Category Archive for: Economics [Return to Main]

Saturday, October 01, 2016

Links for 10-01-16

Friday, September 30, 2016

Links for 09-30-16

Thursday, September 29, 2016

The Decline of the Middle Class is Causing Economic Damage

Larry Summers:

The decline of the middle class is causing even more economic damage than we realized: I have just come across an International Monetary Fund working paper on income polarization in the United States that makes an important contribution to the secular stagnation debate. The authors ... find that polarization has reduced consumer spending by more than 3 percent or about $400 billion annually. If these findings stand up to scrutiny, they deserve to have a policy impact.
This level of reduction in spending is huge. For example, it exceeds by a significant margin the impact in any year of the Obama stimulus program. Alone it would be enough to account for a significant reduction in neutral real interest rates. If consumers were spending 3 percent more, there would be scope to maintain full employment at interest rates much closer to normal. And there would be much less of a problem of monetary policy’s inability to respond to the next recession.
What is the policy implication? Principally, it is the macroeconomic importance of supporting middle class incomes. This can be done in a range of ways from promoting workers right to collectively bargain to raising spending on infrastructure to making the tax system more progressive. ...

Trumponomics

Greg Mankiw:

Trumponomics: Regular readers of this blog know that I often disagree with Paul Krugman. But I come here today agree with a recent post of his on the analysis put out by two Trump economic advisers. The Trump advisers' analysis is truly disappointing (though perhaps not surprisingly so, given what the candidate has said over the course of the campaign).
Their analysis of trade deficits, starting on page 18, boils down to the following: We know that GDP=C+I+G+NX. NX is negative (the trade deficit). Therefore, if we somehow renegotiate trade deals and make NX rise to zero, GDP goes up! They calculate this will bring in $1.74 trillion in tax revenue over a decade.
But of course you can't model an economy just using the national income accounts identity. Even a freshman at the end of ec 10 knows that trade deficits go hand in hand with capital inflows. So an end to the trade deficit means an end to the capital inflow, which would affect interest rates, which in turn influence consumption and investment. ...

A General Theory Of Austerity?

Paul Krugman:

A General Theory Of Austerity?: Simon Wren-Lewis has an excellent new paper trying to explain the widespread resort to austerity in the face of a liquidity trap, which is exactly the moment when such policies do the most harm. His bottom line is that austerity was the result of right-wing opportunism, exploiting instinctive popular concern about rising government debt in order to reduce the size of the state.
I think this is right; but I would emphasize more than he does the extent to which both the general public and Very Serious People always assume that reducing deficits is the responsible thing to do. ...
Meanwhile, as someone who was in the trenches during the US austerity fights, I was struck by how readily mainstream figures who weren’t especially right-wing in general got sucked into the notion that debt reduction was THE central issue. Ezra Klein documented this phenomenon with respect to Bowles-Simpson:
For reasons I’ve never quite understood, the rules of reportorial neutrality don’t apply when it comes to the deficit. On this one issue, reporters are permitted to openly cheer a particular set of highly controversial policy solutions. At Tuesday’s Playbook breakfast, for instance, Mike Allen, as a straightforward and fair a reporter as you’ll find, asked Simpson and Bowles whether they believed Obama would do “the right thing” on entitlements — with “the right thing” clearly meaning “cut entitlements.” ...

Links for 09-29-16

Wednesday, September 28, 2016

VAT of Deplorables

Paul Krugman:

VAT of Deplorables: I’ve been writing about Donald Trump’s claim that Mexico’s value-added tax is an unfair trade policy, which is just really bad economics. ...
But it turns out that Trump wasn’t saying ignorant things off the top of his head: he was saying ignorant things fed to him by his incompetent economic advisers. Here’s the campaign white paper on economics. The VAT discussion is on pages 12-13 — and it’s utterly uninformed.
And it’s not the worst thing: there’s lots of terrible stuff in the white paper, at every level.
Should we be reassured that Trump wasn’t actually winging it here, just taking really bad advice? Not at all. This says that if he somehow becomes president, and decides to take the job seriously, it won’t help — because his judgment in advisers, his notion of who constitutes an expert, is as bad as his judgment on the fly.

