Category Archive for: Economics [Return to Main]

Thursday, August 27, 2015

Shiller: Rising Anxiety That Stocks Are Overpriced

Robert Shiller (a reason to agree with Tim Duy):

Rising Anxiety That Stocks Are Overpriced: Over the five trading days between Aug. 17 and Aug. 24, the U.S. stock market dropped 10 percent — the official definition of a “correction,” with similar or greater drops in other countries. ...
But there are reasons to question whether this was a quick, effective slap on the wrist, or if the market is still too overactive, and thus asking for a more extended punishment. ...
It is entirely plausible that the shaking of investor complacency in recent days will, despite intermittent rebounds, take the market down significantly and within a year or two restore CAPE ratios to historical averages. This would put the S. & P. closer to 1,300 from around 1,900 on Wednesday, and the Dow at 11,000 from around 16,000. They could also fall further; the historical average is not a floor.
Or maybe this could be another 1998. We have no statistical proof. We are in a rare and anxious “just don’t know” situation, where the stock market is inherently risky because of unstable investor psychology.

'Q2 GDP Revised up to 3.7%'

Are you as convinced as Tim is that rate hikes are off the table at the Fed's next meeting?:

Q2 GDP Revised up to 3.7%, by Bill McBride, Calculated Risk: From the BEA: Gross Domestic Product: First Quarter 2015 (Third Estimate)

Real gross domestic product -- the value of the goods and services produced by the nation's economy less the value of the goods and services used up in production, adjusted for price changes -- increased at an annual rate of 3.7 percent in the second quarter of 2015, according to the "second" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.6 percent.

The GDP estimate released today is based on more complete source data than were available for the "advance" estimate issued last month. In the advance estimate, the increase in real GDP was 2.3 percent. With the second estimate for the second quarter, nonresidential fixed investment and private inventory investment increased. ... [emphasis added]

Here is a Comparison of Advance and Second Estimates. PCE growth was revised up from 2.9% to 3.1%. Residential investment was revised up from 6.6% to 7.8%.

Solid growth. And above the consensus of 3.2%.

'The Day Macroeconomics Changed'

Simon Wren-Lewis:

The day macroeconomics changed: It is of course ludicrous, but who cares. The day of the Boston Fed conference in 1978 is fast taking on a symbolic significance. It is the day that Lucas and Sargent changed how macroeconomics was done. Or, if you are Paul Romer, it is the day that the old guard spurned the ideas of the newcomers, and ensured we had a New Classical revolution in macro rather than a New Classical evolution. Or if you are Ray Fair..., who was at the conference, it is the day that macroeconomics started to go wrong.
Ray Fair is a bit of a hero of mine. ...
I agree with Ray Fair that what he calls Cowles Commission (CC) type models, and I call Structural Econometric Model (SEM) type models, together with the single equation econometric estimation that lies behind them, still have a lot to offer, and that academic macro should not have turned its back on them. Having spent the last fifteen years working with DSGE models, I am more positive about their role than Fair is. Unlike Fair, I want “more bells and whistles on DSGE models”. I also disagree about rational expectations...
Three years ago, when Andy Haldane suggested that DSGE models were partly to blame for the financial crisis, I wrote a post that was critical of Haldane. What I thought then, and continue to believe, is that the Bank had the information and resources to know what was happening to bank leverage, and it should not be using DSGE models as an excuse for not being more public about their concerns at the time.
However, if we broaden this out from the Bank to the wider academic community, I think he has a legitimate point. ...
What about the claim that only internally consistent DSGE models can give reliable policy advice? For another project, I have been rereading an AEJ Macro paper written in 2008 by Chari et al, where they argue that New Keynesian models are not yet useful for policy analysis because they are not properly microfounded. They write “One tradition, which we prefer, is to keep the model very simple, keep the number of parameters small and well-motivated by micro facts, and put up with the reality that such a model neither can nor should fit most aspects of the data. Such a model can still be very useful in clarifying how to think about policy.” That is where you end up if you take a purist view about internal consistency, the Lucas critique and all that. It in essence amounts to the following approach: if I cannot understand something, it is best to assume it does not exist.

'Mind the Gap: Assessing Labor Market Slack'

Joseph Tracy, Robert Rich, Samuel Kapon, and Ellen Fu say "that roughly 90 percent of the labor gap that opened up following the recession has been closed":

Mind the Gap: Assessing Labor Market Slack, Liberty Street Economics, NY Fed: Indicators of labor market slack enable economists to judge pressures on wages and prices. Direct measures of slack, however, are not available and must be constructed. Here, we build on our previous work using the employment-to-population (E/P) ratio and develop an updated measure of labor market slack based on the behavior of labor compensation. Our measure indicates that roughly 90 percent of the labor gap that opened up following the recession has been closed.
An earlier post, “A Mis-Leading Labor Market Indicator,” argued that the gap between the E/P ratio and a demographically adjusted version of the same ratio is a useful measure of labor market slack. A challenge in constructing this measure is that it requires a normalization (a level shift) to “re-center” the demographically adjusted E/P ratio. In this earlier post, we normalized by assuming that the average labor gap should be zero over a long period of time. Although this approach was easy to implement, it had the disadvantage of not being linked to wage behavior.
To better motivate an E/P-based approach, we turn to Phillips curve models that relate wage growth to labor market slack. The specification we consider relates nominal wage growth to an E/P gap variable (defined as the difference between a demographically adjusted E/P ratio and the actual E/P ratio), as well as expected inflation and trend productivity growth. Expected inflation is subtracted from nominal wage growth to derive an expected real wage growth series, which is then regressed on a constant, the E/P gap, and trend productivity growth. The E/P gap is normalized so that the estimated intercept of the Phillips curve model is set to zero. This approach implies that when the resulting normalized E/P gap is zero, expected real wage growth adjusted for the return to labor productivity is, on average, zero. That is, a labor market with no slack will have nominal wage growth, on average, equal to expected inflation plus a return to labor productivity.
We estimate Phillips curve models for three wage measures: compensation per hour, average hourly earnings, and the employment cost index. We construct four-quarter-ahead growth rates starting in the first quarter of 1982, the earliest start date for which all three measures are available, and ending in the second quarter of 2015. Expected inflation is measured using survey data on ten-year CPI inflation expectations, and trend productivity growth is a twelve-quarter moving average of (annualized) productivity growth rates. Adopting the same approach we took in another post—“U.S. Potential Economic Growth: Is it Improving with Age?”—we have extended the data sample used to estimate the demographically adjusted E/P ratio back to the early 1960s. This provides us with roughly thirteen million observations on individuals that we divide into 280 cohorts based on decade of birth, sex, race/ethnicity, and educational attainment. For each cohort, we estimate a cohort-specific profile for average employment rates by age that abstracts from cyclical effects. Aggregating these predicted employment rates across individuals produces a demographically adjusted E/P ratio, with the quarterly series derived as an average of the three monthly values.
The three Phillips curve models yield similar normalizations, so we average them instead of selecting one. The chart below shows the actual E/P ratio along with the demographically adjusted E/P ratio based on this new normalization.

E/P: Actual and Adjusted

The next chart plots the estimated E/P gap (the difference between the two series in the chart above) along with the three expected real wage growth measures adjusted for trend productivity growth. By our definition, a positive E/P gap indicates slack in the labor market. The periods in which the estimated E/P gap is zero line up well with the periods in which our adjusted real wage growth measures are also close to zero. Moreover, periods in which the adjusted wage measures have exceeded zero generally correspond to episodes of tight labor markets (negative E/P gaps), while periods in which the measures are below zero are typically associated with slack in the labor market (positive E/P gaps).

E/P Gap and Wage Measures

The current normalized E/P gap is estimated to be 32 basis points, which represents an 89 percent reduction from the 283-basis-point gap in November 2010. This finding suggests that the labor market has made considerable progress in its recovery, but is still not yet back to neutral. To gain additional perspective on this finding, we can compare the current gap with those that existed in two earlier tightening episodes. At the time the FOMC began to raise rates in February 1994, the gap was 92 basis points; at the end of that tightening cycle, it was 14 basis points. And when the Committee began to raise rates in June 2004, the gap was -38 basis points; at the end of that tightening cycle, the gap was -125 basis points. To assess labor market slack and understand the behavior of labor compensation in the quarters ahead, it will be particularly important to mind the gap.

Links for 08-27-15

Wednesday, August 26, 2015

Fed Watch: Dudley Puts The Kibosh On September

Tim Duy:

Dudley Puts The Kibosh On September, by Tim Duy: Monday's action on Wall Street was too much for the Fed. That day, Atlanta Federal Reserve President Dennis Lockhart pulled back his previous dedication to a September rate hike earlier, reverting to only an expectation that rates rise sometimes this year. But today New York Federal Reserve President William Dudley explicitly called September into question. Via the Wall Street Journal:

In light of market volatility and foreign developments, “at this moment, the decision to begin the normalization process at the September [Federal Open Market Committee] meeting seems less compelling to me than it did several weeks ago. But normalization could become more compelling by the time of the meeting as we get additional information” about the state of the economy, he told reporters.

While this comment was sufficiently nuanced to leave open the possibility of September, in reality Dudley pretty much ended the debate. He only reinforced expectations that September was off the table, and time is running out to pull back expectations. Incoming data, what little there is at this point, would need to come in well above expectations to bring September back into play. And that is just mostly like not going to happen.

What about October or December? I tend to think that October is off the table due to a lack of a press conference. Yes, I know the Fed claims every meeting is live, but the reality is that they have reinforced the perception that major policy shifts occur only on meetings with scheduled press conferences. If the Fed  wants eight live meetings a year, they need eight press conferences. December remains open with sufficiently strong data, but does the Fed really want to attempt the first rate hike when financial markets are already tight seasonally?

Fundamentally, the problem for the Federal Reserve is that US financial conditions have tightened since the end of the quantitative easing, and will most likely continue to tighten as the rest of the world, notably now China, eases further. In effect, easier policy in the rest of the world requires, all else equal, easier policy in the US as well. Hence this from the FT:

Interest rate futures indicate that investors now see just a 24 per cent chance of a rate increase in September, down from more than 50 per cent earlier this month. The probable path of rate rises in 2016 has also moderated markedly, according to Bloomberg futures data.

The path of rates necessary to maintain stable growth in the US will be lower in response to easing conditions elsewhere. This is something known to bond market participants who as a group have long been more dovish than FOMC participants. But it was the equity market participants that shocked the Fed into the same realization.

To be sure, critics will loudly proclaim that the Fed must hike in September if only to prove they are not governed by the equity markets. That call will be heard in the next FOMC meeting as well, but it will be a minority view. A thousand point drop in the Dow will not be ignored by the majority of the FOMC. Dismissing what are obviously fragile financial market conditions would be a hawkish signal the FOMC does not want to send. Hiking rates is not going to send a calming message of confidence. That never works. If the history of financial crises has taught us anything, it is that failure to respond with easier policy only adds to the turmoil.

Bottom Line: The Fed has long argued that the timing of the first rate hike does not matter. I had thought so as well, but that is clearly no longer the case. A rate hike during a period of substantial financial market turmoil would matter a great deal. It looks like the Fed's plans to raise rate will once again be overtaken by events.

Ray Fair: The Future of Macro

Ray Fair:

The Future of Macro: There is an interesting set of recent blogs--- Paul Romer 1, Paul Romer 2, Brad DeLong, Paul Krugman, Simon Wren-Lewis, and Robert Waldmann---on the history of macro beginning with the 1978 Boston Fed conference, with Lucas and Sargent versus Solow. As Romer notes, I was at this conference and presented a 97-equation model. This model was in the Cowles Commission (CC) tradition, which, as the blogs note, quickly went out of fashion after 1978. (In the blogs, models in the CC tradition are generally called simulation models or structural econometric models or old fashioned models. Below I will call them CC models.)
I will not weigh in on who was responsible for what. Instead, I want to focus on what future direction macro research might take. There is unhappiness in the blogs, to varying degrees, with all three types of models: DSGE, VAR, CC. Also, Wren-Lewis points out that while other areas of economics have become more empirical over time, macroeconomics has become less. The aim is for internal theoretical consistency rather than the ability to track the data.
I am one of the few academics who has continued to work with CC models. They were rejected for basically three reasons: they do not assume rational expectations (RE), they are not identified, and the theory behind them is ad hoc. This sounds serious, but I think it is in fact not. ...

He goes on to explain why. He concludes with:

... What does this imply about the best course for future research? I don't get a sense from the blog discussions that either the DSGE methodology or the VAR methodology is the way to go. Of course, no one seems to like the CC methodology either, but, as I argue above, I think it has been dismissed too easily. I have three recent methodological papers arguing for its use: Has Macro Progressed?, Reflections on Macroeconometric Modeling, and Information Limits of Aggregate Data. I also show in Household Wealth and Macroeconomic Activity: 2008--2013 that CC models can be used to examine a number of important questions about the 2008--2009 recession, questions that are hard to answer using DSGE or VAR models.
So my suggestion for future macro research is not more bells and whistles on DSGE models, but work specifying and estimating stochastic equations in the CC tradition. Alternative theories can be tested and hopefully progress can be made on building models that explain the data well. We have much more data now and better techniques than we did in 1978, and we should be able to make progress and bring macroeconomics back to it empirical roots.
For those who want more detail, I have gathered all of my research in macro in one place: Macroeconometric Modeling, November 11, 2013.

