Please, sir, may I have a little more of that growing pie I worked so hard to help you make?
...millions of Americans have one overriding question: When will my pay increase arrive? The nation’s unemployment rate has fallen ... to 5.1 percent from 10 percent in 2009, but wages haven’t accelerated upward, as many had expected.
In fact, the labor market is a lot softer than a 5.1 percent jobless rate would indicate. ... This ... continued labor market weakness ... goes far to explain why wage increases remain so elusive. ...
But work force experts assert ... many other factors ... help explain America’s stubborn wage stagnation. Outsourcing, offshoring and imports exert a steady downward tug on wages. Labor unions have lost considerable muscle. Many employers have embraced pay-for-performance policies that often mean nice bonuses for the few instead of across-the-board raises for the many.
Peter Cappelli, a professor at the Wharton School of Business, noted, for instance, that many retailers give managers bonuses based on whether they keep their labor budgets below a designated ceiling. “They’re punished to the extent they go over those budgets,” Professor Cappelli said. “If you’re a local manager and you’re thinking, ‘Should we bump up wages,’ it could really hit your bonus. ...
Jared Bernstein ... put it another way: “There’s this pervasive norm” among employers “that labor costs must be held down at all costs because maximizing profits is the be-all and end-all.”
He added that the “atomization” of the American workplace — with the use of more temps, subcontractors, part-timers and on-call workers — had reduced companies’ costs and workers’ bargaining power.
As a result of all these trends, the share of corporate income going to workers has sunk to its lowest level since 1951. ...
It takes a lot of energy to sustain a lie. When enough people do it together, over a sustained period of time, it wears on them. It also produces a certain kind of culture: one cut loose from the norms of fair conduct and trust that any organization requires in order to survive as something more than a daily, no-holds-barred war of all against all. A battle royale. A circus, if you prefer.
And the act in the center ring? The Amazing Death Spiral. One performer does something so outrageous that anyone else who wishes to further hold the audience’s attention has to match or top it––even if they know it’s insane. Listen to the warning of the one guy who dares grab the ringmaster’s microphone and say that if this keeps on going everyone will end up dead. That’s what poor old John Kasich did. Hear him cry about his “great concern that we are on the verge, perhaps, of picking someone who cannot do this job. I’ve watched people say that we should dismantle Medicare and Medicaid. . . . I’ve heard them talking about deporting 10 or 11 [million] people from this country. . . . I’ve heard about tax schemes that don’t add up.”
And what happened to him? Read the snap poll from Gravis research. Only 3 percent of Republicans thought he won the debate. (First place was Trump with 26.7; second was Rubio with 21.1; third was Cruz with 17.3; and fourth was Ben Carson with 12.5.) Only 2.4 percent said they would vote for Kasich for president. When the clowns are running the show, of course it’s going to be in disarray.
David Brooks says not to worry if candidates are lying about their economic plans, they are just exaggerating to make themselves more attractive to conservative voters (they couldn't possible be lying about who their true allegiance, could they?):
At this stage it’s probably not sensible to get too worked up about the details of any candidate’s plans. They are all wildly unaffordable. What matters is how a candidate signals priorities. Rubio talks specifically about targeting policies to boost middle- and lower-middle-class living standards.
...My experience is that the best way to figure out a candidate’s true priorities — and his or her character — is to look hard at policy proposals.
My view here is strongly influenced by the story of George W. Bush. Younger readers may not know or remember how it was back in 2000, but back then the universal view of the commentariat was that W was a moderate, amiable, bluff and honest guy. I was pretty much alone taking his economic proposals — on taxes and Social Security — seriously. And what I saw was a level of dishonesty and irresponsibility, plus radicalism, that was unprecedented in a major-party presidential candidate. So I was out there warning that Bush was a bad, dangerous guy no matter how amiable he seemed.
How did that work out?
So now we have candidates proposing “wildly unaffordable” tax cuts. Can we start by noting that this isn’t a bipartisan phenomenon, that it’s not true that everyone does it? Hillary Clinton isn’t proposing wildly unaffordable stuff... And proposing wildly unaffordable stuff is itself a declaration of priorities: Rubio is saying that keeping the Hair Club for Growth happy is more important to him than even a pretense of fiscal responsibility. Or if you like, what we’ve seen is a willingness to pander without constraint or embarrassment.
Also, his insistence that the magic of supply-side economics would somehow pay for the cuts is a further demonstration of priorities: allegiance to voodoo trumps all.
At a more general level, I’d argue that it’s a really bad mistake to wave away policy silliness with a boys-will-be-boys attitude. Policy proposals tell us a lot about character — and the history of the past 15 years says that journalists who imagine that they can judge character from the way people come across on TV or in personal interviews are kidding themselves, and misleading everyone else.
"What matters is how a candidate signals priorities." Yes, and the priority seems to be lying is okay to get what you want. That's a great trait to have in a president who might fact the decision to send our kids to die in a war he or she wants. Oh wait.
...Many companies are nudging purely for their own profit and not in customers’ best interests. In a recent column in The New York Times, Robert Shiller called such behavior “phishing.” ...
Some argue that phishing — or evil nudging — is more dangerous in government than in the private sector. The argument is that government is a monopoly with coercive power, while we have more choice in the private sector over which newspapers we read and which airlines we fly.
I think this distinction is overstated. In a democracy, if a government creates bad policies, it can be voted out of office. Competition in the private sector, however, can easily work to encourage phishing rather than stifle it.
One example is the mortgage industry in the early 2000s. Borrowers were encouraged to take out loans that they could not repay when real estate prices fell. Competition did not eliminate this practice, because it was hard for anyone to make money selling the advice “Don’t take that loan.”
On misunderstanding economics: Most of us have long lamented the general public's lack of understanding of economics. A new paper by David Leiser and Zeev Kril sheds interesting light upon this. The human mind, they say, "is not particularly equipped to think about economics"...
Faced with this..., say Leiser and Krill, people resort to metaphors - the most notorious being that governments should manage the public finances as if it were a household. Worse still, they are often overconfident about the applicability of these metaphors. ...
There is, though, another heuristic laypeople use, which Leiser calls the "good begets good heuristic" (pdf). He shows that people believe that good things cause good things to happen, and bad things to cause bad things. For example, they think a rise in unemployment is associated (pdf) with a rise in inflation because both are bad... What might be more problematic is that people think government spending is bad, and so associate it with rising unemployment.
I've got three observations here. First, the poor public understanding of economics is NOT a partisan matter. It leads both to anti-market attitudes and to anti-Keynesian ones.
Second, the issue here is not confined to the UK...
Thirdly, our political and social institutions do not adequately correct these problems, and might exacerbate them. Politicians and the media tend to pander to misconceptions rather than correct them... It's not just economists who should lament this, but everyone who cares about the quality of our democracy.
Catherine Rampell blames the media for the behavior of Republicans during the debate (and more generally), but if the press called them on their "grifting,", would the Republican base listen?
Springtime for Grifters, by Paul Krugman, Commentary, NY Times: At one point during Wednesday’s Republican debate, Ben Carson was asked about his involvement with Mannatech, a nutritional supplements company that makes outlandish claims ... and has been forced to pay $7 million to settle a deceptive-practices lawsuit. The audience booed, and Mr. Carson denied being involved...
As it happens, Mr. Carson lied. ... But the Republican base doesn’t want to hear about it... These days, in his party, being an obvious grifter isn’t a liability, and may even be an asset. ...
About the grifters: Start with the lowest level, in which marketers use political affinity to sell get-rich-quick schemes, miracle cures, and suchlike. That’s the Carson phenomenon, and it’s just the latest example of a long tradition..., a “strategic alliance of snake-oil vendors and conservative true believers” goes back half a century. ...
