we need to ensure that the regulatory structure allows for real innovation, but doesn't make scam-facilitators into billionaires. For example, rooms rented under Airbnb should be subject to the same taxes as hotels and motels pay. Uber drivers and cars should have to meet the same standards and carry the same level of insurance as commercial taxi fleets.
If these services are still viable when operating on a level playing field they will be providing real value to the economy. As it stands, they are hugely rewarding a small number of people for finding a creative way to cheat the system.
Agree about the level playing field, but perhaps it will serve as a catalyst for changing regulations that "were originally designed to serve narrow interests and/or have outlived their usefulness"?
Posted by Mark Thoma on Tuesday, May 27, 2014 at 09:50 AM in Economics, Regulation |
We need to provide more support for education if we want it to be a vehicle for enhanced opportunity rather than a means of promoting existing inequities:
The Share of Borrowers with High Student Loan Balances is Rising, On the Economy, St. Louis Fed: It’s not just the total number of student loan borrowers that is going up. The average balance per borrower is going up as well. And, in particular, the fraction of borrowers with more than $10,000 in student debt is rising.
In a recent Economic Synopses essay, Alexander Monge-Naranjo, research officer and economist with the Federal Reserve Bank of St. Louis, examined the recent growth in student loan debt in the U.S. over the period 2005-2012. As of March 2012, student loan debt stood at $870 billion and had surpassed total credit card debt ($693 billion) and total auto loan debt ($730 billion).
In addition, Monge-Naranjo found that the distribution of student loans by debt levels had shifted, with the share of borrowers with loan balances in excess of $10,000 increasing. Increases were greater at higher levels of debt:
- Only 3 percent of borrowers in 2005 owed more than $100,000. By 2012, that fraction reached 6.2 percent.
- The share of borrowers who owed between $150,000 and $175,000 rose from 1.7 percent to 3.7 percent.
- The share who owed between $175,000 and $200,000 went up from 0.6 percent to 1.5 percent.
- The share of those owing more than $200,000 went up from 0.2 percent to 0.6 percent.
While Monge-Naranjo noted that “high levels of student loan debt pose no problems as long as the investment in education has high returns and the loans are repaid,” he also indicated that some borrowers may suffer adverse effects in the future, such as difficulty obtaining other forms of credit.
Posted by Mark Thoma on Tuesday, May 27, 2014 at 09:03 AM in Economics, Income Distribution, Universities |
The FT is on a roll: In an otherwise unremarkable editorial about the upshot of the elections, the FT comes up with this quite remarkable statement:
The only viable path for France is to press ahead with tax cuts and spending reductions that can sustain growth.
Is the FT really saying that in a Keynesian short run, such as we find ourselves in just now, the balanced budget multiplier is negative? Really? Or that the spending multiplier is negative? Or is it perhaps denying that the Eurozone currently finds itself in such a Keynesian short run, in which a lack of demand is the key constraint on growth? (Let’s not even get into the debate about the long run relationship between growth and the size of the state in Europe, although I can’t help writing down one word: Scandinavia.)
And is the FT really claiming that continuing with this programme would make all those FN voters switch to the socialists and UMP?
Posted by Mark Thoma on Tuesday, May 27, 2014 at 08:55 AM in Economics, Fiscal Policy |
From Vox EU:
Global income distribution: From the fall of the Berlin Wall to the Great Recession, by Christoph Lakner and Branko Milanovic, Vox EU: Since 1988, rapid growth in Asia has lifted billions out of poverty. Incomes at the very top of the world income distribution have also grown rapidly, whereas median incomes in rich countries have grown much more slowly. This column asks whether these developments, while reducing global income inequality overall, might undermine democracy in rich countries.
Posted by Mark Thoma on Tuesday, May 27, 2014 at 08:21 AM in Economics |
Posted by Mark Thoma on Tuesday, May 27, 2014 at 12:06 AM in Economics, Links |
The state, corporations and markets: ... In this post I explain why ... the optimal private/public split will depend on a number of particular and highly contextual issues, about which economics will have a lot to say but where it is unlikely to generally point in one direction. It seems worth making this - I hope uncontroversial - point when the current UK government seems keen to privatise or outsource by one means or another so much of the public sector.
There are two claims ... associated with those who argue in favour of privatisation. One is that markets provide a better allocation system (e.g. here, and follow-ups here and here). For many activities this is undoubtedly true... However much public sector activity is in areas where market imperfections and informational problems of various kinds are endemic. In that situation, market based systems may perform worse than alternatives... Economics is not a discipline that tells us market allocation is always best, but one that tells us when it may work well and when it may not. ...
The second general argument ... is that the profit motive provides an effective incentive system for ensuring efficiency. Yet this argument alone is not enough. It is perfectly possible to run parts of government like a company, where the explicit aim is to maximise profits. Take the East Coast mainline rail company in the UK, for example. ... It appears to have been run very successfully under public ownership...
What this all suggests to me is that the costs and benefits of privatisation will vary from case to case, and that this is an area where microeconomic analysis will be central. ... In such cases, an ideology that says that the private sector ... is always better can be exploited by rent seeking firms. It can lead governments to privatise on unfavourable (to the public) terms, or with inadequate mechanisms in place to ensure value for money and prevent exploitation. At worst, rent seeking firms may be able to exert sufficient control over the political process to make this happen. ...
Posted by Mark Thoma on Monday, May 26, 2014 at 04:00 PM in Economics, Market Failure |
Behavioural artists and piracy: Piracy is everywhere... There is evidence that piracy has reduced straight-up music sales revenue but overall it is unclear whether digitization has impacted adversely on artist returns (because they make up losses with concert revenue and the like) or through lower distribution costs. But when it comes to piracy or music sharing, in general, Joel Waldfogel has convinced me that artists’ incentives to enter and supply quality music hasn’t been harmed and may have even been improved. ...
Today I have released a new NBER Working Paper (or here for the SSRN version) that tries to reconcile these ‘stylised facts’: namely, that artists seem to care about money yet entry incentives haven’t been harmed by piracy. To do this, I assume that artists themselves do not act strictly rationally and are instead time inconsistent in a manner familiar to behavioural economics. Put simply, if music artists aren’t hyperbolic discounters I’m not sure who would be. ...[explains theory]...
Of course, it is just a theory and it is not clear whether it plays a real role or not but it does suggest that our welfare concerns about piracy would be lower than a model with perfectly rational artists would predict. The paper also considers the role of publisher contracts in mediating these outcomes but that doesn’t change things too much.
Posted by Mark Thoma on Monday, May 26, 2014 at 09:44 AM in Economics, Market Failure |
Europe's social safety net is doing its job:
Europe’s Secret Success , by Paul Krugman, Commentary, NY Times: ...Europe’s financial and macroeconomic woes have overshadowed its remarkable, unheralded longer-term success in an area in which it used to lag: job creation.