'It’s Getting Tighter'

Paul Krugman has advice for the Fed:

It’s Getting Tighter: When thinking about the market madness and its possible real effects, here’s something you — where by “you” I mean the Fed in particular — really, really need to keep in mind: the markets have already, in effect, tightened monetary conditions quite a lot.
First of all, if break-evens (the difference between interest rates on ordinary bonds and inflation-protected bonds) are any guide, inflation expectations have fallen sharply...
Second, while interest rates on Treasuries are down, rates on private securities viewed as even moderately risky are up quite a lot...
So real borrowing costs are up sharply for many private borrowers. This is a significant headwind for the U.S. economy, which was hardly growing like gangbusters in any case.
A Fed hike now looks like an even worse idea than it did a few days ago.

'John Kenneth Galbraith on Writing, Inspiration, and Simplicity'

From Tim Taylor:

John Kenneth Galbraith on Writing, Inspiration, and Simplicity: John Kenneth Galbraith (1908-2006) was trained as an economist, but in books like The Affluent Society (1958) and The New Industrial State (1967), his found his metier as a social critic. In these books and voluminous other writings, Galbraith didn't propose well-articulated economic theories, and carry out systematic empirical tests, but instead offered big-picture perspectives of the economy and society of his time. His policy advice was grindingly predictable: big and bigger doses of progressive liberalism, what he sometimes called "new socialism." 

For a sense of how mainstream and Democratic-leaning economists of the time dismissed Galbraith's work, classic example is this scathing-and-smiling review of The New Industrial State by Robert Solow in the Fall 1967 issue of The Public Interest. Galbreath's response appears in the same issue. Connoisseurs of academic blood sports will enjoy the exchange.

Here, I come not to quarrel with Galbraith's economics, but to praise him as one of the finest writers on economics and social science topics it has ever been my pleasure to read. I take as my text his essay on "Writing, Typing, and Economics," which appeared in the March 1978 issue of The Atlantic and which I recently rediscovered. Here are some highlights:

"All writers know that on some golden mornings they are touched by the wand — are on intimate terms with poetry and cosmic truth. I have experienced those moments myself. Their lesson is simple: It's a total illusion. And the danger in the illusion is that you will wait for those moments. Such is the horror of having to face the typewriter that you will spend all your time waiting. I am persuaded that most writers, like most shoemakers, are about as good one day as the next (a point which Trollope made), hangovers apart. The difference is the result of euphoria, alcohol, or imagination. The meaning is that one had better go to his or her typewriter every morning and stay there regardless of the seeming result. It will be much the same. ..."
"My advice to those eager students in California would be, "Do not wait for the golden moment. It may well be worse." I would also warn against the flocking tendency of writers and its use as a cover for idleness. It helps greatly in the avoidance of work to be in the company of others who are also waiting for the golden moment. The best place to write is by yourself, because writing becomes an escape from the terrible boredom of your own personality. It's the reason that for years I've favored Switzerland, where I look at the telephone and yearn to hear it ring. ..."
"There may be inspired writers for whom the first draft is just right. But anyone who is not certifiably a Milton had better assume that the first draft is a very primitive thing. The reason is simple: Writing is difficult work. Ralph Paine, who managed Fortune in my time, used to say that anyone who said writing was easy was either a bad writer or an unregenerate liar. Thinking, as Voltaire avowed, is also a very tedious thing which men—or women—will do anything to avoid. So all first drafts are deeply flawed by the need to combine composition with thought. Each later draft is less demanding in this regard. Hence the writing can be better. There does come a time when revision is for the sake of change—when one has become so bored with the words that anything that is different looks better. But even then it may be better. ..." 
"Next, I would want to tell my students of a point strongly pressed, if my memory serves, by Shaw. He once said that as he grew older, he became less and less interested in theory, more and more interested in information. The temptation in writing is just the reverse. Nothing is so hard to come by as a new and interesting fact. Nothing is so easy on the feet as a generalization. I now pick up magazines and leaf through them looking for articles that are rich with facts; I do not care much what they are. Richly evocative and deeply percipient theory I avoid. It leaves me cold unless I am the author of it. ..." 
"In the case of economics there are no important propositions that cannot be stated in plain language. Qualifications and refinements are numerous and of great technical complexity. These are important for separating the good students from the dolts. But in economics the refinements rarely, if ever, modify the essential and practical point. The writer who seeks to be intelligible needs to be right; he must be challenged if his argument leads to an erroneous conclusion and especially if it leads to the wrong action. But he can safely dismiss the charge that he has made the subject too easy. The truth is not difficult. Complexity and obscurity have professional value—they are the academic equivalents of apprenticeship rules in the building trades. They exclude the outsiders, keep down the competition, preserve the image of a privileged or priestly class. The man who makes things clear is a scab. He is criticized less for his clarity than for his treachery.
"Additionally, and especially in the social sciences, much unclear writing is based on unclear or incomplete thought. It is possible with safety to be technically obscure about something you haven't thought out. It is impossible to be wholly clear on something you do not understand. Clarity thus exposes flaws in the thought. The person who undertakes to make difficult matters clear is infringing on the sovereign right of numerous economists, sociologists, and political scientists to make bad writing the disguise for sloppy, imprecise, or incomplete thought. One can understand the resulting anger." 

'Incentive Pay and Gender Compensation Gaps for Top Executives'

Stefania Albanesi, Claudia Olivetti, and Maria Prados at the NY Fed's Liberty Street Economics:

Incentive Pay and Gender Compensation Gaps for Top Executives: The persistence of a gender gap in wages is shaping the debate over women’s equality in the workplace and underscores the challenge facing policymakers as they consider their potential role in closing it. While the disparity affects females at all income levels, women in professional and managerial occupations tend to experience greater gender-pay differences than those in working-class jobs. The rise in the use of incentive pay, which has been linked to the growth of income inequality (Lemieux, MacLeod, and Parent), might have contributed to the gender gap in earnings (Albanesi and Olivetti). In this post, which is based on our related New York Fed staff report, we document three new facts about gender differences in the structure of executive compensation.

 Evidence on Gender Differences in Executive Pay

Our research focuses on the top five executives by title in public companies (chair/chief executive officer (CEO), vice chair, president, chief financial officer, and chief operating officer) in Standard and Poor’s ExecuComp database between 1992 and 2005. Only 3.2 percent of people in these roles are women.

Fact 1: Female executives receive a lower share of incentive pay in total compensation than males. This difference accounts for 93 percent of the unconditional gender gap in total pay. ...

Fact 2: Compensation of female executives is less sensitive to firm performance than males’. For example, a $1 million increase in firm value generates a $17,150 increase in firm-specific wealth for male executives but only a $1,670 increase for females. For each 1 percent increase in firm market value, compensation rises by $60,000 for men and only $10,000 for women. ...

Fact 3: Compensation of female executives is more exposed to declines in firm value and less exposed to increases in firm value than males’. We find that a 1 percent rise in firm value is associated with a 13 percent rise in firm-specific wealth for female executives and a 44 percent rise for male executives. Conversely, a 1 percent decline in firm value is associated with a 63 percent decline in firm-specific wealth for female executives and a 33 percent decline for males. ...

Are these gender differences in compensation efficient?

Surveys of professionals and executives, time-use studies, and experimental and psychological studies suggest that:

  • Exclusion from informal networks, gender stereotyping, and lack of role models are perceived as substantial barriers to career advancements for female executives.
  • Married female professionals bear a disproportionately large share of childcare responsibilities relative to married men in similar circumstances.
  • Women display lower propensity to enter into competitive environments.
  • Women display lower propensity to initiate negotiations.
  • Women exhibit higher risk aversion.

Based on the efficient paradigm of the pay-setting process, these gender differences in barriers to career advancement and preferences are consistent with Facts 1 and 2, but they would imply lower performance for firms headed by females, an outcome for which we find no evidence in our data. Moreover, this framework cannot explain Fact 3.

We find instead that the gender differences in pay and pay-performance sensitivity are consistent with the “skimming” or “managerial power” view of executive compensation. According to this theory, board members are captive to executives, who use that position to influence their compensation packages in a way that increases their average pay and undermines incentives. In this scenario, the goal of the executive is to prevent pay from falling when firm performance deteriorates and to boost pay when the company is doing well. However, as we document in our paper, top female executives are less entrenched than their male counterparts, since they are usually younger, with fewer years of tenure and weaker networks. Thus, they are more limited than male executives in their ability to control their own compensation.

Our analysis suggests that performance pay schemes should be held to closer scrutiny. Increasing transparency about an executive’s compensation, both in absolute terms and relative to counterparts’, might mitigate gender-pay inequality for top executives. A recent Securities and Exchange Commission ruling that says that companies have to disclose whether executive pay is in line with the company’s financial performance seems to be a good step in this direction.

Our findings also raise concern about the standing of all professional women as incentive pay schemes proliferate outside the executive ranks. The failure of the efficient contracting paradigm to explain the gender differences in the structure of executive compensation points to possible distortions in the link between pay and performance. To the extent that performance pay amplifies earnings differentials resulting from actual or perceived differences in attributes between workers,  it can exacerbate inequality and can severely distort the allocation of resources, if designed incorrectly.

Links for 08-26-15

Tuesday, August 25, 2015

'The Politics of Income Inequality'

I have a new column:

The Politics of Income Inequality: f the policies favored by some Republicans seeking the nomination for president turned into reality, we’d roll back or eliminate our social insurance programs, cut taxes on the wealthy, cut spending even more to slash the deficit, and turn health care over to the private sector. 
The “you’re on your own no matter what bad luck comes your way” society is a desirable outcome according to this view because it creates the correct incentives for people to be gainfully employed and take care of themselves. Never mind that history shows many people won’t prepare for retirement, purchase health care, set aside funds in case of job loss, and so on unless they are forced to do so by government programs, and will thus then end up being an even bigger burden to the rest of society, Those who support these policies appear to believe that this time will somehow be different. 
What do these issues have in common? ...

'Stupid China Stories'

Paul Krugman:

Stupid China Stories: So a stock crash in China triggered a big decline around the world..., why should events in China matter for the rest of us?
Well, you and I might think that it’s because China is a pretty big economy... So when China slumps, you can and should expect knock-on effects elsewhere.
But trust the Republican field to declare that it’s all Obama’s fault. Scott Walker wants Obama to cancel a state dinner with Xi; Donald Trump says that it’s because Obama has let China “dictate the agenda” (no, I have no idea what he thinks he means). And Chris Christie says that it’s because Obama has gotten us deep into China’s debt.
Actually, let’s play a bit with that last one, OK? You could, conceivably, tell a story in which America becomes dependent on Chinese loans; then, when China gets in trouble, it demands repayment, pushing us into crisis too. But any story along those lines has a corollary: we should be seeing a spike in US interest rates as our credit line gets pulled. What you actually see is falling rates: ...
Oh, why am I even bothering?...

'Great Recession Job Losses Severe, Enduring'

Nothing particularly surprising here -- the Great recession was unusually severe and unusually long, and hence had unusual impacts, but it's good to have numbers characterizing what happened:

Great Recession Job Losses Severe, Enduring: Of those who lost full-time jobs between 2007 and 2009, only about 50 percent were employed in January 2010 and only about 75 percent of those were re-employed in full-time jobs.
The economic downturn that began in December 2007 was associated with a rapid rise in unemployment and with an especially pronounced increase in the number of long-term unemployed. In "Job Loss in the Great Recession and its Aftermath: U.S. Evidence from the Displaced Workers Survey" (NBER Working Paper No. 21216), Henry S. Farber uses data from the Displaced Workers Survey (DWS) from 1984-2014 to study labor market dynamics. From these data he calculates both the short-term and medium-term effects of the Great Recession's sharply elevated rate of job losses. He concludes that these effects have been particularly severe.

Of the workers who lost full-time jobs between 2007 and 2009, Farber reports, only about 50 percent were employed in January 2010 and only about 75 percent of those were re-employed in full-time jobs. This means only about 35 to 40 percent of those in the DWS who reported losing a job in 2007-09 were employed full-time in January 2010. This was by far the worst post-displacement employment experience of the 1981-2014 period.
The adverse employment experience of job losers has also been persistent. While both overall employment rates and full-time employment rates began to improve in 2009, even those who lost jobs between 2011 and 2013 had very low re-employment rates and, by historical standards, very low full-time employment rates.
In addition, the data show substantial weekly earnings declines even for those who did find work, although these earnings losses were not especially large by historical standards. Farber suggests that the earnings decline measure from the DWS is appropriate for understanding how job loss affects the earnings that a full-time-employed former job-loser is able to command.
The author notes that the measures on which he focuses may understate the true economic cost of job loss, since they do not consider the value of time spent unemployed or the value of lost health insurance and pension benefits.
Farber concludes that the costs of job losses in the Great Recession were unusually severe and remain substantial years later. Most importantly, workers laid off in the Great Recession and its aftermath have been much less successful at finding new jobs, particularly full-time jobs, than those laid off in earlier periods. The findings suggest that job loss since the Great Recession has had severe adverse consequences for employment and earnings.