Scoring the Trump Trade Plan: Magical Thinking

Marcus Noland at PIIE:

Scoring the Trump Trade Plan: Magical Thinking: Back in the 1970s, Gabriel Garcia Marquez, Isabelle Allende, and other Latin American writers developed a literary style featuring wild juxtapositions and metaphysical leaps that came to be known as magical realism. “Scoring the Trump Economic Plan: Trade, Regulatory, and Energy Policy Impacts (link is external),” by Peter Navarro and Wilbur Ross owes much to the genre.

It is a political document. The challenge for the authors is that ... Donald Trump will cost the US government $2.6 trillion in revenue over 10 years. Mr. Trump wants his tax proposal to be “revenue neutral” so his advisors need to fill that hole.

By their own reckoning they come close, finding $2.374 trillion in additional revenue. They do this by imputing positive growth effects to various trade, regulatory, and energy reforms and then calculating the tax raised on these increments to GDP. The imputed trade policy component of additional revenue is $1.74 trillion or almost three-quarters of the projected total. So trade policy is central to the Trump story.

Unfortunately, the thinking that gets them the $1.74 trillion figure is truly magical. The authors observe that between 1947 and 2001 (the good old days, when America was great), the economy grew at 3.5 percent annually. Since then it has grown at an average of 1.9 percent. They allude to the idea that demographics ... might have something to do with it, only to dismiss this explanation. They entirely ignore the ongoing debate about the sources of productivity growth and the possibility that the rate of technological change is slowing. Instead, they focus on trade. Or more specifically, “disastrous” trade agreements.

And how do they get that $1.74 trillion in revenue? They observe that the United States has a $500 billion deficit in merchandise goods and services…and then they make it disappear! (Luis Borges would be proud.) But don’t believe me, here it is in their own words (link is external)

...[long excerpt]...

Maybe it reads better in Spanish.

Economists generally believe that the magnitude of a nation’s trade deficit fundamentally reflects the difference between saving and investment—if you are consuming more than you produce, you run a deficit, if you produce more than you consume you run a surplus. Trade policy can affect the sectoral and geographic composition of the deficit, but in the long run, the trade balance is determined by the saving-investment balance. If you want to lower the nation’s trade deficit, increasing the saving rate, not launching a trade war would be the right place to start. But there is not a word of this in “Scoring the Trump Economic Plan: Trade, Regulatory, and Energy Policy Impacts.” It’s all perfidious foreigners and incompetent trade negotiators instead. Maybe that makes for a better plot. But it does not constitute a persuasive defense of a questionable tax plan or a solution to the trade deficit. Quite the opposite—it’s another instance of the type of magical thinking best reserved for fictional realities.

U.S. Real Wage Growth: Slowing Down With Age

Robert Rich, Joseph Tracy, and Ellen Fu at the NY Fed's Liberty Street Economics:

U.S. Real Wage Growth: Slowing Down With Age: In Monday’s post, we described the estimation of real wage growth rates for different cohorts of U.S. workers. We showed that the life-cycle pattern of real wage growth is characterized by high growth early in a worker’s career, little to no growth in mid-career, and negative growth as workers near retirement. We also documented that a growing fraction of the U.S. adult population is transitioning into the flat to negative real wage growth phases of their careers. Here, we turn our attention to estimating the effect of this demographic shift on the economy-wide average real wage growth rate. Our analysis shows that this economy-wide average real wage growth rate has declined by a third since the mid-1980s.
As discussed in our recent post, real wages, holding constant any cyclical effects, show positive growth that is concentrated early in a worker’s career. By age 40, real wage growth has typically declined to around zero. The following chart, reproduced from Monday’s post, depicts this pattern for the five cohorts of white males born in the 1950s by different education levels.