What? You haven’t heard about that? Well, that’s not too surprising. European economies, France in particular, get very bad press in America. Our political discourse is dominated by reverse Robin-Hoodism — the belief that economic success depends on being nice to the rich, who won’t create jobs if they are heavily taxed, and nasty to ordinary workers, who won’t accept jobs unless they have no alternative. And according to this ideology, Europe — with its high taxes and generous welfare states — does everything wrong. So Europe’s economic system must be collapsing, and a lot of reporting simply states the postulated collapse as a fact.
The reality, however, is very different. Yes, Southern Europe is experiencing an economic crisis... But Northern European nations, France included, have done far better than most Americans realize. In particular, here’s a startling, little-known fact: French adults in their prime working years (25 to 54) are substantially more likely to have jobs than their U.S. counterparts. ... Other European nations with big welfare states, like Sweden and the Netherlands, do even better. ...
Oh, and for those who believe that out-of-work Americans, coddled by government benefits, just aren’t trying to find jobs, we’ve just performed a cruel experiment using the worst victims of our job crisis as subjects. At the end of last year Congress refused to renew extended jobless benefits... Did the long-term unemployed who were thereby placed in dire straits start finding jobs more rapidly than before? No — not at all. Somehow, it seems, the only thing we achieved by making the unemployed more desperate was deepening their desperation.
I’m sure that many people will simply refuse to believe what I’m saying about European strengths. After all, ever since the euro crisis broke out there has been a relentless campaign by American conservatives (and quite a few Europeans too) to portray it as a story of collapsing welfare states, brought low by misguided concerns about social justice. And they keep saying that even though some of the strongest economies in Europe, like Germany, have welfare states whose generosity exceeds the wildest dreams of U.S. liberals. ...
The truth is that European-style welfare states have proved more resilient, more successful at job creation, than is allowed for in America’s prevailing economic philosophy.
Posted by Mark Thoma on Monday, May 26, 2014 at 12:24 AM in Economics, Social Insurance |
Posted by Mark Thoma on Monday, May 26, 2014 at 12:24 AM in Economics, Links |
Reinhart and Rogoff are back in the news lately as a standard of comparison for data errors (is what Piketty did as bad...?).
But they wouldn't have been forgotten in any case. This research reexamines the Reinhart and Rogoff findings, and concludes that high public debt does not cause low growth. It's the other way around, low growth brings about high debt:
Determinants of the growth and sovereign debt correlation, by Matthijs Lof, Tuomas Malinen, Vox EU: Since the outbreak of the financial crisis, the relationship between debt and growth has been an issue of heated debate among both academics and policymakers. Reinhart and Rogoff (2010a) showed a negative correlation between sovereign debt and economic growth, and argued that countries could be confronted with a considerable decline in their growth potential after the debt-to-GDP ratio exceeds 90%.
While the research by Reinhart and Rogoff had a substantial influence in policy circles, their results are controversial. Last year, researchers from the University of Massachusets Amherst revealed a number of computational errors in the calculations by Reinhart and Rogoff (Herndon et al. 2013). After correcting the errors, Herndon et al. disputed the existence of a 90% threshold in the relationship between debt and growth. They did, however, still find a negative (albeit weaker) negative correlation between debt and growth.
Even if a negative correlation between debt and growth seems undisputed, this does not imply that debt is harmful for growth, since correlation does not always imply causation. In fact, Reinhart and Rogoff (2010b) have emphasised the possible bi-directional causality between debt and growth. They argue that high debt may lead to higher taxes and/or lower government expenditure, which is harmful for economic growth, while on the other hand periods of low growth may lead to high deficits and accumulation of debt. Nevertheless, these hypotheses are not backed by a quantitative analysis to establish the relative size and significance of each direction. To decompose the correlation into cause and effect, we apply Vector Autoregressive (VAR) models. Our main result is that debt does not seem to have any significant impact on growth.
Methods and results
We estimate a VAR for sovereign debt and GDP growth on panel data for 20 OECD countries over a period of 55 years, which we obtain from the dataset of Reinhart and Rogoff (2009). Detailed descriptions of the data and model can be found in our recent article (Lof and Malinen 2014). The application of VAR models has several advantages.
- First, a VAR treats both debt and GDP as endogenous. Both are allowed to have an impact on each other, and these impacts can be separated.
- Second, a VAR is a dynamic model, such that we can analyse and quantify intertemporal impacts. By computing so-called impulse response functions, we can visualise the long-run impact on both variables after a shock hits one of the variables.
- Finally, a VAR is a fairly simple model, which is estimated by regressing both debt and GDP growth on both their own and each other’s past observations.
Eberhardt and Presbitero (2013b) emphasise the role of nonlinearities and cross-country heterogeneities, to show that there is no robust evidence for a significant effect of debt on growth. Our analysis shows that this holds even in this simple linear framework.
Figure 1 shows the cumulative impulse response functions (CIRF) from the estimated panel VAR. The solid line shows the estimated cumulative impact over a period of 10 years on debt (left column) and GDP (right column), after a positive shock to either debt (top row) or GDP (bottom row). The dashed lines show the 95% confidence interval.
The main result is in the top-right panel:
- A positive shock to debt (i.e. an increase in debt) seems to have no negative impact on GDP. The point estimate of the impact is in fact even positive, but the confidence interval is so wide that the effect is not significant.
- On the other hand, the bottom-left panel shows that a positive shock to GDP does have a significant negative impact on debt, which explains the negative correlation between debt and GDP.
Figure 1 Cumulative Impulse-response functions computed from estimated PVAR, for 20 countries over the period 1954–2008
In our article (Lof and Malinen 2014), we elaborate on the robustness of these results. We verify that the results hold for a smaller group of countries for which longer time-series are available, and for different measures of debt. Since we consider a recursive VAR, the order of the variables potentially affects the results. In our benchmark model, we place debt before GDP, such that debt can react to GDP only after a lag, while the reverse effect may occur immediately. The justification behind this assumption is that shocks to debt occur after political decision-making, which takes time. In the article, we also estimate the model with the order reversed. As it turns out, the assumption does not drive our results, as we find similar outcomes with the reverse order.
Finally, we investigate the idea of a threshold effect, or ‘tipping point’, in the relation between debt and growth. Reinhart and Rogoff argue that the negative correlation increases after the level of debt exceeds 90% of GDP. Herndon et al. (2013), as well as Eberhardt and Presbitero (2013a) attempt to refute the existence of such a threshold effect.