'Thinking, Fast and Slow: Efforts to Reduce Youthful Crime in Chicago'

From the NBER Digest:

Thinking, Fast and Slow: Efforts to Reduce Youthful Crime in Chicago: Interventions that get youths to slow down and behave less automatically in high-stakes situations show positive results in three experiments.

Disparities in youth outcomes in the United States are striking. For example, among 15-to-24 year olds, the male homicide rate in 2013 was 18 times higher for blacks than for whites. Black males lose more years of potential life before age 65 to homicide than to heart disease, America's leading overall killer. A large body of research emphasizes that, beyond institutional factors, choices and behavior contribute to these outcomes. Those choices include decisions around dropping out of high school, involvement with drugs or gangs, and how to respond to confrontations that could escalate to serious violence.
In "Thinking, Fast and Slow? Some Field Experiments to Reduce Crime and Dropout in Chicago" (NBER Working Paper No. 21178), authors Sara B. Heller, Anuj K. Shah, Jonathan Guryan, Jens Ludwig, Sendhil Mullainathan, and Harold A. Pollack explain these behavioral differences using the psychology of automaticity. Because it is mentally costly to think through every situation in detail, all of us have automatic responses to some of the situations we encounter. These responses—automaticity—are tuned to situations we commonly face.
The authors present results from three large-scale, randomized experimental studies carried out in Chicago with economically disadvantaged male youth. All three experiments show sizable behavioral responses to fairly short-duration, automaticity-reducing interventions that get youths to slow down and behave less automatically in high-stakes situations.
The first intervention (called Becoming a Man, or BAM, developed by Chicago-area nonprofit Youth Guidance) involved 2,740 males in the 7th through 10th grades in 18 public schools on the south and west sides of the city. Some youths were offered an automaticity-reducing program once a week during school or an after-school sports intervention developed by Chicago nonprofit World Sport Chicago. The authors find that participation in the programming reduced arrests over the program year for violent crimes by 44 percent, and non-violent, non-property, non-drug crimes by 36 percent. Participation also increased engagement with school, which the authors estimate could translate into gains in graduation rates of between 7 and 22 percent.
A second study of BAM randomly assigned 2,064 male 9th and 10th graders within nine Chicago public high schools to the treatment or to a control condition. The authors found that arrests of youth in the treatment group were 31 percent lower than arrests in the control group.
The third intervention was delivered by trained detention staff to high-risk juveniles housed in the Cook County Juvenile Temporary Detention Center. The curriculum in this program, while different from the first two interventions, also focused on reducing automaticity. Some 5,728 males were randomly assigned to units inside the facility that did or did not implement the program. The authors found that those who received programming were about 16 percent less likely to be returned to the detention center than those who did not.
The sizable impacts the authors observe from all three interventions stand in stark contrast to the poor record of many efforts to improve the long-term life outcomes of disadvantaged youths. As with all randomized experiments, there is the question of whether these impacts generalize to other samples and settings. The interventions considered in this study would not be costly to expand. The authors estimate that the cost of the intervention for each participant in the first two studies was between $1,178 and $2,000. In the third case, the per-participant cost was about $60 per juvenile detainee. The results suggest that expanding these programs may be more cost-effective than other crime-prevention strategies that target younger individuals.
The authors also present results from various survey measures suggesting the results do not appear to be due to changes in mechanisms like emotional intelligence or self-control. On the other hand results from some decision-making exercises the authors carried out seem to support reduced automaticity as a key mechanism. The results overall suggest that automaticity can be an important explanation for disparities in outcomes.

Links for 08-25-15

Monday, August 24, 2015

Paul Krugman: A Moveable Glut

 What' causing so much instability in the world economy?

A Moveable Glut, by Paul Krugman, Commentary, NY Times: What caused Friday’s stock plunge? What does it mean for the future? Nobody knows, and not much. ...
Still, investors are clearly jittery..., the world as a whole still seems remarkably accident-prone. ... But why does the world economy keep stumbling? ...
More than a decade ago, Ben Bernanke famously argued that a ballooning U.S. trade deficit was the result, not of domestic factors, but of a “global saving glut”: a huge excess of savings over investment in China and other developing nations... He worried a bit about the fact that the inflow of capital was being channeled, not into business investment, but into housing; obviously he should have worried much more. ...
Of course, the boom became a bubble, which inflicted immense damage when it burst. Furthermore, that wasn’t the end of the story. There was also a flood of capital from Germany and other northern European countries to Spain, Portugal, and Greece. This too turned out to be a bubble, and the bursting of that bubble in 2009-2010 precipitated the euro crisis.
And still the story wasn’t over. With America and Europe no longer attractive destinations, the global glut went looking for new bubbles to inflate. It found them in emerging markets... It couldn’t last, and now we’re in the middle of an emerging-market crisis...
So where does the moving finger of glut go now? Why, back to America, where a fresh inflow of foreign funds has driven the dollar way up, threatening to make our industry uncompetitive again
What’s ... important now is that policy makers take seriously the possibility, I’d say probability, that excess savings and persistent global weakness is the new normal.
My sense is that there’s a deep-seated unwillingness, even among sophisticated officials, to accept this reality. Partly this is about special interests: Wall Street doesn’t want to hear that an unstable world requires strong financial regulation, and politicians who want to kill the welfare state don’t want to hear that government spending and debt aren’t problems in the current environment.
But there’s also, I believe, a sort of emotional prejudice against the very notion of global glut. Politicians and technocrats alike want to view themselves as serious people making hard choices — choices like cutting popular programs and raising interest rates. They don’t like being told that we’re in a world where seemingly tough-minded policies will actually make things worse. But we are, and they will.

'The Fed Looks Set to Make a Dangerous Mistake'

Larry Summers says "Raising rates this year will threaten all of the central bank’s major objectives":

The Fed looks set to make a dangerous mistake: Will the Federal Reserve’s September meeting see US interest rates go up for the first time since 2006? Officials have held out the prospect that ... rates will probably be increased... Conditions could change... But ... raising rates ... would be a serious error that would threaten all three of the Fed’s major objectives— price stability, full employment and financial stability.
Like most major central banks, the Fed has ... a 2 per cent inflation target. The biggest risk is that inflation will be lower than this — a risk that would be exacerbated by tightening policy... Tightening policy will adversely affect employment levels... Higher interest rates will also increase the value of the dollar, making US producers less competitive... This is especially troubling at a time of rising inequality. Studies ... make it clear that the best social program for disadvantaged workers is an economy where employers are struggling to fill vacancies.
There may have been a financial stability case for raising rates six or nine months ago, as low interest rates were encouraging investors to take more risks... That debate is now moot. With credit becoming more expensive, the outlook for the Chinese economy clouded at best, emerging markets submerging, the US stock market in a correction, widespread concerns about liquidity, and expected volatility having increased at a near-record rate, markets are themselves dampening any euphoria or overconfidence. The Fed does not have to do the job. ...
It is no longer easy to think of economic conditions that can plausibly be seen as temporary headwinds. ... This is the “secular stagnation” diagnosis...
New conditions require new policies. There is much that should be done, such as steps to promote public and private investment so as to raise the level of real interest rates consistent with full employment. Unless these new policies are implemented, inflation sharply accelerates, or euphoria in markets breaks out, there is no case for the Fed to adjust policy interest rates.

Links for 08-24-15

Sunday, August 23, 2015

''Young Economists Feel They Have to be Very Cautious''

From an interview of Paul Romer in the WSJ:

...Q: What kind of feedback have you received from colleagues in the profession?

A: I tried these ideas on a few people, and the reaction I basically got was “don’t make waves.” As people have had time to react, I’ve been hearing a bit more from people who appreciate me bringing these issues to the forefront. The most interesting feedback is from young economists who say that they feel that they have to be very cautious, and they don’t want to get somebody cross at them. There’s a concern by young economists that if they deviate from what’s acceptable, they’ll get in trouble. That also seemed to me to be a sign of something that is really wrong. Young people are the ones who often come in and say, “You all have been thinking about this the wrong way, here’s a better way to think about it.”

Q: Are there any areas where research or refinements in methodology have brought us closer to understanding the economy?

A: There was an interesting [2013] Nobel prize in [economics], where they gave the prize to people who generally came to very different conclusions about how financial markets work. Gene Fama ... got it for the efficient markets hypothesis. Robert Shiller ... for this view that these markets are not efficient...

It was striking because usually when you give a prize, it’s because in the sciences, you’ve converged to a consensus. ...

Thomas Piketty: New Thoughts on Capital in the Twenty-First Century

[Transcript]

Links for 08-23-15

Saturday, August 22, 2015

'Did Socialism Keep Capitalism Equal?'

Branko Milanovic:

Did socialism keep capitalism equal?: This is an interesting idea and I think that it will gradually become more popular. The idea is simple: the presence of the ideology of socialism (abolition of private property) and its embodiment in the Soviet Union and other Communist states made capitalists careful: they knew that if they tried to push workers too hard, the workers might retaliate and capitalists might end up by losing  all.
Now, this idea comes from the fact that rich capitalist countries experienced an extraordinary period of decreasing inequality from around 1920s to 1980s, and then since the 1980s, contradicting what a simple Kuznets curve would imply, inequality went up.  It so happens that the turning  point in 1980s coincides with (1) acceleration of skill-biased technological progress, (2) increased globalization and entry of Chinese workers into the global labor market, (3) pro-rich policy changes (lower taxes), (4) decline of the trade unions, and (5) end of Communism as an ideology. So each of these five factors can be used to explain the increase in inequality in rich capitalist countries.
The socialist story recently received a boost from two papers. ...
 I am not sure that this particular story can alone explain the decline in inequality in the West, and certainly it is a story that one hears less often in the US than in Europe, as the United States  believed itself to be sufficiently protected from the Communist virus (although when you look at the repression in the 1920s and McCarthyism in the 1950s, one is not so sure). But even Solow’s recent mention of the changing power relations between capitalists and workers (the end of the Detroit treaty) as ushering in the period of rising inequality is not inconsistent with this view. In a recent conversation, and totally unaware of the literature, an Italian high-level diplomat explained to me why inequality in Italy increased recently: “in then 1970s, capitalists were afraid of the Italian Communist Party”. So there is, I think, something in the ... story.
The implication is of course rather unpleasant: left to itself, without any countervailing powers, capitalism will keep on generating high inequality and so the US may soon look like South Africa. That’s where I think differently: I think there are, in the longer-term, forces that would lead toward reduction in inequality (and that would not be the return of Communism).

'The Voluntarism Fantasy'

This is part of the introduction to an essay by Mike Konczal on how to "insure people against the hardships of life..., accident, illness, old age, and loss of a job." Should we rely mostly upon government social insurance programs such as Medicare and Social Security, or would a system that relies upon private charity be better? History provides a very clear answer:

The Voluntarism Fantasy: Ideology is as much about understanding the past as shaping the future. And conservatives tell themselves a story, a fairy tale really, about the past, about the way the world was and can be again under Republican policies. This story is about the way people were able to insure themselves against the risks inherent in modern life. Back before the Great Society, before the New Deal, and even before the Progressive Era, things were better. Before government took on the role of providing social insurance, individuals and private charity did everything needed to insure people against the hardships of life; given the chance, they could do it again.
This vision has always been implicit in the conservative ascendancy. It existed in the 1980s, when President Reagan announced, “The size of the federal budget is not an appropriate barometer of social conscience or charitable concern,” and called for voluntarism to fill in the yawning gaps in the social safety net. It was made explicit in the 1990s, notably through Marvin Olasky’s The Tragedy of American Compassion, a treatise hailed by the likes of Newt Gingrich and William Bennett, which argued that a purely private nineteenth-century system of charitable and voluntary organizations did a better job providing for the common good than the twentieth-century welfare state. This idea is also the basis of Paul Ryan’s budget, which seeks to devolve and shrink the federal government at a rapid pace, lest the safety net turn “into a hammock that lulls able-bodied people into lives of dependency and complacency, that drains them of their will and their incentive to make the most of their lives.” It’s what Utah Senator Mike Lee references when he says that the “alternative to big government is not small government” but instead “a voluntary civil society.” As conservatives face the possibility of a permanent Democratic majority fueled by changing demographics, they understand that time is running out on their cherished project to dismantle the federal welfare state.
But this conservative vision of social insurance is wrong. It’s incorrect as a matter of history; it ignores the complex interaction between public and private social insurance that has always existed in the United States. It completely misses why the old system collapsed and why a new one was put in its place. It fails to understand how the Great Recession displayed the welfare state at its most necessary and that a voluntary system would have failed under the same circumstances. Most importantly, it points us in the wrong direction. The last 30 years have seen effort after effort to try and push the policy agenda away from the state’s capabilities and toward private mechanisms for mitigating the risks we face in the world. This effort is exhausted, and future endeavors will require a greater, not lesser, role for the public. ...
The state does many things, but this essay will focus specifically on its role in providing social insurance against the risks we face. Specifically, we’ll look at what the progressive economist and actuary I.M. Rubinow described in 1934 as the Four Horsemen of the Apocalypse: “accident, illness, old age, loss of a job. These are the four horsemen that ride roughshod over lives and fortunes of millions of wage workers of every modern industrial community.” These were the same evils that Truman singled out in his speech. And these are the ills that Social Security, Medicare, Medicaid, food assistance, and our other public systems of social insurance set out to combat in the New Deal and Great Society.
Over the past 30 years the public role in social insurance has taken a backseat to the idea that private institutions will expand to cover these risks. Yet our current system of workplace private insurance is rapidly falling apart. In its wake, we’ll need to make a choice between an expanded role for the state or a fantasy of voluntary protection instead. We need to understand why this voluntary system didn’t work in the first place to make the case for the state’s role in fighting the Four Horsemen. ...