At a somewhat higher level are marketing campaigns more or less tied to what purports to be policy analysis. Right-wing warnings of imminent hyperinflation, coupled with demands that we return to the gold standard, were fanned by media figures like Glenn Beck, who used his show to promote Goldline, a firm selling gold coins and bars at, um, inflated prices. ...
Oh, and former Congressman Ron Paul, who has spent decades warning of runaway inflation and is undaunted by its failure to materialize, is very much in the business of selling books and videos showing how you, too, can protect yourself from the coming financial disaster.
At a higher level still are operations that are in principle engaging in political activity, but mainly seem to be generating income for their organizers. ... For example, only 14 percent of what the Tea Party Leadership Fund spends is “candidate focused.”
You might think that such revelations would be politically devastating. But the targets of such schemes know, just know, that the liberal mainstream media can’t be trusted...
Furthermore, the success of the grifters ... defines respectability down.
Consider Mr. Rubio... There was a time when Mr. Rubio’s insistence that $6 trillion in tax cuts would somehow pay for themselves would have marked him as deeply unserious... But the Republican base doesn’t care what the mainstream media says. ...
The point is that we shouldn’t ask whether the G.O.P. will eventually nominate someone in the habit of saying things that are demonstrably untrue, and counting on political loyalists not to notice. The only question is what kind of scam it will be.
The missing lowflation revolution: It will soon be eight years since the US Federal Reserve decided to bring its interest rate down to 0%. Other central banks have spent similar number of years (or much longer in the case of Japan) stuck at the zero lower bound. In these eight years central banks have used all their available tools to increase inflation closer to their target and boost growth with limited success. GDP growth has been weak or anemic, and there is very little hope that economies will ever go back to their pre-crisis trends.
Some of these trends have challenged the traditional view of academic economists and policy makers about how an economy works. ...
My own sense is that the view among academics and policy makers is not changing fast enough and some are just assuming that this would be a one-time event that will not be repeated in the future (even if we are still not out of the current event!).
The comparison with the 70s when stagflation produced a large change in the way academic and policy makers thought about their models and about the framework for monetary policy is striking. During those year a high inflation and low growth environment created a revolution among academics (moving away from the simple Phillips Curve) and policy makers (switching to anti-inflationary and independent central banks). How many more years of zero interest rate will it take to witness a similar change in our economic analysis?
I would send you to Brad DeLong's piece on Ben Bernanke through a short excerpt if I could, but when I post just a few sentences from anything appearing at Project Syndicate they get mad at me. So I mostly just put their articles in links, if I link them at all. Not sure why they don't want me to send them traffic.
Growth Falls Off Sharply in Third Quarter: The economy grew at a 1.5 percent annual rate in the third quarter, a sharp slowing from the 3.9 percent rate reported for the second quarter. The falloff was largely due to slower inventory growth. Inventories subtracted 1.44 percentage points from the growth rate in the quarter after adding 0.02 percentage points in the second quarter. Final demand for the quarter grew a 3.0 percent annual rate. For the first three quarters of the year GDP has risen at a 2.0 percent annual rate.
There were few surprises in the report. Consumption grew at a 3.2 percent rate, driven by a 6.5 percent growth rate in durable good consumption. Non-residential investment grew at a weak 2.1 percent rate. All components of investment were weak, but structures declined at a 4.0 percent rate after rising 6.2 percent in the second quarter. Housing grew at a modest 6.1 percent rate, down from an average of 9.8 percent in the prior three quarters. Exports and imports grew at almost the same rate, having little net effect on growth. Government expenditures grew at a 1.7 percent annual rate, adding 0.3 percentage points to growth.
There continues to be no evidence of inflationary pressures in any sector. The core PCE grew at just a 1.2 percent rate in the quarter. The basic story continues to be one of modest growth with very little inflation.
December Still Very Much A Live Meeting, by Tim Duy: One of two things is going to happen. Either the US economy is or will soon be slowing on the back of already tighter financial conditions. Or the US economy will soon be slowing on the back of future tighter financial conditions as directed by the Federal Reserve.
In a worst case scenario, both of these things will happen.
And the odds of both of these things happening seems higher after this week's FOMC meeting. Rather than being a nonevent as expected, it was actually quite exciting. We learned that the majority of the FOMC remains wedded to the idea of a December rate hike. That was made very clear with this sentence:
In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation.
That was a fairly clear warning that December is really, really in play. No, really this time. They mean it. After all, a number of them are on record repeatedly saying that they expect to hike interest rates this year. I tend to wonder if they feel compelled to act on these statements? The opportunities to show their mettle are fairly limited at this point.
It also seems as if Federal Reserve Governors Lael Brainard and Daniel Tarullo were schooled hard this week. They argued publicly that they did not see reason to raise rates this year. I doubt they changed their opinions - at least not privately. But they very clearly did not change any opinions on the FOMC. Indeed, one wonders if they only hardened their colleagues positions on a rate hike this year. Consider Paul Krugman's response to me:
Maybe, but it’s also worth noting the difference in perspective that comes from having your original intellectual home in international versus domestic macroeconomics. I would say that Brainard’s experience is dominated not so much by the Great Moderation as by the Asian financial crisis and Japan’s stagnation; internationally oriented macro types were aware earlier than most that Depression-type issues never went away. And if you read Brainard’s argument carefully, she devotes a lot of it to the drag America may be facing from weakness abroad and the stronger dollar, which acts as de facto monetary tightening
Krugman is right; I should have mentioned this. Regardless, note what key line was removed from the September statement:
Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.
Downplaying these concerns appears to be an effort to cut the knees out from under Brainard. To be sure, US markets rebounded, but have we seen much in the last six weeks to so quickly remove global concerns? I am wary to believe so with data like these:
In any event, it seems reasonable to believe that the bar for a rate hike at the next FOMC meeting is fairly low. Prior to the meeting I said this:
The middle range of closer to 150,000 jobs a month—a more lackluster reading similar to the past two months—is the gray area. This is the range in which the proper application of risk management principles becomes critical. In that range—a range I find likely—the degree to which Brainard & Co. shape the debate at this week’s meeting will determine the policy outcome in December, and likely beyond.
I am thinking we now we know how little Brainard shaped the debate. Lackluster numbers seem likely to suffice at this juncture. Hence why market expectations moved as they did:
The willingness of the Fed to hike in the face of lackluster numbers is a bit disconcerting, to say the least. Lackluster numbers, by definition, indicate slower activity, and one would think that the Fed would like to see how that played out before piling on. But assuming this from Jon Hilsenrath at the the Wall Street Journal:
Mr. Fischer is among those more eager to raise rates.
It is easy to see how the Fed gets behind tighter policy. I don't know that Brainard could easily counter the gravitas of Fischer.
Bottom Line: December stays on the table. Very much so, in fact. Indeed, in all reality the only reason market participants have not gone all in on December is because they recognize that the Fed has repeatedly cried "wolf" this year. Makes one distrustful of the Fed's proclamations. At this juncture, my expectation is that only disappointing data prevents the Fed from moving in December. It will be interesting to see how well the Fed statement holds up to the light of this week's GDP report and the next two employment reports.
Larry Summers provides another "huh?" response to the WSJ editorial by Mike Spence and Kevin Warsh claiming "that overly easy monetary policy reduces business investment. Indeed, they blame the weakness of business investment during the current recovery on the Fed":
I just read the ‘most confused’ critique of the Fed this year: My friends Mike Spence and Kevin Warsh, writing in the Wall Street Journal on Wednesday, have produced what seems to me the single most confused analysis of U.S. monetary policy that I have read this year. Unless I am missing something -- which is certainly possible -- they make a variety of assertions that are usually exposed as fallacy in introductory economics classes. (Brad DeLong has expressed related views).
My problem is not with their policy conclusion, though I do not share their highly negative view of quantitative easing (QE). There are many harshly critical analyses of QE ... which are entirely coherent and consistent with the macroeconomics of the last 50 years. My differences are based on judgments about empirical magnitudes and relative risks -- not questions of basic logic. ...