To analyse this issue in the VAR framework, we divide the sample into high-debt and low-debt countries. First, we label countries as high-debt country when the average debt-to-GDP ratio over the period 1954-2008 exceeds 50%. Next, we look at those countries for which the maximum debt-to-GDP ratio over this period exceeds 90%. Figure 2 reproduces the off-diagonal panels of Figure 1, for these two samples of high-debt countries and for the corresponding samples of low-debt countries. The results are clear:
- The relation between debt and GDP is remarkably stable across high-debt and low-debt countries.
Consistent with the results in Figure 1, the impact of debt on GDP is insignificant or mildly positive (top row), while the reverse impact of GDP on debt is negative and significant (bottom row). There is no evidence for a negative effect of debt on growth, not even for elevated levels of debt.
Figure 2 Cumulative impulse response functions for different subsamples.
Notes: Left panels: Average Debt-to-GDP ratio>50%. Second from left panels: Average Debt-to-GDP ratio<50%. Second from right panels: Maximum Debt-to-GDP ratio>90%. Right panels: Maximum Debt-to-GDP ratio<90%.
Based on a simple VAR analysis with panel data, we can conclude that there is little evidence for a negative long-run effect of sovereign debt on economic growth. Our findings are consistent with recent studies applying different methods, such as Panizza and Presbitero (2013), as well as Kimball and Wang (2013) who “could not find even a shred of evidence in the Reinhart and Rogoff data for a negative effect of government debt on growth”.
Using the negative correlation between debt and growth as a justification for austerity policies could be another example of confusing correlation with causation. While high levels of sovereign debt may surely be a burden for a country, the claim that debt is harmful for growth is not supported by our results.
Eberhardt, M. and A. F. Presbitero (2013a), “Public debt and economic growth: There is no ‘tipping point’”, VoxEU.org, 17 November.
Eberhardt, M. and A. F. Presbitero (2013b), “This Time They are Different: heterogeneity and Nonlinearity in the Relationship between Debt and Growth”, IMF Working Paper 13/248.
Herndon, T., M. Ash and R. Pollin (2013), “Does high public debt consistently stifle economic growth? A critique of Reinhart and Rogoff”, PERI working paper n° 322, April.
Kimball, M. and Y. Wang (2013). “After crunching the Reinhart and Rogo’s data, we’ve concluded that high debt does not slow growth”, Quartz blog, May 29, 2013.
Lof, M. and T. Malinen (2014), “Does sovereign debt weaken economic growth? A Panel VAR analysis”, Economics Letters 122/3, 403-407.
Panizza, U. and A. F. Presbitero (2013), “Public debt and economic growth in advanced economies: A survey”, Swiss Journal of Economics and Statistics, vol. 149(II): 175-204.
Reinhart, Carmen M and Kenneth S Rogoff (2009), This Time is Different: Eight Centuries of Financial Folly. Princeton University Press.
Reinhart, C. M. and K. S. Rogoff (2010a), “Growth in a Time of Debt”, American Economic Review: Papers and Proceedings 100(2): 573–578.
Reinhart, C. M. and K. S. Rogoff (2010b), “Debt and Growth Revisited”, VoxEU.org, 11 August.
Posted by Mark Thoma on Sunday, May 25, 2014 at 10:26 AM in Economics |
I thought it would be useful to have this note from Jamie Galbraith posted so it can be linked, discussed, etc.:
Unpacking the First Fundamental Law, by James K. Galbraith: In the early pages of Capital for the Twenty-First Century Thomas Piketty states a “fundamental law of capitalism” that α = rxβ, where α is the share of profit in income, β is the capital/output ratio, and r is the rate of return on capital, or the rate of profit. Thus:
r = α/β
Using K for capital, P for profit and Y for both total income and output (which are equal in equilibrium), we have:
α = P/Y and β = K/Y
r = (P/Y)/(K/Y)
The point of this expression is that r cannot be observed directly, whereas the two ratios on the other side of the equation can be. Yet (clearly) Y is unnecessary, since this expression reduces to
r = P/K
with no loss of generality. So the measure of r requires just two things: a flow of money profits from the national income accounts, and a measure of the stock of capital.
What is K? For Piketty, K is the financial valuation of privately-held capital assets, including land, bonds, stocks and other forms of private wealth, such as housing. One may quarrel (as I have) with the connection of this value to prior definitions of capital, but that is not the issue here.
Financial valuation (FV) can be rendered as the present value of the expected future returns from the ownership of capital assets; for this a discount rate is required. Is the discount rate the same as r? Not necessarily. Keeping them distinct, we have:
K = FV = Σi [ Ε(Pi)/(1+d)i]
where Ε indicates an expected value, d is the discount rate and (i) is a time subscript.
Note that FV depends on d. If the discount rate falls, then the financial value of the capital stock will rise. Since the discount rate bears some relationship to the interest rate, at least in equilibrium, FV and therefore r can be pushed around by monetary policy, so long as monetary policy can influence financial valuations without also affecting current money profits. FV also depends on the current expectation of future flows of profit income, which are, in part, a psychological matter.
Clearly, this concept of capital bears no relationship to the physical construct that normally enters a neoclassical production function or the technological view of the capital/output ratio. Piketty's use of “K/Y” as notation is, in this respect, non-standard. Still, nothing prevents us from measuring r – as Piketty defines it – from the observed profit flow and the financial valuation of the capital stock.
Why, as an historical matter, would r as measured tend to be constant over long periods of time? One answer is now obvious: the expected stream of future profits at any given time depends on current profits. In a boom, things are good and are expected to remain so. In a slump, the reverse. P and FV do not always move together. But they will more often than not. And so the ratio between the two observed variables – which is r -- will normally not change very much. One can surely find exceptions – in the turning points of the business cycle, or when monetary policy drives capital valuations out of synch with current profits. But Piketty's approach of calculating decade-by-decade averages may wash those out, to some degree.
What does the long-run constancy of r have to do with savings or with the creation of new physical capital? Nothing at all. Piketty's r is basically a weighted average of financial rates of return across the yield curve and the risk profile of privately-held capital assets. It is the artifact of current profits and the effect of discounted profit expectations on market values. If the discount rate rises (falls), other things equal, the ratio of current profits to financial values also rises (falls). But if the discount rate is stable, thanks to long-term stability of monetary policy and of social attitudes – or even thanks only to averaging over time – then that r should also be reasonably stable over time is no surprise.
Piketty's next big assertion is that r > g , or that the return on financial valuation is normally higher than the rate of growth of income. And so, he argues, so long as the ownership of financial assets is concentrated, as it always is, this leads to an increasing concentration of income (and therefore wealth) as the normal condition of capitalism.
For the truth of the first sentence, we can (for the moment) accept Piketty's evidence – noting that the entire 20th century is an exception. But the first sentence does not lead necessarily to the second.