Links for 08-22-15

Friday, August 21, 2015

Evidence for Sticky Wages

John Robertson, writing at the Atlanta Fed's Macroblog, on evidence for wage stickiness:

No Wage Change?: Even when prevailing market wages are lower, businesses can find it difficult to reduce wages for their current employees. This phenomenon, often referred to as "downward nominal wage rigidity," can result in rising average wages for incumbent workers despite high unemployment levels. Some economic models predict that a period of subdued wage growth can follow, even as the labor market recovers—a kind of delayed wage-adjustment effect.
In her 2014 Jackson Hole speech, Fed Chair Janet Yellen suggested this effect may explain sluggish growth in average wages in recent years, despite significant declines in the rate of unemployment.
This macroblog post looks at evidence of wage rigidity, particularly a spike in the frequency of zero wage changes relative to wage declines. A comparison is made between hourly and weekly wages and between incumbent workers (job stayers) and those who have changed employers (job switchers).
Chart 1 shows the fractions of job stayers reporting the same or a lower hourly or weekly wage than 12 months earlier. These measures are constructed from the Current Population Survey microdata in the Atlanta Fed's Wage Growth Tracker. They include workers who are paid hourly (accounting for about 60 percent of all wage and salary earners). The measures exclude those who usually receive overtime and other supplemental pay and those with imputed or top-coded (redacted) wages. Weekly wage is defined as the hourly wage times the usual number of hours per week worked at that rate. The data are aggregated to an annual frequency (except for 2015, where the first six months of the year are covered).
Job stayers cannot be exactly identified in the data and are approximated by those who are in the same occupation and industry as they were 12 months earlier and the same job as they were in the prior month. Consistent with other studies (see, for example, the work of our colleagues at the San Francisco Fed), we find that the incidence of unchanged hourly wages among job stayers is substantial (although some of this is probably the result of rounding errors in self-reported wages). The measured share of unchanged hourly wages rose disproportionately between 2008 and 2010, and it has remained elevated since. Zero hourly wage changes (the green line in chart 1) have become almost as common as declines in hourly wages (the blue line in chart 1).

150821a

Chart 1 also suggests that weekly wages for job stayers show a pattern over time broadly similar to hourly wages. But the fraction of unchanged weekly wages (the purple line in chart 1) is lower. Each year, about 60 percent of those with no change in their hourly wage had no change in their weekly wage (or hours) either. Also, there are relatively more declines in weekly wages (the orange line in chart 1) than in hourly wages—mostly the result of reduced hours worked. On average, a reduction in weekly wages is associated with a four-hour decline in hours worked per week. About 90 percent of those with lower hourly wages also had lower weekly wages, and 20 percent of those with no change in their hourly wage had a lower weekly wage (working fewer hours).
If job stayers show a relatively high incidence of no wage change, we might expect a different story for job switchers, since they are establishing a new wage contract with a new employer. Chart 2 shows the fraction of job switchers reporting the same or a lower hourly or weekly wage than 12 months earlier. Job switchers are approximated by workers who are in a different industry than a year earlier.

150821b

Not surprisingly, a smaller share of workers experience no change in their hourly or weekly wage when switching jobs. But the pattern of zero wage change for job switchers over time is generally similar to that of job stayers. It is also true that a decline in hourly and weekly wages is more likely for job switchers than for job stayers, with a significant temporary spike in the relative frequency of wage declines for job switchers during the last recession.
Taken at face value, this analysis suggests the presence of some amount of wage rigidity. Also, rigidity increases during recessions and has remained quite elevated since the end of the last recession—especially for job stayers. The question then becomes whether this phenomenon has important macroeconomic consequences. A prediction of most models in which wage stickiness has allocative effects is that it causes firms to increase layoffs when faced with a decline in aggregate demand. Interestingly, during the last recession—when wage stickiness appears to have increased substantially—the rate of layoffs was not unusually high relative to earlier recessions. What was atypical was the size of the decline in the rate of job creation, and this decline contributed to unusually long unemployment spells. As noted by Elsby, Shin, and Solon (2014), it is not clear that an increase in wage rigidity would constrain the hiring of new workers more than it constrains the retention of existing workers.
On the other hand, persistently high wage rigidity in the wake of the Great Recession is consistent with the relatively sluggish pace of wage increases seen in most measures of aggregate wage growth via the "bending" of the short-run Phillips curve (as described by Daly and Hobijn (2014)). Interestingly, the Atlanta Fed's Wage Growth Tracker is an exception. It has indicated somewhat stronger wage growth during the last year than other measures. It will be interesting to see if that trend continues in coming months.

'The Water Market Will Never be a Free Market'

John Whitehead responds to those who say the solution to water problems is to "allow free markets to operate":

...The water market will never be a "free market" in the true sense of the word. A plea to the water authority (i.e., government) to price water more rationally is a plea for policy reform ... towards a better use of incentives. Free markets only exist when there is no government regulation of buyers and sellers, no taxes, no subsidies and no nothing. An efficient free market for water is a difficult thing to pull off since it is a common-pool resource. It is easier for the pizza market to operate efficiently since pizza is a private good. 
I don't think adaption to climate change can be accomplished efficiently by government taking a hands off approach. You can't privatize much of the natural environment. ...

'Scientists Do Not Demonize Dissenters. Nor Do They Worship Heroes.'

Paul Romer's latest entry on "mathiness" in economics ends with:

Reactions to Solow’s Choice: ...Politics maps directly onto our innate moral machinery. Faced with any disagreement, our moral systems respond by classifying people into our in-group and the out-group. They encourage us to be loyal to members of the in-group and hostile to members of the out-group. The leaders of an in-group demand deference and respect. In selecting leaders, we prize unwavering conviction.
Science can’t function with the personalization of disagreement that these reactions encourage. The question of whether Joan Robinson is someone who is admired and respected as a scientist has to be separated from the question about whether she was right that economists could reason about rates of return in a model that does not have an explicit time dimension.
The only in-group versus out-group distinction that matters in science is the one that distinguishes people who can live by the norms of science from those who cannot. Feynman integrity is the marker of an insider.
In this group, it is flexibility that commands respect, not unwavering conviction. Clearly articulated disagreement is encouraged. Anyone’s claim is subject to challenge. Someone who is right about A can be wrong about B.
Scientists do not demonize dissenters. Nor do they worship heroes.

[The reference to Joan Robinson is clarified in the full text.]

Links for 08-21-15

Thursday, August 20, 2015

'Shifting Visions of the ''Good Job'''

From Tim Taylor:

Shifting Visions of the "Good Job": As the unemployment rate has dropped to 5.5% and less in recent months, the arguments over jobs have shifted from the lack of available jobs to the qualities of the jobs that are available. It's interesting to me how our social ideas of what constitutes a "good job" have a tendency to shift over time. Joel Mokyr, Chris Vickers, and Nicolas L. Ziebarth illuminate some of these issues in "The History of Technological Anxiety and the Future of Economic Growth: Is This Time Different?" which appears in the Summer 2015 issue of the Journal of Economic Perspectives. All articles from JEP going back to the first issue in 1987 are freely available on-line compliments of the American Economic Association. (Full disclosure: I've worked as Managing Editor of the JEP since 1986.)

One theme that I found especially intriguing in the Mokyr, Vickers, and Ziebarth argument is how some of our social attitudes about what constitutes a "good job" have nearly gone full circle in the last couple of centuries. Back at the time of the Industrial Revolution in the late 18th and into the 19th century, it was common to hear arguments that the shift from farms, artisans, and home production into factories involved a reduction in the quality of work. But in recent decades, a shift away from factories and back toward decentralized production is sometimes viewed as a decline in the quality of work, too. Here are some examples:

For example, one concern from the time of the original Industrial Revolution was that factory work required scheduling their time in ways that removed flexibility. Mokyr, Vickers, and Ziebarth (citations omitted) note: "Workers who were “considerably dissatisfied, because they could not go in and out as they pleased” had to be habituated into the factory system, by means of fines, locked gates, and other penalties. The preindustrial domestic system, by contrast, allowed a much greater degree of flexibility."

Another type of flexibility in the time before the Industrial Revolution is that people often had the flexibility to combine their work life with their home life, and the separation of the two was thought be worrisome: "Part of the loss of control in moving to factory work involved the physical separation of home from place of work. While today people worry about the exact opposite phenomenon with the lines between spheres of home and work blurring, this disjunction was originally a cause of great anxiety, along with the separation of place-of-work from place-of-leisure. Preindustrial societies had “no clearly defined periods of leisure as such, but economic activities, like hunting or market-going, obviously have their recreational aspects, as do singing or telling stories at work.”

Of course, some common modern concerns about the quality of jobs is that many jobs lack regular hours. Many workers may face irregular hours, or no assurance of a minimum number of hours they can work. Moreover, many jobs now worry that work life is intruding back into home life, because we are hooked to our jobs by our computers and phones. ...
Another a fairly common theme of economists writing back in the 18th and 19th centuries ranging from Adam Smith to Karl Marx was that the new factor jobs treated people as if they were cogs in a machine. ...
Now, of course, there is widespread concern about a lack of factory jobs for low- and middle-skilled workers. Rather than worrying about these jobs being debasing or unfit for humans, we worry that there aren't enough of them.

I guess one reaction to this evolution of attitudes about "good jobs" is just to point out that workers and employers are both heterogenous groups. Some workers put a greater emphasis on flexibility of hours, while others might prefer regularity. Some workers prefer a straightforward job that they can leave behind at the end of the day; others prefer a job that is full of improvisation, learning on the fly, crises, and deadlines. To some extent, the labor market lets employers and workers match up as they desire. There's certainly no reason to assume that a "good job" should be a one-size-fits-all definition.

A second reaction is that there is clearly a kind of rosy-eyed nostalgia at work about the qualities of jobs of the past. Many of us tend to focus on a relatively small number of past jobs, not the jobs that most people did most of the time. In addition, we focus on a few characteristics of those jobs, not the way the jobs were actually experienced by workers of that time.

But yet another reaction is that the qualities of available jobs aren't just a matter of negotiation between workers and employers, and they aren't an historical inevitability. The qualities of the range of jobs in an economy are afffected by a range of institutions and factors like the human capital that workers bring to jobs, the extent of on-the-job training, how easy it is for someone with a series or employers or irregular hours to set up health insurance or a retirement account, rules about workplace safety, rules that impose costs on laying off or firing workers (which inevitably makes firms reluctant to hire more regular employees), the extent and type of union representation, rules about wages and overtime, and much more. I do worry that career-type jobs offering the possibility of longer-term connectedness between a worker and an employer seem harder to come by. In a career-type job, both the worker and employer place some value on the expected continuance of their relationship over time, and act and invest resources accordingly.

Fed Watch: FOMC Minutes Give No Clear Signal

Tim Duy:

FOMC Minutes Give No Clear Signal, by Tim Duy: The FOMC minutes from the July 28-29 FOMC meeting were released today. Arguably they are stale. Arguably they have been overtaken by events. And because the Fed has been very good about not signaling their exact intentions, arguably you can read anything into them you want. If you want to take a hawkish view, I think you focus on this and similar portions of the minutes:

During their discussion of economic conditions and monetary policy, participants mentioned a number of considerations associated with the timing and pace of policy normalization. Most judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point. Participants observed that the labor market had improved notably since early this year, but many saw scope for some further improvement. Many participants indicated that their outlook for sustained economic growth and further improvement in labor markets was key in supporting their expectation that inflation would move up to the Committee's 2 percent objective, and that they would be looking for evidence that the economic outlook was evolving as they anticipated.

When considering a rate hike, "many" participants were willing to dismiss current low inflation if they believe evidence of stronger growth supports their conviction that inflation would trend toward target over time. The data since the July meeting tends to support that view. July retail sales were healthy, and revisions to previous months points toward upward revisions to second quarter GDP growth to 3.0 percent or higher. Industrial production was higher, perhaps starting to move past the declines related to the sharp drop in oil prices. Single family housing starts continued their slow but steady rise, reaching a level last seen in 2007. Homebuilder confidence is up. While manufacturing has been soft, the service sector as measured by the ISM non-manufacturing measure is picking up the slack. And the employment report was yet another in a long line of employment reports suggesting slow yet steady gains. Overall, a picture generally supportive of sustained growth and further improvement in labor markets.