Perhaps Spence and Warsh are on to something that I am missing. I'm curious whether they can point to any peer reviewed economic research, or indeed any statistical work, that backs up their views. I am certainly open to any new evidence or new argument after all that has happened in recent years that easy money reduces business investment. And there is plenty of room for debate over policy.
For now, though, I would put the Spence-Warsh doctrine that easy money reduces investment in a class of propositions backed by neither logic nor evidence.
No rate hike, but door still open for later this year, appears a bit less worried about international conditions, a bit more worried about conditions in the US:
Press Release, Release Date: October 28, 2015, For immediate release: Information received since the Federal Open Market Committee met in September suggests that economic activity has been expanding at a moderate pace. Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. The pace of job gains slowed and the unemployment rate held steady. Nonetheless, labor market indicators, on balance, show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved slightly lower; survey-based measures of longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring global economic and financial developments. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams. Voting against the action was Jeffrey M. Lacker, who preferred to raise the target range for the federal funds rate by 25 basis points at this meeting.
Check Out Our Low, Low (Natural) Rates: ...Thomas Laubach and John C. Williams of the Fed have a new paper updating their estimates of the natural real rate of interest. For those new to the term, the natural rate is a standard economic concept dating back a century; it’s the rate of interest at which the economy is neither depressed and deflating nor overheated and inflating. And it’s therefore the rate monetary policy is supposed to achieve.
Laubach and Williams find that the natural rate has plunged in recent years, and is now very, very low. The particular statistical method they use is reasonable, but in any case — as they document — the result pops out for pretty much any plausible methodology. ...
L-W attribute the decline in the natural rate largely to the slowing of potential output, which in turn reflects demography and what looks like a slowdown in technological progress. That’s more speculative. But the low natural rate is as solid a result as anything in real time can be.
This in turn tells you several things. It says that all the complaints that the Fed is artificially keeping rates low are nonsense; rates are low because that’s what the real economy wants, and the Fed’s only alternative would be to create a depression.
It also casts even more doubt on the wisdom of the Fed’s urge to raise rates. Nothing in the economic situation suggests that rates are too low right now. ...
In any case, the message about what the Fed should do now is clear: nothing.
Can taxing the rich reduce inequality? You bet it can!: Two recently posted papers by Brookings colleagues purport to show that “even a large increase in the top marginal rate would barely reduce inequality.” This conclusion, based on one commonly used measure of inequality, is an incomplete and misleading answer to the question posed: would a stand-alone increase in the top income tax bracket materially reduce inequality? More importantly, it is the wrong question to pose, as a stand-alone increase in the top bracket rate would be bad tax policy that would exacerbate tax avoidance incentives. Sensible tax policy would package that change with at least one other tax modification, and such a package would have an even more striking effect on income inequality. In brief:
A stand-alone increase in the top tax bracket would be bad tax policy, but it would meaningfully increase the degree to which the tax system reduces economic inequality. It would have this effect even though it would fall on just ½ of 1 percent of all taxpayers and barely half of their income.
Tax policy significantly reduces inequality. But transfer payments and other spending reduce it far more. In combination, taxes and public spending materially offset the inequality generated by market income.
The revenue from a well-crafted increase in taxes on upper-income Americans, dedicated to a prudent expansions of public spending, would go far to counter the powerful forces that have made income inequality more extreme in the United States than in any other major developed economy.
A Strategy to Ignore Poverty, NY Times: Arizona, where I was born, in July became the first state to cut poor families’ access to welfare assistance to a maximum of 12 months over a lifetime. That’s a fifth of the time allowed under federal law, and means that 5,000 more people will lose their benefits by next June.
This is only the latest tightening of the screws in Arizona. Last year, about 29,000 poor families received benefits under the Temporary Assistance for Needy Families program, 16,000 fewer than in 2005. In 2009, in the middle of the worst economic downturn since the Depression of the 1930s, benefits were cut by 20 percent.
In fact, I do not even think that Spence and Warsh understand that one is supposed to have a racket in hand when one tries to play tennis. As I see it, the Fed’s open-market operations have produced more spending–hence higher capacity utilization–and lower interest rates–has more advantageous costs of finance–and we are supposed to believe that its policies “have hurt business investment”?!?!
…But textbooks presume the normal conduct of policy and that the prices of financial assets like stocks and bonds are broadly consistent with expectations for the real economy. Nothing could be further from the truth in the current recovery…. Earnings of the S&P 500 have grown about 6.9% annually… pales in comparison to prior economic expansions… half of the profit improvement… from… share buybacks. So the quality of earnings is as deficient as its quantity…. Extremely accommodative monetary policy… $3 trillion in… QE pushed down long-term yields and boosted the value of risk-assets…. Business investment in the real economy is weak. While U.S. gross domestic product rose 8.7% from late 2007 through 2014, gross private investment was a mere 4.3% higher. Growth in nonresidential fixed investment remains substantially lower than the last six postrecession expansions….
As I have said before and say again, weakness in overall investment is 100% due to weakness in housing investment. Is there an argument here that QE has reduced housing investment? No. Is nonresidential fixed investment below where one would expect it to be given that the overall recovery has been disappointing and capacity utilization is not high? No. The U.S. looks to have an elevated level of exports, and depressed levels of government purchases and residential investment. Given that background, one would not be surprised that business investment is merely normal–and one would not go looking for causes of a weak economy in structural factors retarding business investment. One would say, in fact, that business investment is a relatively bright spot.
Yes, businesses have been buying back shares. How would the higher interest rates and higher risk spreads in the absence of QE retard that? They wouldn’t. Yes, earnings growth from business operations over the past five years has been slower than in earlier expansions. How has QE dragged on earnings growth. It hasn’t. ...
And the Federal Reserve’s undertaking of QE has hampered efforts to engage in “fundamental tax reform” how, exactly? Is an argument given here? No, it is not. ......
The point by point rebuttal continues, with the conclusion:
... If you are going to argue that QE has reduced real business investment, argue that QE has reduced real business investment. I see no such argument anywhere in the column.
So Warsh and Spence should not be surprised at my reaction: “Huh!?!?!” and “WTF!?!?!?!?”
Shaw-Hwa Lo and Tian Zheng of Columbia, Adeline Lo of UCSD and Herman Chernoff of Harvard present findings in ... Proceedings of the National Academy of Sciences ... that demonstrates that statistically significant variables are not necessarily predictive. In addition, very predictive variables do not necessarily have to appear significant and thereby evade a researcher using statistical significance as a criterion to evaluate variables for prediction.
Statistical significance is a traditional, long-standing measure in any researcher's toolbox but thus far, scientists have been puzzled by the inability to use results of statistically significant variants in complex diseases to make predictions useful for personalized medicine. Why aren't significant variables leading to good prediction of outcomes? This conundrum affects both simple and complex data in a broad range of science and social science fields.
In their findings, the authors demonstrate that what makes variables good for prediction versus significance depends on different properties of the underlying distributions. They suggest that progress in prediction requires efforts toward a new research agenda of searching for a novel criterion to retrieve highly predictive variables rather than highly significant variables.
They also present an alternative approach, the Partition Retention method, which displays strong power in prediction. ...
"What we're saying here is that using the previously very well-known methods might not be appropriate when we care about predicting important outcomes," says Professor Lo. "Our alternative approach seems to do very well in prediction, and is relevant for many scientific fields."
On the greatness of the great moderation, by Lola Gadea, Ana Gomez-Loscos, and Gabriel Pérez-Quirós, Vox EU: The period of unusually stable macroeconomic activity experienced in the US that began in the mid-eighties is known as the Great Moderation. Kim and Nelson (1999) and McConnell and Perez-Quiros (2000) were the first to document the substantial decline in US output volatility in 1984, but the academic and non-academic literature on the Great Moderation is prolific, and its possible causes – namely, changes in the structure of production, improved policy and good luck – continue to be a matter of lively debate.