First, if part of profits are spent on consumption rather than reinvested in new capital, then (if cc is the rate of capitalists' consumption, including charitable gifts) we could have:
r > g but (r-cc) <= g
It is hard to see how this could lead to a rise in K/Y or in the share of profit in income, purely on grounds of accumulation. And in a simple model, it would not; P/Y falls if (r-cc) < g.
On the other hand, even if (r-cc) < g, it is still possible for increasing financial valuations (a bubble in the capital asset markets, driven by a lower d) to generate increasing concentration of wealth at least for some time. So long as capital is unevenly held, as it always is, bubbles will make some people rich.
And this need not show up in tax data as current (profit) income, since unrealized capital gains are not reported as income subject to tax. But they are wealth. True, bubbles are transient; eventually they burst. But they could be the main thing that we have been dealing with, in short cycles, in most of the wealthy world, for the past 30 years.
Finally, Piketty argues that a slowdown of economic growth, due to slower population growth, must inevitably lead to an increase in the the capital-output ratio. This is a simple artifact of the constancy of r, alongside a drop in g. But, as Jason Furman has asked, would r necessarily stay steady if g declines Looking back at the formula, it all depends on current profits, future expected profits, and the discount rate. If slow growth reduces either current profits or the discount rate, or both, while expectations remain stubbornly high, it's possible that r might decline even more than g.
In short, so far as I can tell, five conclusions may be drawn:
1) The alleged long-run constancy of r is an artifact of no great economic interest.
2) Even it is generally true that r > g, it does not follow that capitalist economies have a necessary tendency toward an increasing share of profit in income.
3) If the share of profit in income is not rising, there is also no obvious reason for wealth to become more concentrated.
4) Yet, wealth inequality can rise in a capitalist economy even if r < g, due to bubbles in financial markets and capital gains that do not count as current income.
5) The effects of a demographic and growth slowdown on the relation between r and g is indefinite. It is not inexorable that slower growth increases the capital-output ratio.
None of this is to deny that rising inequality has occurred. Nor to claim that it doesn't matter. And by yanking mainstream discussion of inequality from the micro to the macro sphere – where it belongs as I have been arguing since the mid-1990s! – Thomas Piketty has done a service to economics.
But his goal was to turn the historical record into fundamental laws and long-range tendencies. Despite strong claims – accepted by many reviewers – it now seems clear that this project fell short.
As a matter of the empirical record, the modern inequality data do not show any inexorable tendencies.
Inequality fell sharply in the two World Wars.* It rose very sharply in many places beginning around 1980 or in some cases a few years before. And that increase largely peaked in 2000, worldwide. The great rise of inequality in recent years was a consequence of the debt crisis, the collapse of communism, of neoliberal globalization. It was not a long-run phenomenon. Piketty projects that it will resume and continue, but it may or may not.
Since 2000, declining inequality has been observed in post-neoliberal (but still capitalist) Latin America. There is new evidence of declining inequality in China, and also in Europe after 2008, at least if one takes the continent as a whole. In the US, there has been a sawtooth pattern, closely related to the stock market, with inequality peaks in 2000, 2007 and 2013, but little trend since 2000. If one believes the new PPP values, income inequality has also fallen for the world population taken as a whole, thanks mainly to the rise of average income in China. Further, in some cases, income inequality may fall thanks to an old-fashioned Kuznets transition. This seems to be part of the recent experience in China.
Finally, there seems no warrant for the view that annual global capital wealth taxation is required to reduce the rise or the level of inequality. Many other measures, including higher wages, expanding social insurance, health care and housing, debt restructuring, effective estate and gift taxes, and the control of predatory finance can and have worked to achieve the same goal.
Perhaps Piketty's Law will vanish, as quickly as it has appeared?
This is a note for discussion purposes. Comments welcome at Galbraith@mail.utexas.edu. The empirical work mentioned is at http://utip.gov.utexas.edu. Other references on request.
* As for why inequality declined during the two World Wars, Piketty lays heavy stress on a decline in K/Y, the capital-output ratio. Numerous graphs (with odd and uneven date-spacing) illustrate this decline for major countries engaged in the wars. But the implicit case that a fall in K/Y had to do (in part) with physical destruction of productive capital makes no sense for any major country in World War I, and only for Germany and Japan in World War II. Moreover, a pure decline in K, whether physical or financial, would have increased, not reduced, r, by Piketty's own definition, and therefore it would have increased, not reduced inequality. [How could Piketty not have seen this?] Further, the fact that all belligerents saw large increases in money incomes, relative to capital valuations, also cannot explain the drop in r relative to g, since Y actually plays no role in the determination of r. (This is a point I did not quite grasp, in preparing my review for Dissent.) So what did cause the fall in inequality? The obvious answer is that money profits P (and also capitalists' consumption) were constrained in the major countries by war-time controls, as a matter of strict policy, while a rapid growth of labor incomes was allowed to proceed. This drove r far below g and so increased the labor share and equalized incomes. Contrary to Piketty's statements in several places, this was no accident. In the United States during World War II, the policy to achieve it was directed by the Office of Price Administration under the direction, in 1942-3, of an economist whose name I do not recall seeing in Piketty's text: John Kenneth Galbraith.
Posted by Mark Thoma on Sunday, May 25, 2014 at 10:22 AM in Economics |
Posted by Mark Thoma on Sunday, May 25, 2014 at 12:06 AM in Economics, Links |
Buying Insurance Against Climate Change: The third National Climate Assessment report ... warns us about our hazardous future... We must face facts: There is a real risk of new kinds of climate-related disaster. ... We are taking major gambles with our environment... Expect surprises.
In March, a United Nations report identified with “high confidence” a number of risks that will be visited on different people unequally. ... In short, we need to worry about the potential for greater-than-expected disasters, especially those that concentrate their fury on specific places or circumstances ... we cannot now predict.
That’s why global warming needs to be addressed by the private institutions of risk management, such as insurance and securitization. They have deep experience in smoothing out disasters’ effects by sharing them among large numbers of people. The people or entities that are hit hardest are helped by those less badly damaged.
But these institutions need ways to deal with such grand-scale issues. Governments should recognize that by giving these businesses a profit incentive to prepare for these unevenly distributed disasters. ...
Posted by Mark Thoma on Saturday, May 24, 2014 at 09:39 AM in Economics, Environment, Market Failure |
Guess I should post something on the Piketty data controversy (please feel free to post links to additional discussion in comments). This is Paul Krugman:
Is Piketty All Wrong?: Great buzz in the blogosphere over Chris Giles’s attack on Thomas Piketty’s Capital in the 21st Century. Giles finds a few clear errors, although they don’t seem to matter much; more important, he questions some of the assumptions and imputations Piketty uses to deal with gaps in the data and the way he switches sources. Neil Irwin and Justin Wolfers have good discussions of the complaints; Piketty will have to answer these questions in detail, and we’ll see how well he does it.