A dovish view, however, could be easily derived from the following sentences and similar portions:

However, some participants expressed the view that the incoming information had not yet provided grounds for reasonable confidence that inflation would move back to 2 percent over the medium term and that the inflation outlook thus might not soon meet one of the conditions established by the Committee for initiating a firming of policy. Several of these participants cited evidence that the response of inflation to the elimination of resource slack might be attenuated and expressed concern about risks of further downward pressure on inflation from international developments. Another concern related to the risk of premature policy tightening was the limited ability of monetary policy to offset downside shocks to inflation and economic activity when the federal funds rate was near its effective lower bound.

Many market participants took this and related comments specifically referring to China and currency prices to argue that September was all but off the table. I would not be so quick; the former view is held by "many," whereas the latter was held by "some." Moreover, I find it hard to believe that any would think it a surprise that some officials explicitly discussed China and currencies. How could they not? How could you not think that in a wide-ranging discussion they had not discussed all that is both good and bad in the economy? That said, as I noted earlier, the minutes are stale. The depreciation of the yuan and further declines in commodity prices since the last FOMC meeting give reason to believe that the ranks of "some" has grown.

The latter points also appealed to those inclined against a rate hike. For instance, prior to the release of the minutes, the prescient Cullen Roche argued:

There is still a lot of chatter about the potential for a September rate hike by the Fed. I have to be honest – I think this is nuts at this point.

After the minutes he added:

My guess is that the odds of a Sept rate hike are fast approaching 0%.

— Cullen Roche (@cullenroche) August 19, 2015

I am clearly sympathetic to the view that the Fed looks to be rushing with the rate hike talk. That said, it is what many officials are talking about since the last FOMC meeting while looking at the same data we are. Via John Hilsenrath at the Wall Street Journal:

Officials speaking since the July meeting have sent conflicting signals about where the group as a whole is most likely to go. In an interview with The Wall Street Journal earlier this month, Atlanta Fed President Dennis Lockhart said he was inclined to move in September. St. Louis Fed President James Bullard said in an interview with Market News International on Wednesday he would push for it. But in an opinion piece written in The Wall Street Journal on Wednesday, Minneapolis Fed President Narayana Kocherlakota said it would be a mistake and Fed governor Jerome Powell said earlier this month a decision hadn’t been made.

Lockhart is seen as swaying with the general consensus, which argues for September. Bullard arguably shouldn't be pushing for a rate hike given his path tendency to follow the direction of market-based inflation expectations, but the neo-Fisherians seem to be making some traction with him. Powell is wisely keeping his cards close to his chest. They should not, after all, have made any decisions yet. And I would say that if Kocherlakota feels so strongly a need to argue against a rate hike in the Wall Street Journal, he must think the momentum is shifting the other direction.

Former Federal Reserve Governor Lawrence Meyer is also interesting here:

“What are you worrying about, September or December? It doesn’t matter. Just pull the trigger,” said Laurence Meyer, co-founder of Macroeconomic Advisers, a research firm, in an interview before the release of the minutes.

Just sick of the debate and wanting to move on? Or a real conviction that the Fed is set to move?

Bottom Line: I have believed that there was a better than 50% chance that the Fed would move in September and am hesitant to move much below 50%. I didn't expect the minutes would give a clear signal regarding September, and am not surprised by the dimensions of the general discussion. And I am wary the Fed may be less responsive to financial market disruption than during most of the post-crisis era given than the economy is close to their estimate of full employment. This is shaping up to be one of the most contentious meetings since the tapering debates. We will soon learn more exactly what data the Fed is data dependent on.

FRBSF: The Economic Outlook

The economic outlook according to Michael Bauer of the SF Fed:

FedViews: Michael Bauer, senior economist at the Federal Reserve Bank of San Francisco, states his views on the current economy and the outlook.

GDP growth rebounded from slow Q1

  • Revised estimates indicate that real GDP rose by 0.7% at an annualized rate in the first quarter of 2015, wiping out the previously reported contraction. A first estimate of 2.3% growth in the second quarter is consistent with an ongoing moderate expansion of the U.S. economy, confirming that the first-quarter weakness was largely due to transitory factors.
  • We expect the U.S. economy to grow slightly above its 2% long-term trend for the next four quarters, and then return to trend by the end of 2016. Positive fundamentals include both rising asset prices, which bolster wealth and balance sheets, and a strengthening labor market, which supports household income and consumer spending. However, the stronger dollar over the past year constitutes a headwind for net exports and a drag on growth. Uncertain economic conditions abroad, including in China and Europe, pose some risks to this outlook, but overall we view upside and downside risks as roughly balanced.

Solid job growth continues

Economy near full employment

  • Labor market conditions have continued to improve, and the economy is nearing full employment. Job growth has been strong and consistent, jobless claims are near a 40-year low, and the unemployment rate of 5.3% in July indicates that there is very little slack in labor markets. While significant growth in wages and compensation has yet to appear, we expect a pickup in wage growth as labor markets tighten further.

Inflation expected to return to target

  • Inflation remains below the Federal Open Market Committee’s 2% long-run target. We may see some further weakness in overall inflation in the second half of the year due to lower oil prices and a stronger dollar. However, we expect inflation to gradually move back to the target over the medium term as energy prices and the value of the dollar stabilize or reverse direction and as the slack in product and labor markets diminishes.

Financial conditions are supportive

  • Financial conditions have modestly tightened in the first half of this year, as evidenced by a stronger dollar, modestly wider credit spreads, and more volatile global equity prices. However, overall they remain very supportive of aggregate demand and should continue to positively affect economic growth.

Global decline in long-term rates

  • U.S. long-term interest rates have fallen over the past 30 years and are near historic lows. Three facts stand out about this secular decline: First, it has been a global phenomenon, as the decline in the United States was paralleled by a similar trend in most developed countries. Second, the decline was largely unexpected, and forecasters consistently overestimated the future level of interest rates at various points in the past. Third, the decline was evident not only in nominal interest rates but also, and more importantly, in real (that is, inflation-adjusted) interest rates, which drive saving and investment decisions.

Nominal and real rates both falling

  • Structural long-lived changes in the world economy have played an important role in this decline in long-term interest rates. In particular, trend growth of output and productivity has markedly slowed in developed countries—the phenomenon of so-called secular stagnation—which has reduced investment demand. Also, the global saving glut, mostly due to fast-growing emerging market economies with excess saving due to large trade surpluses, has exerted downward pressure on real interest rates. Another important contributing structural factor is the shortage of “safe” assets, such as high-quality government securities, the supply of which is failing to keep up with strong global demand.
  • Cyclical, transitory factors are also keeping long-term interest rates down. In particular, easy monetary policy in developed countries, implemented through low policy rates and quantitative easing, has kept short-term and long-term interest rates low.  In addition, uncertainty surrounding the ongoing euro-area crisis and other related risks has led to precautionary savings and flight-to-safety demand. Finally, deleveraging by households and firms in the aftermath of the financial crisis in order to reduce their debt levels and improve their balance sheets has contributed to the global supply of savings.
  • The eventual reversal of the cyclical factors affecting investment and saving in financial markets should lead to some normalization of long-term interest rates. However, the structural factors are not expected to change rapidly. Hence, there is likely to be a new normal for long-term real rates, which will be different—and lower—than in the past.
  • In such an environment, borrowers would benefit from lower interest rates. On the other hand, savers seeking higher returns may take on more risk. A low interest rate environment would also give less potential room for monetary policy to stimulate economic growth through policy rate changes. In sum, lower real interest rates involve both benefits and risks.     

Links for 08-20-15

Wednesday, August 19, 2015

'Reform and Revolution in Macroeconomics'

This is something I've stressed with respect to the failure of macroeconomic models, the failure to ask the right questions prior to the crisis. There was no shortage of tools, though some -- like the restrictions imposed by representative agent modeling needed to be improved to better handle heterogeneous agents -- needed further development. The problem was that we had been told by the eminent thought leader(s) within the profession that the problem of deep recessions had been solved (if not by policy, then by the improvement in the operation of the economy brought about by modern technology -- markets were thought to function sufficiently well so as to avoid such problems, especially financial markets with their digital technology and physics brains). Thus, theoretical questions about deep recessions induced by financial panics were ignored or shunted off to the side (they seemed to lack empirical relevance at that time) and the profession focused on how to conduct policy in a "Great Moderation". So to answer why important questions were left largely unaddressed by mainstream models and thinking, it was a combination of the belief that the questions were unimportant combined with sociology within the profession that placed a lower value on pursuits that might have allowed us to be better prepared when the recession hit.

Simon Wren-Lewis argues there was ample reason to ask these questions if we had been more attention to empirical evidence:

Reform and revolution in macroeconomics: ...While it is nonsense to suggest that DSGE models cannot incorporate the financial sector or a financial crisis, academics tend to avoid addressing why some of the multitude of work now going on did not occur before the financial crisis. It is sometimes suggested that before the crisis there was no cause to do so. This is not true. Take consumption for example. Looking at the (non-filtered) time series for UK and US consumption, it is difficult to avoid attaching significant importance to the gradual evolution of credit conditions over the last two or three decades (see the references to work by Carroll and Muellbauer I give in this post). If this kind of work had received greater attention (which structural econometric modellers would almost certainly have done), that would have focused minds on why credit conditions changed, which in turn would have addressed issues involving the interaction between the real and financial sectors. If that had been done, macroeconomics might have been better prepared to examine the impact of the financial crisis. ...

[His main point is much broader.]

'Musing on Right-Wing Affinity Fraud in Politics and Economics...'

Brad DeLong:

Musing on Right-Wing Affinity Fraud in Politics and Economics...: One reaction to the rise of Donald Trump in Republican presidential primary polls has been the extraordinary hurry with which many other candidates have fallen all over themselves to endorse self-deportation.
Note, however, that by "self-deportation" I do not mean what Mitt Romney meant by the phrase: make life so unpleasant for undocumented immigrants in the United States that they decide to leave. What I mean by "self-deportation" is candidates adopting policies that would deport themselves.
Piyush Jindal's parents were Indian citizens in the United States on student visas. Ted Cruz was born in Canada to a Cuban-citizen father. Both of Marco Rubio's parents were Cuban citizens when he was born. Columba Bush--wife of JEB! Bush--was born a Mexican citizen in Mexico, and Wikipedia at least claims that as of her wedding she did not speak English.
Yet all are now denouncing as unforgivably lax the birthright citizenship constitutional guarantee and the naturalization laws by which they or their spouse claim American citizenship.
This is affinity fraud: saying, "I'm just like you! I think as you do! I hate immigrants! Why, I'd have applauded if the U.S. were to have deported me as a baby!" And the very non-sensicality of the claim is what makes it more credible.
But the most interesting thing to me this morning is that this sort of affinity fraud--pretending to believe, or convincing even oneself that one does believe, patently unbelievable things in order to demonstrate group allegiance--is the way America's right-wing is carrying on its internal and external discussion of economics. Paul Krugman provides three examples:
(1) Claiming to believe or actually convincing oneself that inflation is just around the corner...
(2) Claiming to believe or even believing that recessions are outbreaks of collective laziness on the part of workers and collective forgetting on the part of entrepreneurs...
(3) Claiming to believe or actually believing that doubling down on failed intellectual bets is the right strategy--that if statistical tests reject your models, so much the worse for statistical tests because the models are good...

More from Paul Krugman:

Pension-cutters and Privatizers, Oh My: I wrote Monday about the strange phenomenon of Republicans lining up to propose cuts to Social Security, a deeply unpopular policy that is, however, also a really bad idea. How unpopular? Lee Drutman has the data: only 6 percent of American voters support Social Security cuts, while a majority want it increased. I argued that this apparent act of political self-destructiveness probably reflected an attempt to curry favor with wealthy donors, who are very much at odds with the general public on this issue:...
Now we have another example: Marco Rubio has announced his health care plan, and it involves (a) greatly shrinking the tax deductibility of employer health benefits and (b) turning Medicare into a voucher system. Part (a) is favored by many economists, although I would argue wrongly, but would be deeply unpopular; part (b) is really terrible policy — proposed precisely at the moment when Medicare is showing that it can control costs better than private insurers! — and also deeply unpopular.
The strategy here, surely, is to propose things that voters would hate if they understood what was on the table, but hope that Fox News plus “views on shape of planet differ” reporting elsewhere will keep them confused, while at the same time pleasing mega-donors. It might even work, especially if Trump can be pushed out of the picture and the Hillary-hatred of reporters overcomes professional scruples. But it’s still amazing to watch.

'Tax cuts for the wealthy will help you too!' worked pretty well as a deception, so why not try it elsewhere?