Although the Great Moderation is one of the most widely documented stylized facts of modern macroeconomy, two issues could question its greatness:
First, the Great Moderation has never before been studied in a long historical perspective as previous studies only use post-World War II data;
Can the Great Moderation be identified when considering a longer dataset? In a recent study (Gadea et al. 2015), we investigate this question. We conclude that, considering a dataset beginning in 1875, we chronologically find three structural breaks in variance that roughly correspond to the end of each of the world wars and the beginning of the Great Moderation. Indeed, the Great Moderation had as great an impact on the characteristics of the series as World War II had.
Second, one natural question that has arisen in recent years is the possible end of the Great Moderation due to the Great Recession, which was of unprecedented severity and duration in the postwar US business cycle and led many economists to suspect a major breakdown in the GDP series. But, might output volatility not remain subdued despite the tumult created by the Great Recession? In a recent paper (Gadea et al. 2014), we formally address this question. ...
The Great Moderation is not over in spite of the Great Recession even if we use a historical dataset beginning in the 19th century. The Great Moderation was originally associated with a decrease in output volatility and was considered a great achievement in terms of reducing risk and of decreasing the frequency and depth of recessions. However, after carefully analyzing the characteristics of the Great Moderation, they seem to be more clearly associated with the shape of expansions. Perhaps the benefits associated with an apparent increase in stability are paid for at a very high price. Feeble expansions may be the price to pay for low volatility.
Economic Cycles in Ancient China, by Yaguang Zhang, Guo Fan, and John Whalley, NBER Working Paper No. 21672 Issued in October 2015: We discuss business cycles in ancient China. Data on Ancient China business cycles are sparse and incomplete and so our discussion is qualitative rather than quantitative. Essentially, ancient debates focused on two types of cycles: long run political or dynastic cycles of many decades, and short run nature induced cycles. Discussion of the latter show strong parallels to Jevons’ conception of sun spot cycles. The former has no clear contemporary analogue, were often deep in impact and of long duration. The discussion of both focused on agricultural economies. Ancient discussion on intervention focused on counter cyclical measures, including stockpiling, and predated Keynes and the discussion in the 1930s by centuries. Also, a strongly held belief emerged that cycles create their own cycles to follow, and that cycles are part of the inevitable economic order, a view consistent with Mitchell’s view of the business cycle in the 1940s. Current debates on how best to respond to the ongoing global financial crisis draw in part on historical precedents, but these are largely limited to the last 150 years for OECD countries and with major focus on the 1990’s. Here we also probe material on Ancient China to see what is relevant.
Free Mitt Romney!, by Paul Krugman, Commentary, NY Times: Sometimes I find myself feeling sorry for Mitt Romney. No, seriously. In another time and place, he might have been respected as an effective technocrat ... for his ability to get things done. In fact, that’s kind of how it worked when he was governor of Massachusetts...
But now it’s 2015 in America, and Mr. Romney’s party doesn’t want people who get things done. On the contrary, it actively hates government programs that improve American lives, especially if they help Those People. And this means that Mr. Romney can’t celebrate his signature achievement in public life, the Massachusetts health reform that served as a template for Obamacare.
This has to hurt. Indeed, a few days ago Mr. Romney couldn’t help himself: he boasted to the Boston Globe that “Without Romneycare, we wouldn’t have had Obamacare” and that as a result “a lot of people wouldn’t have health insurance.” And it’s true!
But such truths aren’t welcome in the G.O.P. ... Not surprisingly, then, Mr. Romney quickly tried to walk his comments back, claiming that Obamacare is very different from Romneycare, which it isn’t, and that it has failed.
But you know, it hasn’t. On the contrary, the Affordable Care Act has been a remarkable success, especially considering the scorched-earth opposition it has faced. ...
In short, President Obama, Nancy Pelosi and Harry Reid, who pushed the Affordable Care Act through despite total opposition from the G.O.P., have a lot to be proud of. And so does Mr. Romney, who helped lay the foundation. Instead, however, he’s trashing the best thing he’s ever done.
You have to wonder: Does Mr. Romney really think that his party would look more favorably on Obamacare if it worked even better than it has, if it cost no money at all? If so, he’s delusional. After all, the great majority of Republican-controlled states have turned down free money, refusing to let the federal government expand Medicaid...
The point is that from the point of view of the Republican base, covering the uninsured, or helping the unlucky in general, isn’t a feature, it’s a bug...: the base is actually willing to lose money in order to perpetuate suffering. ...
Maybe Mr. Romney ... just can’t bring himself to admit that he picked the wrong group of people to hang out with. Either way, one hopes for his sake that he eventually gives up his illusions. Trust me, Mitt: it will be a liberating experience.
Insofar as one did want to think, and so construct an argument that the Federal Reserve’s monetary policy operations are destructive and in some ways analogous to “price controls”, the argument would go something like this:
The Federal Reserve’s Open Market Committee’s operations are like those of an agriculture marketing board–a government agency that sets the price for, say, some agricultural product like butter or milk. Some of what is offered for sale at that price that is not taken up by the private market, and the rest is bought by the government to keep the price at its target. And the next month the government finds it must buy more. And more. And more.
Such policies produce excess supplies that then must be stored or destroyed: they produce butter mountains, and milk lakes.
The resources used to produce the butter mountains and milk lakes is wasted–it could be deployed elsewhere more productively. The taxes that must be raised to pay for the purchase of the butter and milk that makes up the mountains and the lakes discourages enterprise and employment elsewhere in the economy, and makes us poorer. Taxes are raised (at the cost of an excess burden on taxpayers) and then spent to take the products of the skill and energy of workers and… throw them away. Much better, the standard argument goes, to eliminate the marketing board, let the price find its free-market equilibrium value, provide incentives for people to move out of the production of dairy products into sectors where private demand for their work exists, and keep taxes low.
Now you can see that a central bank is exactly like an agricultural marketing board, except for the following little minor details:
An agricultural marketing board must impose taxes to raise the money finance its purchases of butter and milk. A central bank simply prints–at zero cost–the money to finance its purchase of bonds.
The butter mountains and milk lakes that the agricultural marketing board owns cannot be sold without pushing the price down below its free-market equilibrium and thus negating the purpose of the board. A central bank does not want to sell its bond mountains, but merely to collect interest and hold them to maturity, at which point they are simply money mountains.
The butter mountains and milk lakes are useless for the agricultural marketing board: all it can do with them is simply watch them rot away. The bond mountain turns into a money mountain–seigniorage–which the central bank then gives to the government, which lowers taxes as a result.
So a central bank is exactly like an agricultural marketing board–NOT!!! They are identical–except that they are completely different.
But, somewhat smarter John Taylor and others might say, a central bank is like an agricultural marketing board. The extra money it puts into circulation when its bonds mature and it transfers profits to the government devalue and debauch the currency. It raises the real resources needed to finance its bond purchases by levying an “inflation tax” on money holders–by reducing the value of their cash just as an income tax reduces the (after-tax) value of incomes.
And I would agree, if the inflation comes. ...
But what if the inflation does not come? What if our economy’s phase is one of not Inflation Economics but Depression Economics, in which the central bank is not pushing the interest rate below its Wicksellian natural rate but is instead stuck trying to manage a situation in which the Wicksellian natural rate of interest is less than zero?
Then the analogies break down completely. Money-printing is then not an inflationary tax but instead a utility-increasing provision of utility services. Bond purchases do not create an overhang that cannot be sold without creating an opposite distortion from the optimal price but instead push the temporal slope of the price system toward what a benevolent central planner would want the temporal slope of the price level to be. ...