But is it possible that Piketty’s whole thesis of rising wealth inequality is wrong? Giles argues that it is...
OK, that can’t be right — and the fact that Giles reaches that conclusion is a strong indicator that he himself is doing something wrong.
I don’t know the European evidence too well, but the notion of stable wealth concentration in the United States is at odds with many sources of evidence. ... [discusses several sources]...
The point is that Giles is proving too much; if his attempted reworking of Piketty leads to the conclusion that nothing has happened to wealth inequality, what that really shows is that he’s doing something wrong.
None of this absolves Piketty from the need to respond to each of the individual questions. But anyone imagining that the whole notion of rising wealth inequality has been refuted is almost surely going to be disappointed.
Posted by Mark Thoma on Saturday, May 24, 2014 at 08:59 AM in Economics |
Posted by Mark Thoma on Saturday, May 24, 2014 at 12:03 AM in Economics, Links |
"The European project is in deep trouble":
Crisis of the Eurocrats, by Paul Krugman, Commentary, NY Times: ...It’s hard to imagine war in today’s Europe, which has coalesced around democratic values and even taken its first steps toward political union. Indeed, as I write this, elections are being held all across Europe ... to select members of the European Parliament. ... But here’s the thing: An alarmingly high fraction of the vote is expected to go to right-wing extremists hostile to the very values that made the election possible. ... The truth is that the European project — peace guaranteed by democracy and prosperity — is in deep trouble...
Why is Europe in trouble?
The immediate problem is poor economic performance. ... The inherent problems of the euro have been aggravated by bad policy. European leaders ... continue to insist, in the teeth of the evidence, that the crisis is all about fiscal irresponsibility, and have imposed savage austerity that makes a terrible situation worse.
The good news, sort of, is that despite all these missteps the euro is still holding together, surprising many analysts... Why this resilience? Part of the answer is that the European Central Bank has calmed markets by promising to do “whatever it takes” to save the euro... Beyond that, however, the European elite remains deeply committed to the project, and, so far, no government has been willing to break ranks.
But... By closing ranks, the elite has in effect ensured that there are no moderate voices dissenting from policy orthodoxy. And this lack of moderate dissent has empowered groups like the National Front in France...
So far,... the elite has been able to hold things together. But we don’t know how long this can last, and there are some very scary people waiting in the wings.
If we’re lucky — and if officials at the European Central Bank ... act boldly enough against the growing threat of deflation — we may see some real economic recovery over the next few years. This could, in turn, offer a breathing space, a chance to get the European project ... back on track.
But economic recovery by itself won’t be enough; Europe’s elite needs to recall what the project is really about. It’s terrifying to see so many Europeans rejecting democratic values, but at least part of the blame rests with officials who seem more interested in price stability and fiscal probity than in democracy. Modern Europe is built on a noble idea, but that idea needs more defenders.
Posted by Mark Thoma on Friday, May 23, 2014 at 10:40 AM in Economics |
The US labor market is not working : In a recent post Paul Krugman looks at the dismal performance of US labor markets over the last decade. To make his point, he compares the employment to population ratio for all individuals aged 25-54 for the US and France. The punch line: even the French work harder than the Americans! And this is indeed a new phenomenon, it was not like that 13 years ago [Just to be clear, there are other dimensions where the French are not working as hard: they retire earlier, they take longer vacations,... but the behavior of the 25-54 year old population is indeed a strong indicator of how a society engages its citizens in the labor market. ]
So are the French the exception? Not quite. Among OECD economies, the US stands towards the bottom of the table when it comes to employment to population ratio for this cohort (#24 out of 34 countries). ...
What is interesting is that most of the countries of the top of the list are countries with a large welfare state and very high taxes (including on labor). So the negative correlation between the welfare state and taxes and the ability to motivate people to work (and create jobs) that some bring back all the time does not seem to be present in the data. ...
[See the original post for the ordered list of countries.]
Posted by Mark Thoma on Friday, May 23, 2014 at 08:27 AM in Economics, Unemployment |
Posted by Mark Thoma on Friday, May 23, 2014 at 12:03 AM in Economics, Links |
Cecchetti & Schoenholtz:
A note on the lender of last resort: ...In responding to queries about the Federal Reserve’s actions on the fateful Lehman weekend in mid-September 2008, various officials noted that the law does not allow the Federal Reserve to lend to an insolvent institution. As we reconsider the role of central bank lending, this is one principle, dating back to Walter Bagehot in the 19th century, that it is important to understand and maintain.
There are three big reasons that a central bank should not lend to a bankrupt institution. The first is that, by lending secured to an insolvent commercial bank, the central bank further subordinates bond holders. ... These actions pick winners and losers. In democracies, such choices are typically the prerogative of elected officials, not central bankers.
Second, lending to an insolvent institution by itself does not put an end to its fragility. Ultimately, the institution must be liquidated or re-capitalized. Postponing this resolution is usually costly. ...
Third, when people find out that the central bank is willing to lend to insolvent banks – and they will find out – then any bank that borrows will be suspected of being bankrupt. The resulting stigma will impair the useful function of the lender of last resort...
The real problem in 2008 was that there was no resolution regime in place that would allow ... big intermediaries to fail without disrupting the entire global financial system. ... Dodd-Frank ... created a new resolution mechanism... However, that regime ... remains untested...
Importantly, Dodd-Frank also narrowed the legal form of recipients eligible for Fed discount loans, contrary to the broad latitude suggested by Bagehot. ... Post Dodd-Frank, the discount window is for banks only. Others will have to seek liquidity elsewhere, even if they are solvent.
Posted by Mark Thoma on Thursday, May 22, 2014 at 09:49 AM in Economics, Financial System |
Unique economics of healthcare: I was prompted to write this follow-up on health economics following a recent post by blogger Noah Smith, who weighs in with some reasonable views after some intense criticism of the ‘freakonomic’ Chicago-boy Steven Levitt. In a meeting with UK PM David Cameron, Levitt and his co-author apparently made some rather absurd remarks to him about health care.
They told him that the U.K.’s National Health Service -- free, unlimited, lifetime heath care -- was laudable but didn’t make practical sense.
"We tried to make our point with a thought experiment," they write. "We suggested to Mr. Cameron that he consider a similar policy in a different arena. What if, for instance...everyone were allowed to go down to the car dealership whenever they wanted and pick out any new model, free of charge, and drive it home?"
Rather than seeing the humor and realizing that health care is just like any other part of the economy, Cameron abruptly ended the meeting...
This nonsense reminds me that what constitutes economic debate in the US is often laughable at best.
Health care is obviously not like most other parts of the economy. As I said last week medical services are credence goods - goods which we don’t know whether we need, and even once we’ve consumed them, still don’t know if they were good value. In economic terms, these goods suffer from the worse of possible information failures, particularly with respect to the asymmetry of information between the seller (in this case the doctor) and the consumer.