The MC and MB of Habits

"The brain’s habit-forming circuits may also be wired for efficiency":

Wired for habit, by Elizabeth Dougherty, McGovern Institute for Brain Research August 19, 2015: We are creatures of habit, nearly mindlessly executing routine after routine. Some habits we feel good about; others, less so. Habits are, after all, thought to be driven by reward-seeking mechanisms that are built into the brain. It turns out, however, that the brain’s habit-forming circuits may also be wired for efficiency.
New research from MIT shows that habit formation, at least in primates, is driven by neurons that represent the cost of a habit, as well as the reward. “The brain seems to be wired to seek some near optimality of cost and benefit,” says Ann Graybiel, an Institute Professor at MIT and also a member of the McGovern Institute for Brain Research.
This study is the first to show that cost considerations are wired into the learning of habits. ...
“To know there are other brain signals like cost hiding under the reward signal is very exciting,” says Yael Niv, an associate professor of psychology at Princeton University and an affiliate of the Princeton Neuroscience Institute who was not involved in this work. “This study suggests that we should not be blinded by reward. Reward is only one side of the coin. The other side is how much do you have to pay for it.”...

Links for 08-19-15

Tuesday, August 18, 2015

'What Is The Chinese Economic System?

Barkley Rosser:

What Is The Chinese Economic System?: In a recent post Paul Krugman criticizing China's interventions in forex markets..., he labeled the Chinese system as being "rapacious crony capitalism." This has led various commentators in various papers to have varying degrees of vapors. But even if we grant that "rapacious" is not a scientific term that may be dramatic for blogging but is not useful for seriously categorizing the Chinese economic system, the hard fact is that it is not obvious what it is, and it may simply be too complicatedly mixed and large for any of the usual categories to really fit.

This is actually a current professional problem for me and my wife, who are nearing completing the third edition of our textbook, Comparative Economics in a Transforming World Economy, MIT Press. ... From the standpoint of professional comparative economics, what the heck the Chinese system is is a matter of serious and substantial debate. ...

As it was, China never was that much of a full-blown command socialist economy. It was always more decentralized than the old USSR, with this partly due to its sheer size and diversity...

The ... Chinese government itself [says] ... China is a "socialist market economy." OK, it is indeed a market economy. It probably was not during the Mao era, even if command central planning was much weaker than in the old USSR. There was still command planning, but a lot of it was decentralized to local levels. After Deng Xiaoping took control in 1978, he pretty much undid most of the command central planning apparatus, moving the economy to being predominantly a market one.

The more complicated issue involves property ownership, and here there is no agreement. A major part of this is that China has property forms that are not seen anywhere else in the world. One of the larger parts of the Chinese economy, which used to get lots of publicity but has not received much lately, is what was called the Town and Village Enterprise (TVE) sector. This is the sector that lies between the remaining state-owned sector (from the center) and the fully privatized corporate capitalist sector of the Chinese economy. There are at least four different property forms in this mostly rural part of the Chinese economy, with them varying from being somewhat more publicly (if locally) owned to being more privately, although in some cases cooperatively so, owned. Much of this sector, which as more than a third of the whole economy, is very hard to characterize as being either socialist or capitalist, although clearly the Chinese like to consider it more socialist.

Now this odd term is close to others that have been or still are used to describe economies around the world. One is "market socialist." That was most famously used to describe the former Yugoslavia, which also had a form of workers' management that attracted lots of attention from comparative economists. Other nations also were called this, especially Hungary, which lacked the workers' management part. They had forms of collective or state ownership, but no (or little) command central planning. The state-owned enterprises operated in market environments. ...

The other similar term is "social market economy," which Germany uses to label its system ("sozialmarktwirtschaft" in German). This is really a fully market capitalist system, but one with a large social safety net. And the Germans have that, certainly compared to the US, and many have commented on the generally better functioning of that economy (which also has lots of labor-management cooperation) than many other economies around.

So, the Chinese system is not like either the old Yugoslav or the current German system, even though it has a lot of state or collective ownership, and certainly is heavily a market system. Clunky and not precisely accurate and vaguely propagandistic as it is, "socialist market economy" may be the best we can do.

'Wealth and Income Distribution: New Theories Needed for a New Era '

More from Joe Stiglitz (along with Ravi Kanbur) on what needs to change in economics:

Wealth and income distribution: New theories needed for a new era, Vox EU: Six decades ago, Nicholas Kaldor (1957) put forward a set of stylized facts on growth and distribution for mature industrial economies. The first and most prominent of these was the constancy of the share of capital relative to that of wealth in national income. At about the same time, Simon Kuznets (1955) put forward a second set of stylized facts -- that while the interpersonal inequality of income distribution might increase in the early stages of development, it declines as industrialized economies mature.

These empirical formulations brought forth a generation of growth and development theories whose object was to explain the stylized facts. Kaldor himself presented a growth model which claimed to produce outcomes consistent with constancy of factor shares, as did Robert Solow. Kuznets also developed a model of rural-urban transition consistent with his prediction, as did many others (Kanbur 2012).

Kaldor-Kuznets facts no longer hold

However, the Kaldor-Kuznets stylized facts no longer hold for advanced economies. The share of capital as conventionally measured has been on the rise, as has interpersonal inequality of income and wealth. Of course, there are variations and subtleties of data and interpretation, and the pattern is not uniform. But these are the stylized facts of our time. Bringing these facts center stage has been the achievement of research leading up to Piketty (2014).

It stands to reason that theories developed to explain constancy of factor shares cannot explain a rising share of capital. The theories developed to explain the earlier stylized facts cannot very easily explain the new trends, or the turnaround. At the same time, rising inequality has opened once again a set of questions on the normative significance of inequality of outcomes versus inequality of opportunity. New theoretical developments are needed for positive and normative analysis in this new era.

What sort of new theories? In the realm of positive analysis, Piketty has himself put forward a theory based on the empirical observation that the rate of return to capital, r, systematically exceeds the rate of growth, g; the famous r > g relation. Much of the commentary on Piketty’s facts and theorizing has tried to make the stylized fact of rising share of capital consistent with a standard production function F (K, L) with capital ‘K’ and labor ‘L’. But in this framework a rising share of capital can be consistent with the other stylized fact of rising capital-output ratio only if the elasticity of substitution between capital and labor is greater than unity, which is not consistent with the broad empirical findings (Stiglitz, 2014a). Further, what Piketty and others measure as wealth ‘W’ is a measure of control over resources, not a measure of capital K, in the sense that that is used in the context of a production function.

Differences between K and W

There is a fundamental distinction between capital K, thought of as physical inputs to production, and wealth W, thought of as including land and the capitalized value of other rents which give command over purchasing power. This distinction will be crucial in any theorizing to explain the new stylized facts. ‘K’ can be going down even as ‘W’ increases; and some increases in W may actually lower economic productivity. In particular, new theories explaining the evolution of inequality will have to address directly changes in rents and their capitalized value (Stiglitz 2014). Two examples will illustrate what we have in mind.

  • Consider first the case of all sea-front property on the French Riviera.

As demand for these properties rises, perhaps from rich foreigners seeking a refuge for their funds, the value of sea frontage will be bid up. The current owners will get rents from their ownership of this fixed factor. Their wealth will go up and their ability to command purchasing power in the economy will rise correspondingly. But the actual physical input to production has not increased. All else constant, national output will not rise; there will only be a pure distributional effect.

  • Consider the case where the government gives an implicit guarantee to bail out banks.

This contingent support to income flows from ownership of bank shares will be capitalized into the value of these shares. Of course, there is an equal and opposite contingent liability on all others in the economy, in particular on workers -- the owners of human capital. Again, without any necessary impact on total output, the political economy has created rents for share owners, and the increase in their wealth will be reflected in rising inequality. One can see this without going through a conventional production function analysis. Of course, the rents once created will provide further resources for rentiers to lobby the political system to maintain and further increase rents. This will set in motion a spiral of increasing inequality, which again does not go through the production system at all -- except to the extent that the associated distortions represent a downward shift in the productivity of the economy (at any level of inputs of ‘K’ and labor).

Analyzing the role of land rents in increases in inequality can be done in a variant of standard neoclassical models -- by expanding inputs to include land; but explaining increase in inequality as a result of an increase in other forms of rent will need a theory of rents which takes us beyond the competitive determination of factor rewards.

Differences in inequality: Capital income versus labor income

The translation from factor shares to interpersonal inequality has usually been made through the assumption that capital income is more unequally distributed than labor income. Inequality of capital ownership then translates into inequality of capital income, while inequality of income from labor is assumed to be much smaller. The assumption is made in its starkest form in models where there are owners of capital who save and workers who do not.

These stylized assumptions no longer provide a fully satisfactory explanation of income inequality because: (i) there is more widespread ownership of wealth through life cycle savings in various forms including pensions; and (ii) increasingly unequal returns to increasingly unequally distributed human capital has led to sharply rising inequality of labor income.

Sharply rising inequality of labor income focuses attention on inequality of human capital in its most general sense:

  • Starting with unequal prenatal development of the foetus;
  • Followed by unequal early childhood development and investments by parents;
  • Unequal educational investments by parents and society; and
  • Unequal returns to human capital because of discrimination at one end and use of parental connections in the job market at the other end.

Discrimination continues to play a role, not only in the determination of factor returns given the ownership of assets, including human capital; but also on the distribution of asset ownership.

  • At each step, inequality of parental resources is translated into inequality of children’s outcomes.

An exploration of this type of inequality requires a different type of empirical and theoretical analysis from the conventional macro-level analysis of production functions and factor shares (Heckman and Mosso, 2014, Stiglitz, 2015).

In particular, intergenerational transmission of inequality is more than simple inheritance of physical and financial wealth. Layered upon genetic inequalities are the inequalities of parental resources. Income inequality across parents, due to inequality of income from physical and financial capital on the one hand, and inequality due to inequality of human capital on the other, is translated into inequality of financial and human capital of the next generation. Human capital inequality perpetuates itself through intergenerational transmission just as wealth inequality caused by politically created rents perpetuates itself.

Given such transmission across generations, it can be shown that the long-run, ‘dynastic’ inequality will also be higher (Kanbur and Stiglitz 2015). Although there have been advances in recent years, we still need fully developed theories of how the different mechanisms interact with each other to explain the dramatic rises in interpersonal inequality in advanced economies in the last three decades.1

High inequality: New realities and old debates

The new realities of high inequality have revived old debates on policy interventions and their ethical and economic rationale (Stiglitz 2012). Standard analysis which balances the tradeoff between efficiency and equity would suggest that taxation should now become more progressive to balance the greater inherent inequality against the incentive effects of progressive taxation (Kanbur and Tuomala,1994 ).

One counter argument is that what matters is not inequality of ‘outcome’ but inequality of ‘opportunity’. According to this argument, so long as the prospects are the same for all children, the inequality of income across parents should not matter ethically. What we should aim for is equality of opportunity, not income equality. However, when income inequality across parents translates into inequality of prospects across children, even starting in the womb, then the distinction between opportunity and income begins to fade and the case for progressive taxation is not undermined by the ‘equality of opportunity’ objective (Kanbur and Wagstaff 2015).

Concluding remarks

Thus, the new stylized facts of our era demand new theories of income distribution.

  • First, we need to break away from competitive marginal productivity theories of factor returns and model mechanisms which generate rents with consequences for wealth inequality.

This will entail a greater focus on the ‘rules of the game.’ (Stiglitz et al 2015).

  • Second, we need to focus on the interaction between income from physical and financial capital and income from human capital in determining snapshot inequality, but also in determining the intergenerational transmission of inequality.
  • Third, we need to further develop normative theories of equity which can address mechanisms of inequality transmission from generation to generation.2

References

Bevan, D and J E Stiglitz (1979), "Intergenerational Transfers and Inequality", The Greek Economic Review, 1(1), August, pp. 8-26.

Heckman, J and S Mosso (2014), "The Economics of Human Development and Social Mobility", Annual Reviews of Economics, 6: 689-733.

Kaldor, N (1957), "A Model of Economic Growth", The Economic Journal, 67(268): 591-624.

Kanbur, R (2012), "Does Kuznets Still Matter?" in S. Kochhar (ed.), Policy-Making for Indian Planning: Essays on Contemporary Issues in Honor of Montek S. Ahluwalia, Academic Foundation Press, pp. 115-128, 2012.

Kanbur, R and J E Stiglitz (2015), "Dynastic Inequality, Mobility and Equality of Opportunity", CEPR Discussion Paper No. 10542.

Kanbur, R and M Tuomala (1994), ‘‘Inherent Inequality and the Optimal Graduation of Marginal Tax Rates", (with M. Tuomala), Scandinavian Journal of Economics, Vol. 96, No. 2, pp. 275-282, 1994.

Kuznets, S (1955), "Economic Growth and Income Inequality", The American Economic Review, 45(1): 1-28.

Piketty, T (2014), Capital in the Twenty-First Century, Cambridge Massachusetts: The Belknap Press of Harvard University Press.

Piketty, T, E Saez, and S Stantcheva (2011), “Taxing the 1%: Why the top tax rate could be over 80%”, VoxEU.org, 8 December.

Roemer, J E and A Trannoy (2014), "Equality of Opportunity", in A B Atkinson and F Bourguignon (eds.) Handbook of Income Distribution SET Vols 2A-2B. Elsevier.

Stiglitz, J E, et. al. (2015) "Rewriting the Rules of the American Economy", Roosevelt Institute.