Uniting Behind the Divisive ‘Cadillac’ Tax on Health Plans: One of us, a former member of the Obama administration, remains a fan of the president. The other, not so much. But we agree on one thing: The excise tax on high-cost health care plans, the so-called Cadillac tax, is good policy. Congress should side with President Obama and resist calls to scrap it. ...
To some, the Cadillac tax is unpopular because unions oppose it, having negotiated especially generous health plans. But legislators should not let special interests stand in the way of a more rational health care system for all Americans.
To some, the Cadillac tax is unpopular because it was passed as part of the Affordable Care Act, a.k.a. Obamacare. But the Cadillac tax can be evaluated as a stand-alone measure. Both fans and critics of Obamacare should see the merits in a more level playing field between alternative forms of compensation.
One of us worked for President Obama when the Affordable Care Act was passed. One of us worked for President George W. Bush and supported John McCain and Mitt Romney in their attempts to defeat Mr. Obama. We disagree on many things, but we agree that health policy is too important to treat as if it were nothing more than another political battlefield.
Some policies deserve bipartisan support. The Cadillac tax is one of them.
Are Canadian progressives showing Americans the way?: Reflecting on the recent outcome of the Canadian election, in which the Liberal Party of Canada cast itself as a progressive left of center party and reversed its fortunes in a major way to win a strong majority government, Larry Summers wrote in the Washington Post that “More infrastructure investment is not just good economics. It is good politics. Let us hope that American presidential candidates get the word!” ...
Paul Krugman echoes the same sentiment in a New York Times column entitled, somewhat inappropriately, “Keynes Comes to Canada.” ...
There is something ... that both countries share, and something they don’t, that sets an important backdrop.
Both countries have a significant need for important public sector investments in physical, and I would also say social, infrastructure. The populace sees this need as much in Canada as in the United States.
In Montreal, concrete slabs have fallen off of expressway overpasses, and killed unfortunate commuters. In Toronto, the gridlock associated with the commute to work is more than just a daily aggravation; it is a significant block to economic growth. In Vancouver, expansions in public transit are in need of significant funding. And the majors and city councils in countless municipalities battle with the need to update sewers and roads.
Both countries have this need, but in the US it is a harder sell. In a poll that I conducted with EKOS and The Pew Charitable Trusts, we found that the most significant difference in values on the two sides of the borders has less to do with philosophical issues associated with how to define a good life, but rather the role of government. Americans are much more likely to see government as hindering rather than helping them to achieve their personal goals.
My own view is that this comes down to a different view on the efficiency of government by a significant fraction of the population in the two countries. Canadians are much more likely to see government as a tool or a means to an end, Americans to see it as too inefficient and incapable of helping them accomplish their goals. A significant fraction of Canadians continue to have—in spite being told otherwise for a decade by their out-going conservative Prime Minister—a certain trust in the capacity for collective action through the public sector. Americans have seen too many failures to feel otherwise.
So in fundamental ways, Canadians may be more receptive to the message that Mr. Summers and Mr. Krugman would like to send Americans. ...
[In the full post, which is much longer, he discusses other important differences as well.]
Keynes Comes to Canada, by Paul Krugman Commentary, NY Times: ...On Monday, Canadian voters swept the ruling Conservatives out of power, delivering a stunning victory to the center-left Liberals. And while there are many interesting things about the Liberal platform, what strikes me most is its clear rejection of the deficit-obsessed austerity orthodoxy that has dominated political discourse across the Western world. The Liberals ran on a frankly, openly Keynesian vision, and won big. ...
Here’s what the Liberal Party of Canada platform had to say...: “Interest rates are at historic lows, our current infrastructure is aging rapidly, and our economy is stuck in neutral. Now is the time to invest.”
Does that sound reasonable? It should, because it is. ... Strange to say, however, that hasn’t been happening. ... Since 2010 public investment has been falling as a share of G.D.P. in both Europe and the United States, and it’s now well below pre-crisis levels. Why?
The answer is that in 2010 elite opinion somehow coalesced around the view that deficits, not high unemployment and weak growth, were the great problem facing policy makers. There was never any evidence for this view... But never mind — it was what all the important people were saying...
Most notably, those who should have stood up for public spending suffered a striking failure of nerve. Britain’s Labour Party, in particular... Even President Obama temporarily began echoing Republican rhetoric about the need to tighten the government’s belt.
And having bought into deficit panic, center-left parties found themselves in an extremely weak position. Austerity rhetoric comes naturally to right-wing politicians, who are always arguing that we can’t afford to help the poor and unlucky (although somehow we’re able to afford tax cuts for the rich.) Center-left politicians who endorse austerity, however, find themselves reduced to arguing that they won’t inflict quite as much pain. It’s a losing proposition, politically as well as economically.
Now come Justin Trudeau’s Liberals, who are finally willing to say what sensible economists (even at places like the International Monetary Fund) have been saying all along. And they weren’t punished politically...
So will the Liberals put their platform into practice? They should. ... Canada is probably facing an extended period of weak private demand, thanks to low oil prices and the likely deflation of a housing bubble.
Let’s hope, then, that Mr. Trudeau stays with the program. He has an opportunity to show the world what truly responsible fiscal policy looks like.
A Bridge Too Far?: There is much current angst on the difficult problem of how to escape a liquidity trap. Paul Krugman points out that in Japan, the ratio of debt to GDP is growing, leaving little room for a further tame fiscal expansion. He favors something more aggressive.
Tony Yates argues instead for a helicopter drop. Print money and give it to Japanese citizens. The benefit of that approach is that it does not leave the government with an increase in interest bearing debt. Simon Wren Lewis looks more closely at the technical aspects of this idea.
What are the differences between aggressive fiscal expansion financed by debt creation; and printing money and giving it to citizens? There are two.
First, an aggressive fiscal expansion, as envisaged by Keynesians, would be spent on infrastructure. A money financed transfer would be spent by citizens.
Second, an aggressive fiscal expansion, as envisaged by Keynesians, would be financed by issuing long term bonds. A money financed transfer would be financed by printing money.
While infrastructure expenditure is sorely needed, at least in the U.S., I see no reason to give up on sound cost benefit analysis to decide which projects are worth pursuing and which are not. That’s why I favor giving checks to citizens over building a bridge to nowhere. ...
I prefer private sector investment over government sector investment. But there are also good arguments for more public infrastructure projects. Build a bridge if it is needed; but make sure that it goes somewhere first. More importantly; finance the project by printing money: not by issuing thirty year bonds.
Since the 2008 financial crisis and the subsequent Great Recession, the economic profession has been heavily criticised. Economists were not able to predict the events that took place after Lehman Brothers folded – and they were divided about the right response to the crisis. Since then in much of the media (both traditional and new), economists are often described at best as delusional types, living in a fantasy world described by abstract mathematical models where individuals are hyper-rational, and where markets are perfect and deliver the best possible outcomes. At worst, they are accused of defending the interests of greedy capitalists and multinationals.
The life’s work of Angus Deaton, which has earned him the Nobel Prize in Economics, is a demonstration of how the best economists cannot be caricatured in this way. His research has always been driven by real world problems of huge relevance for economic policy, development and progress and – at the same time –grounded in economic theory. His work has shown what economics and an economist can offer to the policy debate and to social sciences in general. His approach has never shied away from difficult problems and it has always stressed the importance of bringing economic theory to data. He has shown that economic models and economists’ insights are useful to the extent to which they can be brought to bear on real data.
Throughout his career, he has been the opposite of the insular economist, immersed in the abstract world of perfect markets and hyper-rational consumers. On the contrary, he has used insights from other disciplines and engaged in conversations and occasional collaborations with psychologists (such as Daniel Kahneman), epidemiologists (such as Michael Marmot) and philosophers (such as Nancy Cartwright). Finally, he has not shied away from taking controversial positions, which, however, were always grounded on research rather than ideology and/or political correctness.