LSE_U.S. Real Wage Growth: Slowing Down With Age

This life-cycle pattern of real wage growth combined with the aging of the U.S. adult population suggests that average real wage growth in the economy would be slowing. How fast and pronounced is this slowing due to changing demographics? To answer this question, we need to be careful to “hold constant” the state of the labor market over time by removing the effects of cyclical factors. Why do this? There are two channels through which the state of the labor market can affect average real wage growth for the economy. The first is that tighter labor markets, all else the same, should increase real wage growth for workers relative to what would be expected from a neutral or slack labor market. The second is that the degree of tightness or slackness in the labor market affects the likelihood that different types of workers are employed. For example, workers with less education and at an earlier career stage are more likely to experience unemployment in a slack labor market. Therefore, we need to control for both of these channels to isolate the economy-wide impact of demographics on real wage growth. We derive our assessment of the effect of population aging on real wage growth under the condition of a neutral labor market. It turns out that this is an especially convenient benchmark now because most current assessments suggest that the U.S. labor market is very close to neutral.
In Monday’s post, we explained how our methodology for estimating the 140 cohort-specific real wage profiles controls for cyclical factors relating to tight or slack labor markets. Consequently, the real wage growth rates for the five cohorts shown above should be interpreted as what workers in those cohorts would expect to experience on average at each age in a neutral labor market.
To derive the “cyclically neutral” aggregate average real wage growth, we also need the likelihood that individuals would be working at each age within a neutral labor market. In an earlier post assessing labor market slack, we discussed how to estimate these employment rate profiles so that they reflect a neutral labor market. The next chart shows the resulting employment rate profiles for our earlier five cohorts.

LSE_U.S. Real Wage Growth: Slowing Down With Age

Employment rates increase with the level of an individual’s education and tend to peak early in the career. As an individual approaches retirement, the employment rate declines at an increasing rate.
We now have the necessary pieces to construct the cyclically neutral aggregate average real wage growth series, with our estimate based on the following procedure. For each year and month, we use our sample of individuals from the Current Population Survey (CPS) described in Monday’s post. For each individual, we use his/her cohort and age to identify an expected employment rate and an expected real wage growth rate. Since the CPS is a random sample, each worker is assigned a sample weight reflecting how many people in the population that individual represents. We combine these three elements by multiplying the individual’s employment rate, real wage growth rate, and sample weight.
For illustrative purposes, consider an individual from the CPS who according to the sample weight represents 100,000 people in the U.S. population. Regardless of this individual’s actual employment status at the time of the survey, we assign a predicted employment rate to the individual based on his/her cohort and age. If we assume this employment rate is 0.6, then this person would represent 60,000 employed individuals in a neutral labor market. Next, we assign the predicted real wage growth rate based on this person’s cohort and age to each of these 60,000 individuals. Averaging across all individuals in the CPS survey for that month gives us the expected economy-wide real wage growth rate associated with a neutral labor market at that point in time. We then repeat this exercise for each year/month in our estimation period.
The following chart provides the answer to the question of how changing demographics affect real wage growth over time. The analysis suggests that this cyclically neutral aggregate real wage growth rate peaked in the mid-1980s at around 1.8 percent. Over the subsequent thirty years, the changing demographics and aging of the U.S. adult population has reduced this real wage growth rate to around 1.2 percent—a 33 percent decline.

LSE_U.S. Real Wage Growth: Slowing Down With Age

The analysis also suggests that the pace of the decline has not been uniform over the three decades with the average leveling out in the 2000s. Readers should keep in mind that this measure is an average of individual real wage growth rates, which is not the same as the growth rate of an index tracking an average real wage. Thus, the aggregate average real wage growth series we derive is not directly comparable to growth rates in real compensation per hour, average hourly earnings, or the employment cost index.
So what does all of this mean? We have shown that U.S. real wage growth has been slowing down over the past thirty-five years with the aging of our workforce. Abstracting from cyclical factors impacting the labor market, this slowing is likely to continue in the years ahead as more individuals near retirement and experience negative real wage growth. Again, it is important to keep in mind that the degree of this slowing is specific to our measure of average real wage growth. Moreover, real wage growth should reflect labor productivity growth over long periods of time. An important component of labor productivity growth reflects job matching and on-the-job learning which is front-loaded in a worker’s career. Consequently, the aging of the U.S. population will continue to act as a headwind to labor productivity and wage growth.
Disclaimer
The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

Links for 09-28-16

Tuesday, September 27, 2016

Trump On Trade

Paul Krugman:

Trump On Trade: For the most part,... the media consensus seems to be that Clinton won. This is a big deal: you know, just know, that they were primed to declare Trump the winner... But he was so bad and she so good that they couldn’t. ...