For these goods the demand curve may slope any which way, and people are often left to use price as the only signal of quality (or quantity for that matter). This means that a socially optimal level of medical service provision cannot be determined using basic marginal economic analysis. ...
Posted by Mark Thoma on Thursday, May 22, 2014 at 08:46 AM in Economics, Health Care |
Posted by Mark Thoma on Thursday, May 22, 2014 at 12:03 AM in Economics, Links |
It's unlikely that this is limited to the NY Fed region. This is NY Fed president William Dudley:
... What Kinds of Jobs Have Been Created During the Recovery?
Let me turn to the topic of today’s press briefing: how the types of jobs in the region have changed over the last business cycle. Firms often change the way they utilize workers and the mix of skills they employ during recessions and recoveries. The weakening demand during recessions forces firms to look for new ways to be more efficient to cope with hard times. These adjustments do not affect all workers equally. Indeed, it’s what we typically think of as middle-skilled workers—for example, construction workers, machine operators and administrative support personnel—that are hardest hit during recessions. Further, a feature of the Great Recession and indeed the prior two recessions, is that the middle-skill jobs that were lost don’t all come back during the recoveries that follow. Instead, job opportunities have tended to shift toward higher- and lower-skilled workers.
As we’ll show, these same trends have played out in our region. While there’s been a good number of both higher-skill and lower-skill jobs created in the region during the recovery, opportunities for middle-skilled workers have continued to shrink.
I believe it is important for us to highlight these job trends and to understand their implications for our region. There have been significant and long-lasting changes to the nature of work. As a result, many middle-skilled workers displaced during the recession are likely to find that their old jobs will never come back. Furthermore, workers are increasingly facing higher skill requirements in order to land a good job. These dynamics in the labor market present a host of challenges for the region to address. However one thing is clear: workers will need more education, training and skills to take full advantage of the types of job opportunities being created in our region, as well as across the nation. So, it’s important that we work together to find ways to help people in our region adapt to these changes. ...
Posted by Mark Thoma on Wednesday, May 21, 2014 at 09:22 AM in Economics, Unemployment |
Net neutrality may be harder to achieve than we thought, by Joshua Gans, Digitopoly: For the last few weeks I have been working on a paper out of the notes I posted on weak and strong net neutrality. The paper is now done (at least as a working paper) and it seems appropriate to summarize its main findings as some were unexpected. ...[continue]...
The first finding is one that I had already forecast. Net neutrality requires a lot of neutrality to be effective. Put simply, in situations, where consumers have a direct pricing relationship with content providers (such as is the case with Netflix), if you prohibited ISPs from charging different access fees to different content providers, ISPs could use consumer charges to undo any real consequences of that. ... ISPs could build in content-based price discrimination into their charges to consumers and effectively allow them to extract rents from content providers...[continue to other three findings]...
Posted by Mark Thoma on Wednesday, May 21, 2014 at 09:22 AM in Economics |
Dudley Revisits Exit Strategy, by Tim Duy: Today New York Federal Reserve President William Dudley gave what was both an interesting and depressing speech. Interesting in that he provides some new thoughts on the exit strategy. Depressing in that he outlines a case for persistently low interest rates. One wonders why, given such an outlook, the Fed is so firmly focused on the exit strategy to begin with, rather than accelerating the pace of the recovery.
Dudley tries to sound an optimistic note regarding the outlook, including dismissing the first quarter GDP report, but his optimism is tempered, very tempered:
With the fundamentals of the economy improving and fiscal drag abating, I expect the economy to get back on to a roughly 3 percent growth trajectory over the remainder of this year, with some further strengthening likely in 2015. But, there remains considerable uncertainty about that forecast and, given the persistent over-optimism about the growth outlook by Federal Reserve officials and others in recent years, we shouldn’t count our chickens before they hatch.
Three percent growth is not exactly anything to write home about; the only thing exciting about 3 percent is that we just can't seem to get there. Dudley specifically notes weak capital spending and housing markets as key concerns. He senses that the capital spending issue is transitory, but housing less so:
I think housing has been weaker than anticipated because several significant headwinds persist for this sector. First, mortgage credit is still not readily available to households with lower credit scores. Second, some people are coping with higher student loan debt burdens that have delayed their entry into the housing market as first-time homebuyers. This, in turn, makes it more difficult for existing homeowners to sell and trade-up. Third, there may be some ongoing difficulties increasing housing supply. The housing downturn was very deep and protracted. It takes time to shift resources back into this area. Also, in some markets house prices still appear to be below the cost of building a new home. Thus, in those markets, it remains uneconomic to undertake new home construction. Although I expect that the housing recovery will resume, the pace will likely be slow, especially relative to past economic recoveries.
Notice that he does not mention the mortgage rate increase over the past year, instead focusing on issues largely outside the control of the Federal Reserve. In other words, housing is a problem that they can't fix and thus will simply contribute to weak growth. Regarding inflation, Dudley is optimistic that the trajectory will prove to be in the right direction, but sees little reason to expect any sharp increases. There is simply too much slack in the labor market, evidenced by low wage growth. Here he paints a bleak picture and lays down some markers:
...the trend of labor compensation is running at only about a 2 percent annualized pace. This is far below the roughly 3½ percent pace that would be consistent with trend productivity growth of 1 to 1½ percent and the FOMC’s 2 percent inflation objective.
Trend productivity growth of just 1 to 1.5 percent is very, very low and feeds into the Fed's belief that potential growth is in the 2.2 to 2.3 percent range. Dudley's expected 3 percent growth thus hardly eats into excess capacity. Still surprises me that the Fed remains focused on policy firming when arguably conditions require a delay in the tapering process.
On that inflation target, Dudley argues against the "2 percent is a ceiling" hypothesis:
...once we reach 2 percent, I would expect that we would spend as much time slightly above 2 percent as below it, recognizing that we will hardly ever be exactly at 2 percent because of the inherent volatility in prices. If inflation were to drift above 2 percent, all else equal, then we would tend to resist such a rise. But, if inflation were slightly above 2 percent even as unemployment remained far above levels consistent with maximum employment, then the unemployment consideration would dominate because we would be further from the unemployment objective than we are from the inflation objective. This should not surprise anyone. This is what our “balanced approach” implies.
The operative word here is "slightly." What is "slightly" above 2 percent? My guess is that as long as inflation remains below 2.25 percent and employment outcomes remain subpar, the Fed will remain on a low-interest rate path (though not a zero rate path). Above 2.25 would be more disconcerting but, realistically, it is unlikely that the US economy would experience higher inflation in the absence of clear evidence that labor market slack had evaporated. In other words, I suspect that if inflation were above 2.25 percent, the Fed would not need to choose between the elements of the dual mandate; the case for a higher rate trajectory would be clear.