Saving and intertemporal choices...
Development economics – demand, measurement, health and happiness...
Why "Trump’s rhetoric (and Bernie Saunders’ on the left) resonates with so many":
Letter from America: Horse, a hippo and middle-aged angst The election season is already upon us in the United States, about as welcome as what used to be called a ‘social disease,’ in this case with no possibility of cure for the next fifteen months. It is an unusually interesting election, at least if you are indifferent to the worst possible outcomes. For those of us who worry about the undermining of democracy by organized wealth, there is an ironic pleasure in watching the discomfort that The Donald has inflicted on the Republican moneyed establishment, especially its tax- and benefit-reducing orthodoxy. (A nice simile for Trump comes from a colleague who works in South Africa: Trump is like the hippopotamus, which rapidly twirls its tail to create a fan through which it defecates, throwing a noxious cloud on all around.) The irony is that only an independent multi-billionaire could mount such a challenge, and indeed, many would like to see an electable non-Clinton multi-billionaire on the Democratic side. While there is always an anti-Washington sentiment in US general elections, it is palpable now.
The new disaffected... The official unemployment rate is back to its level before the Great Recession, and the economy is ticking upwards. The fraction with health insurance has increased. Yet long-term unemployment remains stubbornly high and labor force participation is unusually low. Disability rates are sharply up. Real median wages show no sign of shaking off their long-term stagnation... Middle-aged Americans today are among the first to find, in their 40s and 50s, that they will be no better off than their parents. Many of them, who used to look forward to defined-benefit pensions, are now dependent on a stock market that looks like an increasingly unreliable guarantor of a happy retirement, and a world of zero interest rates is not a good world for those saving for retirement. These people have legitimate reasons to be unhappy. In the long familiar way, they have found convenient scapegoats. It was the blacks, or the women, or the immigrants who held down wages, or took the good jobs. It was the bankers who got rich from tanking the stock market, sinking pension prospects, and now paying no interest on lifetime savings. No wonder Trump’s rhetoric (and Bernie Saunders’ on the left) resonates with so many. ...
IMF economists Florence Jaumotte and Carolina Osorio Buitron (via Vox EU):
Union power and inequality, by Florence Jaumotte and Carolina Osorio Buitron, Vox EU: Inequality in advanced economies has risen considerably since the 1980s, largely driven by the increase of top earners’ income shares. This column revisits the drivers of inequality, emphasizing the role played by changes in labor market institutions. It argues that the decline in union density has been strongly associated with the rise of top income inequality and discusses the multiple channels through which unionization matters for income distribution.
Revisiting the drivers of inequality: The role of labor market institutions
Rising inequality in advanced economies, in particular at the top of the distribution, has become a great focus of attention for economists and policymakers. In most advanced economies, the share of income accruing to the top 10% earners has increased at the expense of all other income groups (Figure 1). While some inequality can increase efficiency by strengthening incentives to work and invest, recent research suggests that high inequality is associated with lower and less sustainable growth in the medium run (Berg and Ostry 2011, Dabla-Norris et al. 2015). Moreover, a rising concentration of income at the top of the distribution can also reduce welfare by allowing top earners to manipulate the economic and political system in their favor (Stiglitz 2012).
Traditional explanations for the rise of inequality in advanced economies have been skill-biased technological change and globalization, which increase the relative demand for skilled workers. However, these forces foster economic growth, and there is little policymakers are able or willing to do to reverse these trends. Moreover, while high income countries have been similarly affected by technological change and globalization, inequality in these economies has risen at different speeds and magnitudes.
Figure 1. Evolution of inequality measures in advanced economies
Sources: World Top Incomes Database; SWIID (v.4.0); and Luxembourg Income Study/New York Times Income Distribution Database. 1/ Advanced Economies = USA, GBR, AUT, BEL, DNK, FRA, DEU, ITA, NLD, NOR, SWE, CHE, CAN, JPN, FIN, IRL, PRT, ESP, AUS, and NZL. For the top 10 income share, FIN, GBR, and PRT are excluded due to missing data over part of the 1980-2010 period. Simple average. 2/ Shares of disposable income by decile using Luxembourg Income Study data. Varying years for countries, including AUS, AUT, BEL, CAN, DNK, FIN, FRA, DEU, IRL, ITA, NLD, NOR, ESP, SWE, CHE, GBR, and USA.
As a consequence, the more recent literature focuses on the relation between institutional changes and the rise of inequality, with financial deregulation and the decline in top marginal personal income tax rates often cited as important contributors. Surprisingly, the role played by changes in labor market institutions – such as the widespread decline in the share of workers affiliated with trade unions, so-called ‘union density’ – has not featured prominently in recent inequality debates. Nevertheless, these changes could potentially have profound implications on income distribution.
In a recent paper (Jaumotte and Osorio Buitron 2015), we fill this gap in the literature and examine the relationship between labor market institutions and various income inequality measures (namely, the top 10% income share, the Gini of gross income, and the Gini of net income), focusing on the experience of 20 advanced economies over the 1980-2010 period.1 While we pay particular attention to labor market institutions, our empirical approach controls for other determinants of inequality identified in the literature, such as technology, globalization, financial liberalization, top marginal personal income tax rates, and common global trends.
A surprising finding: A strong negative link between union density and top earners’ income shares
The most novel aspect of our paper is the discovery of a strong negative relationship between unionization and top earners’ income shares (Figure 2).2 Although causality is always difficult to establish, the influence of union density on top income shares appears to be largely causal, as evidenced by our instrumental variable estimates. The set of instruments used for union density captures the fact that, although unionization tends to decline in periods of high unemployment, the effect is weaker in countries where unemployment benefits are managed by unions (i.e. the Ghent system) or where collective bargaining is more centralized. In addition, the result survives the inclusion of possible omitted variables that could both reduce unionization and increase inequality. These additional controls include changes in elected government and in social norms on inequality, sectoral employment shifts such as the decline of industry and rise of services sectors, the strong expansion of employment in finance, and rising education levels.
Figure 2. Top 10% income share and union density in advanced economies
Sources: OECD; and World Top Incomes Database. Note: *** denote significance at the 1 percent level, ** at the 5 percent level, and * at the 10 percent level. Advanced Economies = USA, AUT, CAN, DNK, FIN, FRA, DEU, IRL, ITA, JPN, NLD, NZL, NOR, PRT, ESP, SWE, CHE, and GBR.
The magnitude of the effect is also significant; the decline in union density explains about 40% of the average increase in the top 10% of income share in our sample countries. One important caveat, though, is that the effect could be partly offset when collective bargaining coverage largely exceeds unionization (e.g. through extension agreements), likely reflecting higher unemployment. While this second finding is somewhat less robust and needs further corroboration, it does suggest that representativeness of unions may be an important element for the latter to reduce inequality.
Another main result of our analysis is that the decline in union density has been strongly associated with less income redistribution, likely through unions’ reduced influence on public policy (Figure 3). Historically, unions have played an important role in the introduction of fundamental social and labor rights. Again, this relationship appears largely causal. With regard to other labor market institutions, we find that reductions in the minimum wage relative to the median wage are related to significant increases in overall inequality. But we do not find compelling evidence concerning the effects of unemployment benefits and employment protection laws on income inequality.
Figure 3. Redistribution effect of unions in advanced economies
Sources: OECD; and SWIID (v.4.0). Note: *** denote significance at the 1 percent level, ** at the 5 percent level, and * at the 10 percent level. Advanced Economies = USA, FRA, DEU, ITA, NLD, NOR, SWE, CHE, CAN, JPN, IRL, PRT, ESP, AUS, AUT, BEL, DNK, FIN, NZL,and GBR.