Stiglitz, J E (1969), "Distribution of Income and Wealth Among Individuals", Econometrica, 37(3), July, pp. 382-397. (Presented at the December 1966 meetings of the Econometric Society, San Francisco.)

Stiglitz, J E (2012), The Price of Inequality: How Today’s Divided Society Endangers Our Future, New York: W.W. Norton.

Stiglitz, J E (2014), "New Theoretical Perspectives on the Distribution of Income and Wealth Among Individuals", paper presented to the International Economic Association World Congress, Dead Sea, June and forthcoming in Inequality and Growth: Patterns and Policy, Volume 1: Concepts and Analysis, to be published by Palgrave MacMillan.

Stiglitz, J E (2015), "New Theoretical Perspectives on the Distribution of Income and Wealth Among Individuals: Parts I-IV", NBER Working Papers 21189-21192, May.

Footnotes

1 For early discussions of such transmission processes, see Stiglitz (1969) and Bevan and Stiglitz (1979).

2 Developments in this area are exemplified by Roemer and Trannoy (2014).

Links for 08-18-15

Monday, August 17, 2015

Stiglitz: Towards a General Theory of Deep Downturns

This is the abstract, introduction, and final section of a recent paper by Joe Stiglitz on theoretical models of deep depressions (as he notes, it's "an extension of the Presidential Address to the International Economic Association"):

Towards a General Theory of Deep Downturns, by Joseph E. Stiglitz, NBER Working Paper No. 21444, August 2015: Abstract This paper, an extension of the Presidential Address to the International Economic Association, evaluates alternative strands of macro-economics in terms of the three basic questions posed by deep downturns: What is the source of large perturbations? How can we explain the magnitude of volatility? How do we explain persistence? The paper argues that while real business cycles and New Keynesian theories with nominal rigidities may help explain certain historical episodes, alternative strands of New Keynesian economics focusing on financial market imperfections, credit, and real rigidities provides a more convincing interpretation of deep downturns, such as the Great Depression and the Great Recession, giving a more plausible explanation of the origins of downturns, their depth and duration. Since excessive credit expansions have preceded many deep downturns, particularly important is an understanding of finance, the credit creation process and banking, which in a modern economy are markedly different from the way envisioned in more traditional models.
Introduction The world has been plagued by episodic deep downturns. The crisis that began in 2008 in the United States was the most recent, the deepest and longest in three quarters of a century. It came in spite of alleged “better” knowledge of how our economic system works, and belief among many that we had put economic fluctuations behind us. Our economic leaders touted the achievement of the Great Moderation.[2] As it turned out, belief in those models actually contributed to the crisis. It was the assumption that markets were efficient and self-regulating and that economic actors had the ability and incentives to manage their own risks that had led to the belief that self-regulation was all that was required to ensure that the financial system worked well , an d that there was no need to worry about a bubble . The idea that the economy could, through diversification, effectively eliminate risk contributed to complacency — even after it was evident that there had been a bubble. Indeed, even after the bubble broke, Bernanke could boast that the risks were contained.[3] These beliefs were supported by (pre-crisis) DSGE models — models which may have done well in more normal times, but had little to say about crises. Of course, almost any “decent” model would do reasonably well in normal times. And it mattered little if, in normal times , one model did a slightly better job in predicting next quarter’s growth. What matters is predicting — and preventing — crises, episodes in which there is an enormous loss in well-being. These models did not see the crisis coming, and they had given confidence to our policy makers that, so long as inflation was contained — and monetary authorities boasted that they had done this — the economy would perform well. At best, they can be thought of as (borrowing the term from Guzman (2014) “models of the Great Moderation,” predicting “well” so long as nothing unusual happens. More generally, the DSGE models have done a poor job explaining the actual frequency of crises.[4]
Of course, deep downturns have marked capitalist economies since the beginning. It took enormous hubris to believe that the economic forces which had given rise to crises in the past were either not present, or had been tamed, through sound monetary and fiscal policy.[5] It took even greater hubris given that in many countries conservatives had succeeded in dismantling the regulatory regimes and automatic stabilizers that had helped prevent crises since the Great Depression. It is noteworthy that my teacher, Charles Kindleberger, in his great study of the booms and panics that afflicted market economies over the past several hundred years had noted similar hubris exhibited in earlier crises. (Kindleberger, 1978)
Those who attempted to defend the failed economic models and the policies which were derived from them suggested that no model could (or should) predict well a “once in a hundred year flood.” But it was not just a hundred year flood — crises have become common . It was not just something that had happened to the economy. The crisis was man-made — created by the economic system. Clearly, something is wrong with the models.
Studying crises is important, not just to prevent these calamities and to understand how to respond to them — though I do believe that the same inadequate models that failed to predict the crisis also failed in providing adequate responses. (Although those in the US Administration boast about having prevented another Great Depression, I believe the downturn was certainly far longer, and probably far deeper, than it need to have been.) I also believe understanding the dynamics of crises can provide us insight into the behavior of our economic system in less extreme times.
This lecture consists of three parts. In the first, I will outline the three basic questions posed by deep downturns. In the second, I will sketch the three alternative approaches that have competed with each other over the past three decades, suggesting that one is a far better basis for future research than the other two. The final section will center on one aspect of that third approach that I believe is crucial — credit. I focus on the capitalist economy as a credit economy , and how viewing it in this way changes our understanding of the financial system and monetary policy. ...

He concludes with:

IV. The crisis in economics The 2008 crisis was not only a crisis in the economy, but it was also a crisis for economics — or at least that should have been the case. As we have noted, the standard models didn’t do very well. The criticism is not just that the models did not anticipate or predict the crisis (even shortly before it occurred); they did not contemplate the possibility of a crisis, or at least a crisis of this sort. Because markets were supposed to be efficient, there weren’t supposed to be bubbles. The shocks to the economy were supposed to be exogenous: this one was created by the market itself. Thus, the standard model said the crisis couldn’t or wouldn’t happen ; and the standard model had no insights into what generated it.
Not surprisingly, as we again have noted, the standard models provided inadequate guidance on how to respond. Even after the bubble broke, it was argued that diversification of risk meant that the macroeconomic consequences would be limited. The standard theory also has had little to say about why the downturn has been so prolonged: Years after the onset of the crisis, large parts of the world are operating well below their potential. In some countries and in some dimension, the downturn is as bad or worse than the Great Depression. Moreover, there is a risk of significant hysteresis effects from protracted unemployment, especially of youth.
The Real Business Cycle and New Keynesian Theories got off to a bad start. They originated out of work undertaken in the 1970s attempting to reconcile the two seemingly distant branches of economics, macro-economics, centering on explaining the major market failure of unemployment, and microeconomics, the center piece of which was the Fundamental Theorems of Welfare Economics, demonstrating the efficiency of markets.[66] Real Business Cycle Theory (and its predecessor, New Classical Economics) took one route: using the assumptions of standard micro-economics to construct an analysis of the aggregative behavior of the economy. In doing so, they left Hamlet out of the play: almost by assumption unemployment and other market failures didn’t exist. The timing of their work couldn’t have been worse: for it was just around the same time that economists developed alternative micro-theories, based on asymmetric information, game theory, and behavioral economics, which provided better explanations of a wide range of micro-behavior than did the traditional theory on which the “new macro - economics” was being constructed. At the same time, Sonnenschein (1972) and Mantel (1974) showed that the standard theory provided essentially no structure for macro- economics — essentially any demand or supply function could have been generated by a set of diverse rational consumers. It was the unrealistic assumption of the representative agent that gave theoretical structure to the macro-economic models that were being developed. (As we noted, New Keynesian DSGE models were but a simple variant of these Real Business Cycles, assuming nominal wage and price rigidities — with explanations, we have suggested, that were hardly persuasive.)
There are alternative models to both Real Business Cycles and the New Keynesian DSGE models that provide better insights into the functioning of the macroeconomy, and are more consistent with micro- behavior, with new developments of micro-economics, with what has happened in this and other deep downturns . While these new models differ from the older ones in a multitude of ways, at the center of these models is a wide variety of financial market imperfections and a deep analysis of the process of credit creation. These models provide alternative (and I believe better) insights into what kinds of macroeconomic policies would restore the economy to prosperity and maintain macro-stability.
This lecture has attempted to sketch some elements of these alternative approaches. There is a rich research agenda ahead.

Paul Krugman: Republicans Against Retirement

Why do Republicans want to get rid of Social Security?:

Republicans Against Retirement, by Paul Krugman, Commentary, NY Times: Something strange is happening in the Republican primary — something strange, that is, besides the Trump phenomenon. For some reason, just about all the leading candidates other than The Donald have taken a deeply unpopular position, a known political loser, on a major domestic policy issue. And it’s interesting to ask why.
The issue in question is the future of Social Security... The retirement program is, of course, both extremely popular and a long-term target of conservatives, who want to kill it precisely because its popularity helps legitimize government action in general. ...
What’s puzzling about the renewed Republican assault on Social Security is that it looks like bad politics as well as bad policy. Americans love Social Security, so why aren’t the candidates at least pretending to share that sentiment?
The answer, I’d suggest, is that it’s all about the big money.
Wealthy individuals have long played a disproportionate role in politics, but we’ve never seen anything like what’s happening now: domination of campaign finance, especially on the Republican side, by a tiny group of immensely wealthy donors. Indeed, more than half the funds raised by Republican candidates through June came from just 130 families.
And while most Americans love Social Security, the wealthy don’t. ... By a very wide margin, ordinary Americans want to see Social Security expanded. But by an even wider margin, Americans in the top 1 percent want to see it cut. And guess whose preferences are prevailing among Republican candidates.
You often see political analyses pointing out, rightly, that voting in actual primaries is preceded by an “invisible primary” in which candidates compete for the support of crucial elites. But who are these elites? In the past, it might have been members of the political establishment and other opinion leaders. But what the new attack on Social Security tells us is that the rules have changed. Nowadays, at least on the Republican side, the invisible primary has been reduced to a stark competition for the affections and, of course, the money of a few dozen plutocrats.
What this means, in turn, is that the eventual Republican nominee — assuming that it’s not Mr. Trump —will be committed not just to a renewed attack on Social Security but to a broader plutocratic agenda. Whatever the rhetoric, the GOP is on track to nominate someone who has won over the big money by promising government by the 1 percent, for the 1 percent.

'The Labor Market Effect of Opening the Border to Immigrant Workers'

Andreas Beerli and Giovanni Peri at Vox EU:

The labor market effect of opening the border to immigrant workers, by Andreas Beerli and Giovanni Peri, Vox EU: The case for immigration restrictions is periodically debated in the political arena. The refugee crisis in southern Europe in recent months and the increased number of asylum seekers, who may turn into undocumented economic immigrants, has spurred discussion for stricter border enforcement and controls. In the UK, David Cameron promised few years ago to bring annual net migration down to ‘tens of thousands’ and put a cap on skilled non-European immigrants. With the British economy recovering, the cap has become binding for the first time in June of this year. Firms report problems in finding the right type of workers (Economist 2015a), yet relaxing immigration restrictions has little to no support among parties in the UK (Economist 2015b). In February 2014, Swiss voters narrowly approved a referendum to curb immigration from the EU after resentment to immigration grew, following the opening of labour markets to European workers (New York Times 2014).

The effects of immigration restrictions on the inflow of immigrants and, in turn, on native workers’ employment outcomes are prominently discussed among policymakers. In spite of high sounding statement about the need of ‘pulling up the draw-bridge’ to avoid a flood of immigrants who can take away jobs, there is little direct evidence in the economic literature on how more open immigration policies affect immigration flows and, in turn, native labor market outcomes. Existing studies have analyzed the effects of immigration flows, comparing regions that receive more or fewer immigrants within a country, and interpreting the differences in outcomes as driven by immigration. However, examples in which different policies were adopted in otherwise similar regions – allowing a causal analysis of immigration policies on flows and on native labor markets – are rare.

The literature has leveraged the tendency of immigrants to settle in regions with a network of compatriots (e.g. Card 2001, Peri and Sparber 2009, Dustmann et al. 2013) or it has used ‘push episodes’ from sending countries such as the collapse of the Soviet Union (Borjas & Doran 2015) or the wave of refugees from Cuba (Card 1990) to learn about their labor market effects. These episodes, however, are not under the control of the receiving country and therefore from them we do not learn much about the effectiveness and labor market consequences of different immigration policies.

In a recent paper, we exploit the Swiss integration into the European labor market after 1999 and study the causal effect of removing restrictions on immigrant flows and on native employment and wages (Beerli and Peri 2015).

Access to the Swiss labor market: border vs. non-border regions

The Swiss case was unique in that two different parts of the country experienced different timing in the implementation of the free movement policy. Labor market access for cross-border workers (foreign workers commuting from Italy, France, Germany, and Austria), was gradually eased beginning in 1999 and fully liberalized in 2004.

  • This type of workers could only work in the border region (BR), which encompasses municipalities close to the national border.
  • They were not allowed in the non-border region (NBR).

Labor market access for other immigrants, who intended to work and settle in Switzerland, was also eased between 1999 and 2007 but symmetrically in all regions.