Trump on trade was ignorance all the way.

There were specifics: China is “devaluing” (not so — it was holding down the yuan five years ago, but these days it’s intervening to keep the yuan up, not down.) There was this, on Mexico:

Let me give you the example of Mexico. They have a VAT tax. We’re on a different system. When we sell into Mexico, there’s a tax. When they sell in — automatic, 16 percent, approximately. When they sell into us, there’s no tax. It’s a defective agreement. It’s been defective for a long time, many years, but the politicians haven’t done anything about it.

Gah. A VAT is basically a sales tax. It is levied on both domestic and imported goods, so that it doesn’t protect against imports — which is why it’s allowed under international trade rules, and not considered a protectionist trade policy. I get that Trump is not an economist — hoo boy, is he not an economist — but this is one of his signature issues, so you might have expected him to learn a few facts.

More broadly, Trump’s whole view on trade is that other people are taking advantage of us — that it’s all about dominance, and that we’re weak. And even if you think we’ve pushed globalization too far, even if you are worried about the effects of trade on income distribution, that’s just a foolish way to think about the problem.

So don’t score Trump as somehow winning on trade. Yes, he blustered more confidently on that subject than on anything else. But he was talking absolute garbage even there.

Why Study Economics?

Stanley Fischer:

Why Study Economics?: I am very pleased to visit today with the students and faculty of the Howard University Economics Department. First, a fact that you know but others may not: The Howard University Economics Department is the only producer of economics Ph.D.'s among the nation's historically black colleges and universities, and it has been teaching economics to undergraduates for nearly a century.1
Speaking as one economist to a group among whom I hope will be many future economists, let me start by saying that pursuing a degree in economics can bring many rewards. First, an economics degree provides many possible career paths. The discipline's logical, structured approach to problem solving is valued in many settings, including academia, banking, business, consulting, government, and law. Economics majors typically receive salaries that represent a good return on their educational investment. Second, in addition to career prospects and financial rewards, economics offers a means of engaging in many of society's most pressing issues. The study of economics provides a rigorous, analytic perspective on human behavior. It commands respect and has the ability to influence policies that address important issues. A degree in economics will help you understand and participate in these policy debates, putting you in a good position to change the world for the better.
Next, I would like to discuss two current questions that economists are actively debating: First, why is participation in our nation's labor force declining? And, second, what can be done to improve economic mobility (the ability to climb the economic ladder) for children from all groups and from all areas of the country? By doing so, I hope to illustrate the relevance of economics to important, real-life issues.
The proportion of adults participating in the labor force--that is, either holding jobs or actively searching for employment--has declined substantially over the past decade. The decline has reflected, in part, the severe economic recession. Millions of people lost their jobs, and many of them experienced great difficulty finding new employment. Some of these people became discouraged and stopped looking for work. In other words, they dropped out of the labor force. However, much of the decline in labor force participation reflects factors that precede the recession.2 Most significantly, our population is aging, and older people participate in the labor market at lower rates than younger adults. In addition, the labor force participation of prime-age males--that is, individuals aged 25 through 54--has been declining since the mid-1960s, particularly among those with only a high school degree or less education, and has continued to decline in the years since the last recession.
Economists are examining a number of reasons why prime-age males are falling out of the labor force. Here there are differences among economists. Some economists have emphasized the role of public assistance programs, such as disability insurance. Some evidence suggests that public assistance income has likely played a role. Other economists have put more emphasis on the effects of the reduction over time in the demand for lower-skilled labor.3 Indeed, the wages of high school graduates have fallen sharply in comparison with the wages of college graduates over the past 40 years. Many economists believe that the decline in demand for lower-skilled workers reflects technological changes.4 For instance, the introduction of information technology such as desktop computers may have boosted the wages of highly skilled workers by more than the wages of workers with fewer skills. The slump in demand for lower-skilled labor likely also reflects the effects of globalization, including competition from goods produced and imported from abroad.5
My second current question concerns economic mobility: How likely is a child from a low-income family to move up to a higher income level as an adult? Over the past few years, economists have made important findings using newly available data. First, economic mobility varies substantially across the United States. For example, the odds of a child from the bottom quintile of the income distribution reaching the top quintile of income as an adult are 11 percent here in the Washington, D.C., area but only 4 percent in the Charlotte, North Carolina, region. Second, mobility is significantly lower in areas with greater residential segregation in terms of both race and income. Mobility is also lower in areas with greater income inequality, less family stability, and lower-quality schools.6 However, we need further study and analysis to understand whether these factors cause lower mobility or are merely correlated with it. Thus, despite the gains in our knowledge in recent years, significant gaps remain in our understanding of what factors help and hinder economic mobility.