Dudley anticipates that the tapering process will continue, and thus turns his attention to the lift-off from the zero bound. Here he admits the reality of the situation. They really have no idea when the first rate increase will occur:
Turning first to the timing of lift-off, how the outlook evolves matters. We currently anticipate that a considerable period of time will elapse between the end of asset purchases and lift-off, but precisely how long is difficult to say given the inherent uncertainties surrounding the outlook.
I would congratulate him for avoiding the use of a date, but then he includes a footnote pointing to the March Summary of Economic Projections and the embedded anticipation that rates will rise in the middle of next year. Fed officials simply can't decide whether those projections are meaningful or not.
As far as the pace of timing, that too is data dependent, although given the current forecasts Dudley anticipates a tame trajectory:
With respect to the trajectory of rates after lift-off, this also is highly dependent on how the economy evolves. My current thinking is that the pace of tightening will probably be relatively slow. This depends, however, in large part, not only on the economy’s performance, but also on how financial conditions respond to tightening.
And he too expects rates will be subdued over the longer term, laying out three reasons:
First, economic headwinds seem likely to persist for several more years...Second, slower growth of the labor force due to the aging of the population and moderate productivity growth imply a lower potential real GDP growth rate as compared to the 1990s and 2000s. Because the level of real equilibrium interest rates appears to be positively related to potential real GDP growth, this slower trend implies lower real equilibrium interest rates even after all the current headwinds fully dissipate...Third, changes in bank regulation may also imply a somewhat lower long-term equilibrium rate.
When it comes to the Fed's exit from extraordinary monetary policy, Dudley throws in a new twist. Conventional wisdom is that the Fed would stop reinvesting the principal payments on assets held by the Fed prior to raising rates. Dudley suggests this might not be a wise decision. First, he argues that this might send the wrong signal to financial markets:
Ending reinvestments as an initial step risks inadvertently bringing forward any tightening of financial conditions as this might foreshadow the impending lift-off date for rates in a manner inconsistent with the Committee’s intention.
Second - which seems to be in contradiction to the first - it that he prefers lifting rates to enhance policy flexibility:
Second, when conditions permit, it would be desirable to get off the zero lower bound in order to regain some monetary policy flexibility. This goal would argue for lift-off occurring first followed by the end of reinvestment, rather than vice versa. Delaying the end of reinvestment puts the emphasis where it needs to be—getting off the zero lower bound for interest rates. In my opinion, this is far more important than the consequences of the balance sheet being a little larger for a little longer.
Dudley is saying that the Fed can reduce accommodation via raising rates or reducing the balance sheet, and they should should begin with the former to normalize policy. This reveals his confidence in being able to manage the balance sheet while raising rates, the topic of which takes up the remainder of his speech. Note the qualifier "when conditions permit." This is not about tightening policy simply in order to get rates higher; it is about how to tighten policy - what mix of tools to use - when the time to tighten comes.
I don't quite see the communications challenges Dudley describes. In order to prevent expectations of an earlier rate hike we should hike rates rather than end reinvestments? Not sure this makes much sense. Maybe better to just say that they will reduce accommodation further when appropriate, and that process will involve some mix of rate hikes and balance sheet reduction, the exact mix to be determined by evolving economic and financial conditions.
Bottom Line: Dudley reinforces expectations that the low rate environment will persist long into the future. The data flow is not providing reason to think otherwise at this point; we would need to see higher inflation numbers coupled with real reason to believe labor market slack was rapidly evaporating, probably in the form of stronger wage growth. It remains interesting that the Fed does not view their own outlook as reason to accelerate the pace of activity. They seem relatively content to accept what they themselves acknowledge is an ongoing disappointment.
[PS: Still in light blogging mode. Preoccupied with teaching this term.]
Posted by Mark Thoma on Wednesday, May 21, 2014 at 12:15 AM in Economics, Fed Watch, Monetary Policy |
Posted by Mark Thoma on Wednesday, May 21, 2014 at 12:06 AM in Economics, Links |
No, Taking Away Unemployment Benefits Doesn’t Make People Get Jobs, by Bryce Covert: When 1.3 million long-term unemployed people lost benefits because Congress let the program lapse, some claimed that taking away the checks would encourage people to go out and get a job. That isn’t panning out for the 74,000 people who are no longer getting checks in Illinois.
In January, one month after they lost benefits, 64,000 of them, or 86 percent, were still unemployed, according to an analysis of wage records by the Illinois Department of Employment Security (IDES). February was similar: 61,3000 people were still unemployed, or 82.7 percent of the original group. That means two months later, four out of five people who were cut off from benefits still weren’t bringing in wages.
“This notion that temporary unemployment benefits provide people a reason not to return to work really needs to end because it is not supported by the data,” IDES Director Jay Rowell said.
Other natural experiments have shown that, rather than spurring a flurry of hiring, cutting off benefits can have disastrous consequences. ...
Posted by Mark Thoma on Tuesday, May 20, 2014 at 10:37 AM in Economics, Social Insurance, Unemployment |
At MoneyWatch, what is econometrics?:
Using Econometrics to Figure Out How the World Really Works, by Mark Thoma: Many people believe there has been no progress in economics, but that isn't true. ...
Posted by Mark Thoma on Tuesday, May 20, 2014 at 08:37 AM in Econometrics, Economics |
Why the Fed Should Not Raise Interest Rates, by Mark Thoma: The Fed’s target interest rate has been at the zero lower bound since December of 2008, and Fed watchers are trying to predict when the Fed will begin reversing this policy. The consensus appears to be that the Fed will begin raising the target rate at the beginning of next year, but many economists believe the policy reversal should have already started. There are four main justifications for the call to raise interest rates sooner rather than later, all of which are misguided...
Posted by Mark Thoma on Tuesday, May 20, 2014 at 08:31 AM in Economics, Fiscal Times, Monetary Policy |
Daron Acemoglu, Suresh Naidu, James A Robinson, and Pascual Restrepo:
Democracy causes economic development?, by Daron Acemoglu, Suresh Naidu, James A Robinson, Pascual Restrepo, Vox EU: Many analysts view democracy as a neutral or negative factor for growth. This column discusses new evidence showing that democracy has a robust and sizable pro-growth effect. The central estimates suggest that a country that switches from non-democracy to democracy achieves about 20% higher GDP per capita over the subsequent three decades.
Posted by Mark Thoma on Tuesday, May 20, 2014 at 08:30 AM in Development, Economics |
Posted by Mark Thoma on Tuesday, May 20, 2014 at 12:06 AM in Economics, Links |
David Wiczer at the St. Louis Fed's relatively new blog:
The Recession’s Effect on Job Churn, by David Wiczer: Jobs in the U.S. labor market get turned over at a surprising frequency, with flows into/out of unemployment being almost four times faster than in Germany, despite similar unemployment rates.1 But when U.S. workers leave jobs, they are twice as likely to go directly into another one as become unemployed.2 These job-to-job transitions make up the bulk of the job destruction and creation in the U.S. labor market.