After 2007, the free movement policy was fully executed for cross-border workers and for all other EU immigrants in both regions.

Thus, the two different schedules created a time-window between 1999 and 2004, in which the border region became gradually more open to immigrants than the non-border due to cross-border workers. The difference in openness became most pronounced between 2004 and 2007 when cross-border workers had free access to border regions but no access to non-border regions.

We leverage this differential degree of openness of the border relative to the non-border to analyze the effect of removing immigration barriers on the inflow of new immigrants and on native labor market outcomes. As cross-border workers and other immigrants had similar demographic characteristics and skills, we look at the total share of foreign-born in the labor force and we adopt a flexible difference-in-difference framework. We analyze differential outcomes in the period 1999-2004, during which border region progressively eased the entry of cross-border workers, and in the period 2004-2007, in which cross-border liberalization was fully executed in the border region.1

The effect on immigration

Figure 1 displays the evolution of the labor force share of new immigrants in border and non-border regions (top panel) and the difference between them (bottom panel) during the period 1994-2010. The figure shows that the share of new immigrants moved together prior to 1999 (pre-reform), with a difference around 7 percentage points. Between 1999 and 2010, however, the share of new immigrants increased from 12.6% to 18.2% in the border regions, and from 5.5% to 7.4% in the non-border regions. Hence, new immigrants as share of the workforce increased by 3.7 percentage points more in the border compared to the non-border region.

Figure 1. Share of new immigrants in BR and NBR (top panel) and their difference (bottom panel)

Peri fig1a 14 aug

Peri fig1b 14 aug

Notes: The left panel plots the evolution of the share of new immigrants on the total workforce in the border region (BR, left y-axis) and the same share in the non-border region (NBR, right y-axis). The right panel plots the difference in the share of new immigrants between both regions.

A more rigorous regression exercise yields a similar finding. The difference in share of new immigrants between border and non-border regions was stable prior to 1999 but it increased thereafter by about 4 percentage points up until 2010. Figure 2 shows that the cumulated gap in immigrant share, after controlling for several labor market characteristics, was significantly different from 0 for the first time in 2004 and remained significant after 2007.

Figure 2. Estimated difference in immigrant share, between BR and NBR, coefficients and 5%-confidence intervals (base year = 1998)

Peri fig2 14 aug

Notes: The figure plots coefficients (straight line) and the 5%-confidence interval (dashed lines) of a difference-in-difference estimate with immigrants as share of labor force and including municipality and year fixed effects as controls for local, industry-driven demand shocks.

The effect on labor market outcomes

Having established that relaxing the restrictions on EU immigrants induced a significant growth, although certainly not a flood of immigrants, the next question we tackle is whether and how this influx affected natives’ labor markets. We exploit the same differential policy treatment between border and the non-border regions and find that average wages and hours worked by natives were not affected by it.

  • However, when analyzing the effects separately by education group, we find that natives with a college degree benefited from the liberalization policy in terms of higher wages;
  • Middle-educated workers (with upper secondary education but no college degree) suffered some decline in employment.
  • Low-educated native workers were not affected.

This finding is puzzling at first, as the largest group of newly arriving immigrants was college educated and a standard model with skill complementarity would suggest that highly educated natives compete most directly with immigrants and should endure more negative effects.

To explore this puzzle, we investigate whether immigration had an effect on the job specialization of natives. Previous research (Peri and Sparber, 2009, 2011, Foged and Peri 2013) suggests that natives’ job specialization is likely to respond to the inflow of immigrants. As more immigrants take jobs, natives move to occupations where competition from immigrants is lower and complementarity effects are stronger. We find that highly educated natives were able to climb into higher management positions in response to the inflow of similarly educated immigrants, explaining some of their wage gains. On the other hand, middle-educated natives did not upgrade their positions but, instead, were reallocated to less-challenging job tasks and were replaced by immigrants in the ‘intermediate task’ range. So while in general natives responded to immigrant inflow, highly educated experienced an ‘upgrade’ of their jobs while middle-educated did not.

Discussion and conclusions

Our findings add to the existing evidence on the effects of immigration on native workers.

  • First, by directly tackling immigration policies, we see that fully opening the border to neighbor countries increased immigrants only by 4 percentage points of the labor force over eight years.
  • Second, we find that such an increased inflow did not have significant aggregate effects. Some groups of workers, however, experienced wage benefits while other experienced employment losses.

The recent research in this area has recognized the importance of looking at policy changes within countries to learn about their causal impact on foreign workers and labor markets. Dustmann et al. (2015), using an episode that allowed cross-border Czech workers into Germany, showed that in the short-run a substantial influx of unskilled workers reduced wages of unskilled young natives while unskilled older workers suffer employment declines. They explain this finding with the fact that old workers might either have larger labor supply elasticity (due to attractive outside options) or face larger wage rigidity than young workers. Our analysis shows that employment responses might also depend on the degree of occupation and task adjustment by native workers with different education levels. Such adjustment affects wage and employment effects.

References

Beerli, A and G Peri (2015), “The Labor Market Effect of Opening the Border: New Evidence from Switzerland”, NBER Working Paper 21319.

Borjas, G J  and K Doran (2015), “Cognitive Mobility: Native Responses to Supply Shocks in the Space of Ideas”, Journal of Labor Economics, 33 (1), 109—145.

Card, D (1990), “The Impact of the Mariel Boatlift on the Miami Labor Market”, Industrial and Labor Relations Review, 43 (2), 245—257.

Card, D (2001), “Immigrant Inflows, Native Outflows, and the Local Labor Market Impacts of Higher Immigration”, Journal of Labor Economics, 19 (1), 22—64.

Dustmann, C, U Schönberg and J Stuhler (2015), “Labor Supply Shocks and the Dynamics of Local Wages and Employment”, Manuscript, University College London, March 2015.

The Economist (2015a), “How to kneecap the recovery”, 18 June.

The Economist (2015b), “Raise the Drawbridge”, 9 April.

Glitz, A (2012), “The Labor Market Impact of Immigration: A Quasi-Experiment Exploiting Immigrant Location Rules in Germany”, Journal of Labor Economics, 30 (1), 175—213.

The New York Times (2014), “Swiss Voters Narrowly Approve Curbs on Immigration”, 9 February.

Peri, G and C Sparber (2009), “Task Specialization, Immigration, and Wages”, American Economic Journal: Applied Economics, 1 (3), 135—169.

Footnote

1 An important concern is that both regions could have experienced different pre- or post-1999 economic trends after the burst of the dot-com bubble. In the paper we establish that both regions are similar in terms of their industrial structure, and we control for local, industry-specific demand shocks and show similar pre-1999 economic trends.

Links for 08-17-15

Sunday, August 16, 2015

'The U.S. Foreclosure Crisis Was Not Just a Subprime Event'

From the NBER Digest:

The U.S. Foreclosure Crisis Was Not Just a Subprime Event, by Les Picker, NBER: Many studies of the housing market collapse of the last decade, and the associated sharp rise in defaults and foreclosures, focus on the role of the subprime mortgage sector. Yet subprime loans comprise a relatively small share of the U.S. housing market, usually about 15 percent and never more than 21 percent. Many studies also focus on the period leading up to 2008, even though most foreclosures occurred subsequently. In "A New Look at the U.S. Foreclosure Crisis: Panel Data Evidence of Prime and Subprime Borrowers from 1997 to 2012" (NBER Working Paper No. 21261), Fernando Ferreira and Joseph Gyourko provide new facts about the foreclosure crisis and investigate various explanations of why homeowners lost their homes during the housing bust. They employ microdata that track outcomes well past the beginning of the crisis and cover all types of house purchase financing—prime and subprime mortgages, Federal Housing Administration (FHA)/Veterans Administration (VA)-insured loans, loans from small or infrequent lenders, and all-cash buyers. Their data contain information on over 33 million unique ownership sequences in just over 19 million distinct owner-occupied housing units from 1997-2012.

 

The researchers find that the crisis was not solely, or even primarily, a subprime sector event. It began that way, but quickly expanded into a much broader phenomenon dominated by prime borrowers' loss of homes. There were only seven quarters, all concentrated at the beginning of the housing market bust, when more homes were lost by subprime than by prime borrowers. In this period 39,094 more subprime than prime borrowers lost their homes. This small difference was reversed by the beginning of 2009. Between 2009 and 2012, 656,003 more prime than subprime borrowers lost their homes. Twice as many prime borrowers as subprime borrowers lost their homes over the full sample period.
The authors suggest that one reason for this pattern is that the number of prime borrowers dwarfs that of subprime borrowers and the other borrower/owner categories they consider. The prime borrower share averages around 60 percent and did not decline during the housing boom. Although the subprime borrower share nearly doubled during the boom, it peaked at just over 20 percent of the market. Subprime's increasing share came at the expense of the FHA/VA-insured sector, not the prime sector.
The authors' key empirical finding is that negative equity conditions can explain virtually all of the difference in foreclosure and short sale outcomes of prime borrowers compared to all cash owners. Negative equity also accounts for approximately two-thirds of the variation in subprime borrower distress. Both are true on average, over time, and across metropolitan areas.
None of the other 'usual suspects' raised by previous research or public commentators—housing quality, race and gender demographics, buyer income, and speculator status—were found to have had a major impact. Certain loan-related attributes such as initial loan-to-value (LTV), whether a refinancing occurred or a second mortgage was taken on, and loan cohort origination quarter did have some independent influence, but much weaker than that of current LTV.
The authors' findings imply that large numbers of prime borrowers who did not start out with extremely high LTVs still lost their homes to foreclosure. They conclude that the economic cycle was more important than initial buyer, housing and mortgage conditions in explaining the foreclosure crisis. These findings suggest that effective regulation is not just a matter of restricting certain exotic subprime contracts associated with extremely high default rates.

Links for 08-16-15

Saturday, August 15, 2015

'Marxists and Conservatives Have More in Common than Either Side Would Like to Admit'

Chris Dillow on common ground between Marxists and Conservatives:

Fairness, decentralization & capitalism: Marxists and Conservatives have more in common than either side would like to admit. This thought occurred to me whilst reading a superb piece by Andrew Lilico.

He describes the Brams-Taylor procedure for cutting a cake in a fair way - in the sense of ensuring envy-freeness - and says that this shows that a central agency such as the state is unnecessary to achieve fairness:...

The appropriate mechanism here is one in which there is a balance of power, such that no individual can say: "take it or leave it."

This is where Marxism enters. Marxists claim that, under capitalism, the appropriate mechanism is absent. Marx stressed that ... the labour market is an arena in which power is unbalanced...

Nor do Marxists expect the state to correct this, because the state is captured by capitalists - it is "a committee for managing the common affairs of the whole bourgeoisie."...

Instead, Marx thought that fairness can only be achieved by abolishing both capitalism and the state - something which is only feasible at a high level of economic development - and replacing it with some forms of decentralized decision-making. ...

In this sense, Marxists agree with Andrew: people can find fair allocations themselves without a central agency. ...

Links for 08-15-15

Friday, August 14, 2015

Paul Krugman: Bungling Beijing’s Stock Markets

The Chinese leadership appears to be "imagining that it can order markets around":

Bungling Beijing’s Stock Markets, by Paul Krugman, Commentary, NY Times: ... Is it possible that after all these years Beijing still doesn’t get how this “markets” thing works?
The background: China’s economy is ... slowing as China runs out of surplus labor. ... The ... problem is how to sustain spending during the transition. And that’s where things have gotten weird.
At first, the Chinese government supported the economy in part through infrastructure spending, which is the standard remedy for economic weakness. But it also did so by funneling cheap credit to state-owned enterprises. The result was a run-up in these enterprises’ debt, which by last year was high enough to raise worries about financial stability.
Next, China adopted an official policy of boosting stock prices... But the consequence was an obvious bubble, which began deflating earlier this year.
The response of the Chinese authorities was remarkable: They pulled out all the stops to support the market — suspending trading in many stocks, banning short-selling, pushing large investors to buy, and instructing graduating economics students to chant “Revive A-shares, benefit the people.”
All of this has stabilized the market for the time being. But it is at the cost of tying China’s credibility to its ability to keep stock prices from ever falling. And the Chinese economy still needs more support.
So this week China decided to let the value of its currency decline... But Chinese authorities seem to have imagined that they could control the renminbi’s descent, taking it a couple of percent at a time.
They appear to have been taken completely by surprise by the market’s predictable reaction; namely, the initial devaluation of the renminbi was ... a sign of much bigger declines to come. Investors began fleeing China, and policy makers abruptly pivoted from promoting currency devaluation to an all-out effort to support the renminbi’s value.
The common theme in these wild policy swings is that China’s leadership keeps imagining that it can order markets around, telling them what prices to reach. ... Do the country’s leaders really not understand why that won’t work?
If they really don’t, that’s a big concern. China is an economic superpower — not quite as super as the United States or the European Union, yet, but big enough to matter a lot. And it’s facing tough times. So if its leadership is really as clueless as it has been looking lately, that bodes ill, not just for China, but for the world as a whole.

Links for 08-14-15