I will conclude by discussing diversity in the economics profession. Our profession currently is not very diverse, but it needs to be. Only about one-fourth of tenured and tenure-track faculty members in U.S. academic economics departments are women, and only around 5 percent are African American or Hispanic. Yet research conducted by economists as well as other social scientists suggests that a diversity of perspectives and ideas lead to better decisions and increased productivity.7 In my own experience, economic policy decisions are better when informed by a wide range of views and experiences. You all here today are crucial to the future of our profession.
Indeed, I hope that by obtaining your degrees and working on economic problems, you will help change the field of economics itself. As in many other fields, economics undergoes continual redesign by its practitioners. We need--and by that I mean society as a whole needs--a more diverse set of practitioners in economics, practitioners who may perceive different questions to be important and different answers to be more persuasive. And so, by joining the profession you can acquire the power to change not only the field, but also the broad set of societal institutions that are influenced by the work of economists.
Economists tend to respond to the results of research. And the research shows the importance of diversity in decisionmaking. As a result, many organizations are working very seriously to become more diverse. At the Federal Reserve Board, these efforts include developing connections with the Economics Department here at Howard. Our economists have recently served as visiting faculty at Howard or have given guest lectures here. During the past spring semester, Board economists served as mentors to Howard master's degree and Ph.D. students. This fall, we are offering a class on statistical programming methods through the university. On October 25th, we will host an open house with the undergraduate economics association here at Howard for students who are interested in learning more about the Federal Reserve. I encourage you to attend. I would also like to make you aware that the Board offers internships to qualified students, including Howard students studying economics. Moreover, the Federal Reserve Board's Office of Diversity and Inclusion is coordinating an effort to increase the diversity of our staff.8 Everyone at the Board with responsibility for recruiting, hiring, management, and promotion is involved. But I want to emphasize that these are steps on what will be a long road.
Finally, Board economists are also working to increase our understanding of the diverse economic experiences of different groups in the economy. For example, staff economists have recently been examining the disparities in wealth across families using our Survey of Consumer Finances. Wealth is an important measure of household well-being; it can be used to start a new business, cover expenses when household income unexpectedly falls, and provide an inheritance to children--all factors that influence opportunities for economic advancement. One study finds that factors such as educational attainment and inheritances almost entirely explain the gap between the wealth of white families and that of Hispanic families. Although these factors also explain most of the gap in wealth between white families and black families, a substantial portion of this gap cannot be explained by such factors.9 Additional research is required to fully explain the difference in wealth across white and African American households.
Thank you for inviting me to speak to you. It would be great to see some of you who are here today going on to influence the direction of the country on any number of issues. To put it in a nutshell, I firmly believe that a degree in economics will equip you for a personally productive and rewarding career, will position you to help make progress on some of society's toughest issues, and will change the field of economics itself.
Thank you for listening--and may you all both enjoy and succeed in your future careers, especially in economics.
1. I am grateful to Andrew Cohen and Byron Lutz of the Federal Reserve Board staff for their assistance. Views expressed are mine and are not necessarily those of the Federal Reserve Board or the Federal Open Market Committee.
2. See Stephanie Aaronson, Tomaz Cajner, Bruce Fallick, Felix Galbis-Reig, Christopher Smith, and William Wascher (2014), "Labor Force Participation: Recent Developments and Future Prospects (PDF) ," Brookings Papers on Economic Activity (Fall), pp. 197-255.
3. See John Bound, Stephan Lindner, and Timothy Waidmann (2014), "Reconciling Findings on the Employment Effect of Disability Insurance ," IZA Journal of Labor Policy, vol. 3 (11), pp. 1-23. For an opposing view that concludes that disability insurance has significantly suppressed the labor force participation of the less skilled, see David H. Autor and Mark G. Duggan (2003), "The Rise in the Disability Rolls and the Decline in Unemployment," Quarterly Journal of Economics, vol. 118 (February), pp. 157-205.
4. See Daron Acemoglu (2002), "Technical Change, Inequality, and the Labor Market," Journal of Economic Literature, vol. 40 (March), pp. 7-72.
5. See David H. Autor, David Dorn, and Gordon H. Hanson (2013), "The China Syndrome: Local Labor Market Effects of Import Competition in the United States," American Economic Review, vol. 103 (October), pp. 2121-68.
6. See Raj Chetty, Nathaniel Hendren, Patrick Kline, and Emmanuel Saez (2014), "Where Is the Land of Opportunity? The Geography of Intergenerational Mobility in the United States ," Quarterly Journal of Economics, vol. 129 (November), pp. 1553-1623.
7. See, for example, Amanda Bayer and Cecilia Elena Rouse (forthcoming), "Diversity in the Economics Profession: A New Attack on an Old Problem," Journal of Economic Perspectives.
8. See Board of Governors of the Federal Reserve System (2015), Report to the Congress on the Office of Minority and Women Inclusion (PDF) (Washington: Board of Governors, March).
9. See Jeffrey P. Thompson and Gustavo A. Suarez (2015), "Exploring the Racial Wealth Gap Using the Survey of Consumer Finances (PDF)," Finance and Economics Discussion Series 2015-076 (Washington: Board of Governors of the Federal Reserve System, September).