However, it appears that employed workers have slowed their transitions between employers. (Among others, Mike Konczal at The Next New Deal discussed this in a recent blog post.3) While this does not necessarily affect the unemployment rate (as these job-to-job changers are never unemployed), it may be a sign of two things:
- Finding a job is still very difficult.
- The job market may be experiencing coagulation, less churn and less “dynamism.”
If the second point is true, this could spell worrying news for allocative efficiency if we believe that the flow of workers from job to job plays a significant role in efficiently allocating workers.
Additional data show not only the flow of workers but also what types of firms they flow to and from.4 Young firms (those less than a year old) have much higher rates of hiring and separations (more churn) than more established firms. However, most workers do not work at such young firms, and the fall has been steady, and not particularly cyclical, from about 5 percent to 3 percent from 1998 to 2011. In the same period, young firms’ fraction of new hires fell from about 38 percent in 1998 to its low at 32 percent in 2009, though it recovered slightly. In other words, churn could diminish because all firms are doing less hiring and firing or because young firms, which hire and fire a great deal, are accounting for a smaller fraction of employment. Part of the decline in churn is the changing age profile of firms. The churn rate has fallen since 1998, it fell most sharply in 2009, and, aside from young firms, there has been no recovery.
What does all of this mean? Most simply, some labor market indicators show that we are still not back to prerecession levels. But it also seems that there has been a long-term process behind these sluggish statistics, and the recession only exacerbated it. How does this affect such variables as worker productivity and wages? That demands more work on the theory of worker churn that has yet to be done.
Notes and References
1 Elsby, Michael; Hobijn, Bart; and Sahin, Aysegul. “Unemployment Dynamics in the OECD.” The Review of Economics and Statistics, May 2013, Vol. 95, No. 2, pp. 530-548.
2 Fallick, Bruce and Fleischman, Charles. “Employer-to-Employer Flows in the U.S. Labor Market: The Complete Picture of Gross Worker Flows.” Finance and Economics Discussion Series, 2004-34.
3 Konczal, Mike. “Not Just the Long-Term Unemployed: Those Unemployed Zero Weeks Are Struggling to Find Jobs.” Next New Deal, April 17, 2014.
4 Haltiwanger, John; Hyatt, Henry; McEntarfer; and Sousa, Liliana. “Job Creation, Worker Churning, and Wages at Young Businesses.” Kauffman Foundation, November 2012.
Posted by Mark Thoma on Monday, May 19, 2014 at 09:49 AM
Springtime for Bankers, by Paul Krugman, Commentary, NY Times: By any normal standard, economic policy since the onset of the financial crisis has been a dismal failure. It’s true that we avoided a full replay of the Great Depression. But employment has taken more than six years to claw its way back to pre-crisis levels...
Now Timothy Geithner, who was Treasury secretary for four of those six years, has published a book, “Stress Test,” about his experiences. And basically, he thinks he did a heckuva job. ...
Much of Mr. Geithner’s book is devoted to a defense of the U.S. financial bailout, which he sees as a huge success story — which it was, if financial confidence is viewed as an end in itself. ... But where is the rebound in the real economy? Where are the jobs? ...
One reason for sluggish recovery is that U.S. policy “pivoted,” far too early, from a focus on jobs to a focus on budget deficits. Mr. Geithner denies ... any responsibility for this... That doesn’t match independent reporting, which portrays Mr. Geithner ridiculing fiscal stimulus as “sugar” that would yield no long-term benefit.
But fiscal austerity wasn’t the only reason recovery has been so disappointing..., the burden of high household debt, a legacy of the housing bubble, has been a big drag on the economy. And there was, arguably, a lot the Obama administration could have done to reduce debt burdens without Congressional approval. But it didn’t... Why? According to many accounts, the biggest roadblock was Mr. Geithner’s consistent opposition to mortgage debt relief — he was, if you like, all for bailing out banks but against bailing out families.
“Stress Test” asserts that no conceivable amount of mortgage debt relief could have done much to boost the economy. But the leading experts on this subject are ... Atif Mian and Amir Sufi, whose just-published book “House of Debt” argues very much the contrary. ...
In the end, the story of economic policy since 2008 has been that of a remarkable double standard. Bad loans always involve mistakes on both sides — if borrowers were irresponsible, so were the people who lent them money. But when crisis came, bankers were held harmless for their errors while families paid full price.
And refusing to help families in debt, it turns out, wasn’t just unfair; it was bad economics. Wall Street is back, but America isn’t, and the double standard is the main reason.
Posted by Mark Thoma on Monday, May 19, 2014 at 12:24 AM in Economics, Financial System, Policy |
Posted by Mark Thoma on Monday, May 19, 2014 at 12:06 AM in Economics, Links |
Diagnoses and Prescriptions: The Great Recession: There’s a very interesting, albeit down-in-the-weeds, analytic debate brewing around a confluence of recent publications. Tim Geithner’s new book defends the interventions of the Treasury department he led to reflate credit markets (and I worked with the team on this back then). Mian and Sufi’s new book ... argues that Treasury got it wrong by not recognizing the extent to which debt burdens were restricting growth and intervening in ways to write off more debt...
Dean Baker has long argued the problem was not just the debt overhang but the wealth effect’s sharp shift into reverse when the housing bubble burst. That’s similar to Main/Sufi except it implies that even had you forgiven the debt, consumption still would have tanked. Brad DeLong articulates an “all-of-the-above” theory, suggesting each of these analyses gets at one part of the problem but you need all of them to understand what happened.
Here’s what I think..., you have to do everything you can to get the system back up. You have to reflate the credit system through both liquidity (as in the TARP) as well as Mian/Sufi-style principal reductions and cramdowns of mortgage debt that cannot realistically be serviced without sustained pain. The administration did a lot of the former and little (not none) of the latter. ...
Dean’s point means that debt forgiveness and revived credit flows must be met with deep fiscal stimulus that lasts as long as needed. ... With the private sector still licking its wounds, absent committed stimulus there’s no reason to expect deleveraging, or even aggressive monetary policy, to trigger the growth needed to reach escape velocity. ...
So I’m with Brad—all of the above. And let’s keep it real: the problem was not only that we didn’t do all of the above. It’s that even when we did the right things, we didn’t stick with them long enough. The important thing is to try to learn from our mistakes, and I for one am thankful to all of these authors for continuing to plumb these deep waters. ...
Posted by Mark Thoma on Sunday, May 18, 2014 at 10:42 AM in Economics, Fiscal Policy |