Channels: A balance of power story
Our finding of a strong negative relationship between union density and top earners’ income share challenges preconceptions about the channels through which union density affects the distribution of incomes. Indeed, the widely held view is that changes in labor market institutions affect low- and middle-wage workers but are unlikely to have a direct impact on top income earners. Our finding highlights the interconnectedness between what happens to the middle class and top income shares. If de-unionization weakens earnings of middle- and low-income workers, the income share of corporate managers and shareholders necessarily increases.
There are several channels through which weaker unions could lead to higher top income shares. In the workplace, the weakening of unions reduces the bargaining power of average wage earners relative to capital owners and top executives. Channels include the positive effect of weaker unions on the share of capital income – which tends to be more concentrated than labor income – and the fact that lower union density may reduce workers’ influence on corporate decisions, including those related to top executive compensation (Figure 4). Outside the workplace, there could be a political economy channel by which a weakening of unions reduces workers’ political voice and strengthens other already dominant groups, enabling them to better control the economic and political system in their favor (Acemoglu and Robinson 2013).
Figure 4. Episodes of strong declines in union density: Effects on inequality
Sources: World Top Incomes Database; EU Klems; OECD; and author’s calculations. 1/ Labor income share is share of labor compensation in value added, adjusted for the labor income of the self-employed. 2/ Relative wage in finance is the ratio of labor compensation per hour worked in finance to the labor compensation per hour worked in the rest of the economy.
If our findings are interpreted as causal, higher unionization and minimum wages can help reduce inequality. However, this is not necessarily a blanket recommendation for higher unionization and minimum wages. Other dimensions are clearly relevant. The experience with unions has been positive in some countries, but less so in others. For instance, if unions primarily represent the interests of only some workers, they can lead to high structural unemployment for some other groups (e.g. the young). Similarly, in some instances, minimum wages can be too high and lead to high unemployment among unskilled workers and competitiveness losses. Deciding whether or not to reform labor market institutions has to be done on a country-by-country basis, taking into account how well the institutions are functioning and possible trade-offs with other policy objectives (competitiveness, growth, and employment). Finally, addressing rising inequality will likely require a multi-pronged approach including tax reform and policies to curb excesses associated with the deregulation of the financial sector.
Authors’ note: The views expressed herein are those of the authors and should not be attributed to the IMF, its Executive Board, or its management.
Acemoglu, D and J A Robinson (2013), “Economics versus Politics: Pitfalls of Policy Advice,” Journal of Economic Perspectives, Vol. 27, No. 2, pp.173-192.
Berg, A and J Ostry (2011), “Inequality and Unsustainable Growth: Two Sides of the Same Coin?” IMF Staff Discussion Note No. 11/08 (Washington: International Monetary Fund).
Dabla-Norris, E, K Kochhar, N Suphaphiphat, F Ricka, and E Tsounta (2015), “Causes and Consequences of Income Inequality: A Global Perspective” IMF Staff Discussion Note No. 15/13 (Washington: International Monetary Fund).
Stiglitz, J (2012), The Price of Inequality: How Today’s Divided Society Endangers Our Future (New York: W.W. Norton).
1 The advanced economies in this study are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, the UK, and the US.
2 The relationship with the Gini coefficient of gross income is also negative but somewhat less robust.
China's real unemployment rate is much higher than the official rate and, when correctly measured, is much closer to that in other nations at similar levels of development, according to "Long Run Trends in Unemployment and Labor Force Participation in China" (NBER Working Paper No. 21460). The study estimates that the actual unemployment rate in 2002-09 averaged nearly 11 percent, while the official rate averaged less than half that. Moreover, despite some reports to the contrary, by 2009 China's labor market had still not recovered from huge layoffs that occurred during the later 1990s and early 2000s as the nation transitioned from a government-controlled economy to one in which private enterprise and market forces were more at play.
"The official unemployment rate series for China is implausible and is an outlier in the distribution of unemployment rates across countries ranked by their stage of development," write researchers Shuaizhang Feng, Yingyao Hu, and Robert Moffitt. "We find that, by approximately 2002, the unemployment in China was actually higher than that of high income countries, exactly the opposite of what is implied by the official series."
The official unemployment rate in China, which is based on registered unemployment figures, has long been viewed with suspicion. Various private studies have tried to come up with better estimates. This paper uses for the first time a nationally representative sample of registered urban residents–the "hukou" population–based on urban household survey data, supplemented with weights derived from the decennial census. The study derives a much different picture of how Chinese unemployment has evolved since the mid-1990s.
The authors describe three distinct periods in China's labor market. The first–from 1988 to 1995–was characterized by an economy dominated by state-owned enterprises (SOEs). Unemployment was low: their estimate suggests an average of 3.9 percent while the official average was 2.5 percent. Then in 1995-2002, the unemployment rate rose rapidly, by one percentage point per year, as SOEs shed massive numbers of workers and rural migrants flooded the cities in search of jobs. SOEs went from employing 60 percent of China's workforce in 1995 to 30 percent in 2002. Yet the official unemployment rate reflected none of that volatility. Unemployment peaked in 2003 and began to fall in later years, by the authors' calculations. It nevertheless still averaged 10.9 percent for the 2002-09 period while the official average was only 4.2 percent.
Compared to other nations with similar gross national income per capita, China's unemployment rate in 2009 was relatively high. The authors nevertheless caution against making direct comparisons with unemployment rates in other countries, because China’s urban household survey data do not define labor-force status in exactly the same way that many developed nations do.
Some groups had worse unemployment rates than others in the transition years from 1995-2002. The study estimates that the jobless rate was 18.3 percent for non-college-educated young women and 14.5 percent for non-college-educated young men. In contrast, the estimated rates were less than 2 percent for older college-educated men and women, whose advantage was evident both before and after the transition.
"Overall, we see that people without college degrees, younger people, and females systematically face more slack labor markets than their more educated, older, and male counterparts," the authors conclude. "The most striking pattern is that younger people had very high unemployment rates, especially for more recent cohorts... Even at the age of around 30, the 1970s female cohorts had roughly a 10 percent unemployment rate, as compared to only 3 percent for females born in the 1960s."
Unsurprisingly, some regions fared worse than others during the transition. The Northeast, South Central, and Southwest regions of the country saw the largest increases in their unemployment rates during the 1995-2002 period. These were also the regions with the greatest number of SOE layoffs. In the Northeast region, for example, some 7.3 million workers were laid off during the period–42 percent of its total SOE employment in 1995.
While China's unemployment rate has soared since the mid-1990s, labor force participation has dropped. Participation averaged 83.1 percent around 1995, fell dramatically during the transition, and stabilized at around 74 percent during the 2002-09 period. Young people were hit especially hard by the layoffs during the 1995-2002 period. The labor force participation rate of young men and women, with and without college education, all fell by more than 10 percentage points.
"The results suggest that cohort differences might be in play and that the younger generation may have faced higher cost and/or lower benefit in participating [in the] labor market," the authors conclude.
A summary of a new paper by Nick Buffie and Dean Baker (as they are careful to note, the results are preliminary):
Executive Summary There has been a large increase in the number of workers receiving Social Security Disability Insurance (DI) over the last quarter century. While most of this increase is explained by well - known demographic factors, such as the growing number of women in the workforce and the aging of the baby boomers, there is considerable concern that workers are increasingly choosing to collect DI benefits as an alternative to working. This concern has figured prominently in the debate over plans to maintain full funding for the DI program beyond the projected DI trust fund depletion date in late 2016.1,2
This paper examines the extent to which cuts in state workers’ compensation (WC) benefits may have contributed to the rise in DI awards. To some extent, these programs may be seen as alternative sources of support for workers with job - related injuries. Insofar as injured workers are less able to receive WC benefits, they may be more likely to turn to the DI program.
At the national level, there is a clear correlation between the sharp decline in WC benefits over the last quarter century and the rise in DI benefits. This paper examines whether there could be a causal relationship between the reduction in WC benefits and the rise in DI benefits by examining state - level data.