Links for 09-27-16

Monday, September 26, 2016

Trump Picks Top Climate Skeptic to Lead EPA Transition

Robin Bravender at Scientific American (originally at ClimateWire):

Trump Picks Top Climate Skeptic to Lead EPA Transition: Donald Trump has selected one of the best-known climate skeptics to lead his U.S. EPA transition team... Myron Ebell, director of the Center for Energy and Environment at the conservative Competitive Enterprise Institute, is spearheading Trump’s transition plans for EPA, the sources said. ... Ebell’s role is likely to infuriate environmentalists and Democrats but buoy critics of Obama’s climate rules.
Ebell ... is known for his prolific writings that question what he calls climate change “alarmism.” ...
Ebell has called the Obama administration’s Clean Power Plan for greenhouse gases illegal and said that Obama joining the Paris climate treaty “is clearly an unconstitutional usurpation of the Senate’s authority.”
He told Vanity Fair in 2007, “There has been a little bit of warming ... but it’s been very modest and well within the range for natural variability, and whether it’s caused by human beings or not, it’s nothing to worry about.”
Ebell’s views appear to square with Trump’s when it comes to EPA’s agenda. Trump has called global warming “bullshit” and he has said he would “cancel” the Paris global warming accord and roll back President Obama’s executive actions on climate change...