In a variety of specifications , there is a strong relationship between the decline in state - level WC beneficiaries and rise in new DI awards. This suggests that people are turning to DI because they are le ss able to collect WC benefits.
A test of whether the rise in DI awards by state can be explained by policy changes to the state WC program found some evidence of a relationship. Given the difficulties in capturing the policy changes in the relevant variable, this is strongly suggestive that the rise in DI benefits was in part the result of state - level policy decisions to make WC programs less generous.
These estimates suggest that more than one - fifth of the rise in the number of workers receiving DI awards can be explained by cuts to WC programs. These results are preliminary.
We expect to conduct further tests of the relationship between WC and the DI program, but the results in this analysis strongly suggest that cuts in the former have led to increases in the latter. ...
Quantitative easing has had a difficult time stimulating demand (which would put pressure on prices and raise inflation). The money mostly piles up in banks instead of turning into new loans and new spending. Helicopter money would, I think, do much better, especially if it was distributed to people with a very high propensity to spend the money (so it would have much better distributional consequences as well). But central banks seem afraid to try this, or even consider it seriously. Simon Wren-Lewis says those fears are unfounded:
“Central banks are often accused of being obsessed with inflation. This is untrue. If they are obsessed with anything, it is with fiscal policy.”
As an academic turned central banker, King knew of what he spoke. The fear is sometimes called fiscal dominance: that they will be forced to monetize government debt in such a way that means inflation rises out of control.
I believe this fear is a key factor behind central banks’ reluctance to think seriously about helicopter money. Creating money is no longer a taboo: with Quantitative Easing huge amounts of money have been created. But this money has bought financial assets, which can subsequently be sold to mop up the money that has been created. Under helicopter money the central bank creates money to give it away. If that money needs to be mopped up after a recession is over in order to control inflation, the central bank might run out of assets to do so. A good name for this is ‘policy insolvency’. 
There is a simple way to deal with this problem.  The government commits to always providing the central bank with the assets they need to control inflation. If, after some doses of helicopter money, the central bank needs and gets refinanced in this way, then helicopter money becomes like a form of bond financed fiscal stimulus, but where the bond finance is delayed. In my view that delay may be crucial in overcoming the deficit fetishism that has proved so politically successful over the last five years, as well as giving central banks a much more effective unconventional monetary instrument than QE.  But central banks do not want to go there, partly because they worry about the possibility of a government that would renege on that commitment.
The fear is irrational for two reasons... [explains]...
Central banks overcame one big psychological barrier when they undertook Quantitative Easing. That was the first, and perhaps the more important, stage in ending their primitive fear of fiscal dominance. They now need to complete the process, so we can start having rational discussions about alternatives to QE.
The Lofty Promise and Humble Reality of International Trade: How should we feel about international trade? Should we applaud it for its ability to lift the world’s poor out of poverty, lower the price of goods, and increase the variety of products we can consume? Or should we be concerned about the effects it has on employment, inequality, and the availability of decent jobs within the US?
As we shall see, this is not an easy question to answer. ...
And yet, to a significant degree, it is wrong. Actual experience, from the richest country in the world to some of the poorest places on the planet, suggests that cash assistance can be of enormous help for the poor. And freeing them from what President Ronald Reagan memorably termed the “spider’s web of dependency” — also known as forcing the poor to swim or sink — is not the cure-all....
Abhijit Banerjee ... released a paper with three colleagues last week that carefully assessed the effects of seven cash-transfer programs in Mexico, Morocco, Honduras, Nicaragua, the Philippines and Indonesia. It found “no systematic evidence that cash transfer programs discourage work.” ...
Still, Professor Banerjee observed, in many countries, “we encounter the idea that handouts will make people lazy.”
Professor Banerjee suggests the spread of welfare aversion around the world might be an American confection. “Many governments have economic advisers with degrees from the United States who share the same ideology,” he said. “Ideology is much more pervasive than the facts.”
What is most perplexing is that the United States’ own experience with both welfare and its “reform” does not really support the charges. ...
A Plea to My Fellow Free Marketers: As a free-market loving individual, it pains me to see so many of my fellow travelers claim the Fed has artificially suppressed interest rates since the onset of the crisis. Recently, I was disappointed to see George Will and Bill Gross repeat these claims. They have made these claims before, but I was hoping after all these years they would begin to question the premise of their views. But alas, it did not happen. Here is George Will's latest volley on this issue :
[S]even years of ZIRP — zero interest-rate policy — have not restored the economic dynamism essential for social mobility but have had the intended effect of driving liquidity into equities in search of high yields, thereby enriching the 10 percent of Americans who own approximately 80 percent of the directly owned stocks. ...
So the Fed has chosen to hold off on their goal of normalizing interest rates and... and the investment community wonders how long can this keep goin’ on. For a long time I suppose, as evidenced by history at least. Ken Rogoff and Carmen Reinhart have meticulously documented periods of “financial repression”[.]
There is no doubt the low interest rates over the past seven years has caused many problems: they have harmed individuals living on fixed income, incentivized unusual reaching for yield by investors, and made it easier to run large budget deficits. But are the low rates behind these developments really the Fed's doing?
What I wish George Will, Bill Gross, and other free market advocates would consider is the possibility that the Fed itself is not the source of the low rates, but simply is a follower of where market forces have pushed interest rates. That is, the Great Recession and the prolonged slump that followed caused interest rates to be depressed and the Fed did its best to keep short-term interest rate near this low market-clearing level.
I'd like to see the definition of a "deficit hawk"!
I'd think a true deficit hawk would be truly concerned about, uh, the deficit. So they'd support both tax increases1 and spending cuts to reduce the deficit. They'd oppose policies that increase the deficit (like the Bush tax cuts, and the war in Iraq). They'd also be concerned about policies that led to the financial crisis and a deep recession - since the deficit increases during a recession.
Maybe I'm talking my own position since I opposed the Bush tax cuts (that created a structural deficit). I opposed the Iraq war. I frequently talked to regulators about lax lending in real estate (and posted some of those discussion on this blog in 2005) that led directly to the financial crisis and large deficits. And I support both intelligent tax increases and spending cuts.
Unfortunately, my experience is that most people who claims to be "deficit hawks", are really pushing a different agenda. I wish Timiraos would provide a few examples of deficit hawks!
Also the "red ink set to rise later this decade" is expected in increase the deficit from 2.5% of GDP to about 3.1% in 2020.
1 Note: Some people like to focus on "growth" to reduce the deficit, and they tend to focus on tax cuts to boost growth. However, all data and research shows that at the current marginal rates, tax cuts do not pay for themselves and lead to much larger deficits.
How Does Declining Unionism Affect the American Middle Class and Intergenerational Mobility?, by Richard Freeman, Eunice Han, David Madland, Brendan V. Duke, NBER Working Paper No. 21638 [Open Link to Earlier Version]: This paper examines unionism’s relationship to the size of the middle class and its relationship to intergenerational mobility. We use the PSID 1985 and 2011 files to examine the change in the share of workers in a middle-income group (defined by persons having incomes within 50% of the median) and use a shift-share decomposition to explore how the decline of unionism contributes to the shrinking middle class. We also use the files to investigate the correlation between parents’ union status and the incomes of their children. Additionally, we use federal income tax data to examine the geographical correlation between union density and intergenerational mobility. We find: 1) union workers are disproportionately in the middle-income group or above, and some reach middle-income status due to the union wage premium; 2) the offspring of union parents have higher incomes than the offspring of otherwise comparable non-union parents, especially when the parents are low-skilled; 3) offspring from communities with higher union density have higher average incomes relative to their parents compared to offspring from communities with lower union density. These findings show a strong, though not necessarily causal, link between unions, the middle class, and intergenerational mobility.