Paul Krugman: Progressive Family Values

"An attempt to focus on the problems of the real America":

Progressive Family Values, by Paul Krugman, NY Times: Here’s what happens every election cycle: pundits demand that politicians offer the country new ideas. Then, if and when a candidate actually does propose innovative policies, the news media pays little attention, chasing scandals or, all too often, fake scandals instead. Remember the extensive coverage last month, when Hillary Clinton laid out an ambitious mental health agenda? Neither do I. ...
Still, there really are some interesting new ideas coming from one of the campaigns, and they arguably tell us a lot about how Mrs. Clinton would govern.
Wait... Aren’t Republicans also offering new ideas? Well, I guess proposing to round up and deport 11 million people counts as a new idea. And Republicans ... seem to have moved past ... proposing tax cuts that deliver most of their benefits to the wealthy. Now they are, instead, proposing tax cuts that deliver all of their benefits to the 1 percent — O.K., actually just 99.6 percent, but who’s counting?
Back to Mrs. Clinton: Much of her policy agenda could be characterized as a third Obama term, building on the center-left policies of the past eight years. ... For example..., her proposed enhancements to the Affordable Care Act would extend health coverage to around 10 million more people, whereas Donald Trump’s proposed repeal ... would cause around 20 million people to lose coverage.
In addition..., Mrs. Clinton is pushing a distinctive agenda centered around support for working parents. ... One piece ... involves 12 weeks of paid family leave to care for new children, help sick relatives, or recover from illness or injury. ...
Another, even more striking piece involves helping families with young children in several ways, especially ... to hold down the cost of child care (the campaign sets a target of no more than 10 percent of income.) ...
But why should helping working parents be such a priority? It looks to me like an attempt to focus on the problems of the real America — not the white, rural “real America” of right-wing fantasies... And that America is one in which ... stay-at-home mothers are a distinct minority, and in which the problem of how to take care of children while making ends meet is central to many people’s lives. ...
So anyone who complains that there aren’t big new ideas in this campaign simply isn’t paying attention. One candidate, at least, has ideas that would make a big, positive difference to millions of American families.

Fed Watch: December Looking Good. But...

Tim Duy:

December Looking Good. But..., by Tim Duy: FOMC doves squeezed out another victory at last week’s meeting. But can they do it again in December?
As was widely expected, the Fed held rates steady at the September FOMC meeting. That said, the meeting was clearly divisive, with three dissents, all from regional bank presidents. And the accompanying statement leaned in a hawkish direction – the committee noted that near-term risks were “balanced” and that the case for a rate hike had “strengthened.” Moreover, only three of the participants did not expect a rate hike before year end.
And if that was not enough, during her press conference, Federal Reserve Chair Janet Yellen suggested the bar to a December rate hike was low:
…most participants do expect that one increase in the federal funds rate will be appropriate this year and I would expect to see that if we continue on the current course of labor market improvement and there are no major new risks that develop and we simply stay on the current course.
Sounds like December is a go. But markets are not entirely convinced, with participants pricing in a roughly 60% chance of a rate hike. Perhaps this pricing reflects post-election economic risk. Or perhaps it reflects the possibility that the doves can stare down the hawks one more time before the composition of the Board changes next year.
Can they? That question requires understanding what happened to squash the parade of Fed presidents looking for a rate hike in September. What happened were Federal Reserve Governors Lael Brainard and Daniel Tarrullo. Brainard in particular laid down the intellectual framework ahead of the FOMC meeting, arguing that the potential for further labor market improvement and asymmetric policy risks justified a steady hand at this meeting. Yellen and the rest of the Board bought into this story. The hawks could squawk all they wanted, but the votes just weren’t going to go in their favor.
This episode provided two important lessons. The first is that if you haven’t been taking Brainard seriously this past year – ever since her bombshell speech last October – you have been doing it wrong. The second is that a small group of governors can have a much larger influence on policy than a large group of presidents. There are lots of presidents, and they talk a lot, so their message is louder. But the power rests in the Board.
Indeed, this asymmetry of power is why the relative lack of speeches from Board members is one of the Fed’s biggest communication failures. The people driving policy shouldn’t be waiting until the Friday before the blackout period to begin delivering their message.
Now consider the dots. There remain three “no hike” dots for 2016. I think it is reasonable to believe those three dots belong to Tarullo, Brainard, and Chicago Federal Reserve President Charles Evans. If true, that suggests that Tarullo and Brainard are at the present time considering making another dovish stand at the December meeting. To do so, they need to keep Yellen on their side.
During the press conference, Yellen revealed that she remains attached to a preemptive view of policy. Since monetary policy operates with long lags, it is important that policy responds to inflationary threats before they emerge. She also rejected a “whites of their eyes” approach to policy, or the suggestion by Evans that they Fed waits until core inflation hits two percent before they hike rates. These concerns are balanced against Brainard’s argument that they can’t be sure they have yet achieved full employment.
Hence, and as I said ahead of the meeting, I think that if unemployment dips between now and December, or progress on underemployment resumes, or inflation moves closer to target, the hawks will win as Yellen’s support will shift toward a rate hike. And these things can all be reasonably expected given the current course of job growth, which is in excess of the Fed’s estimate of what is necessary to absorb labor force growth. For the doves to have a decent chance of holding back the hawks one more time, progress on these points needs to remain stalled.
Regardless of a December hike or not, the Fed continues to mark down the expected path of policy. The median projected Fed funds rate dropped 50bp for both 2017 and 2018, continuing the pattern of the Fed moving toward the market rather than vice-versa. And note that the changing composition of the FOMC next year will allow for this dovish message to come through. This meeting’s dissenters will all be replaced with presidents that are on average more dovish. Consider this ordering of monetary policy makers via Julia Coronado of Graham Capital, modified to show the shift of voters for next year:

Fed2017

Voting presidents will be more aligned with the preferences of the governors. This should help ease some of the recent communications challenges even if the governors maintain their relative silence.
Bottom Line: Doves on the Board continue to delay the preemptive strike on inflation. Stalling gains on unemployment and underemployment gave them the ammunition to stand their ground. If those gains resume, doves will fall prey to the hawks at the next meeting. But they will have an easier time maintaining a shallow path of policy next year, and hopefully are better set to communicate that path.

Links for 09-26-16

Sunday, September 25, 2016

Links for 09-25-16

Saturday, September 24, 2016

When Industrial Policy Harms Performance

 

A colleague, Bruce Blonigen, has a new paper at the Economic Journal:

When Industrial Policy Harms Performance: Evidence from the World Steel Industry, by Romesh Vaitilingam RES: The use of industrial policies to support a country’s steel sector has damaging effects on the export competitiveness of downstream manufacturing sectors that make use of steel. That is the central finding of research by Professor Bruce Blonigen, published in the September 2016 issue of the Economic Journal.
His cross-country analysis indicates that sectors in which steel is a major input, such as fabricated metals and machinery, suffer particularly badly. He also finds that export subsidies and government ownership are the industrial policies that have the most harmful effects on downstream export competitiveness – and the effects are most evident in less developed countries. He concludes:
‘My results are concerning given the popularity of industrial policies, but they are consistent with a couple of possible explanations.’
‘The first is that governments are not seeking to improve the welfare of their country, but have other objectives in mind, such as responding to political lobbies.’
‘The other possibility is that policy-makers do not understand or recognize the entire range of industrial policy effects and the need to coordinate overlapping policies so they are not at cross-purposes. This may be why the harmful effects seem to be largest in less developed countries.’
Throughout history, governments have used industrial policies to guide the development of key sectors in their economies and to spur economic development. These policies can vary substantially from subsidizing production to limiting import competition to promoting export sales.
One practical concern is that a layering of industrial policies often accumulates over time, leading to the presence of multiple policies at cross-purposes with each other. An additional concern is that targeted industrial policies may result from political pressure by particular sectors without regard to how they will affect other parts of the economy.
Recent efforts by the South African government to target industrial policies at its lagging manufacturing sector illustrate these concerns. The government found that a prior policy program targeted at its steel sector, which is a source of key inputs to many manufacturing sectors, had led to uncompetitive steel prices and hurt downstream manufacturing sectors. Rather than eliminate the industrial policies in their steel sector, the government layered additional policies in the steel-using sectors in the hope of restoring the health of these downstream sectors.
Is this South African example typical? Evidence is scant to non-existent on the net effects of industrial policies on economic growth and development. While there are many studies of the effects of specific industrial policies, particularly import tariffs, the difficulty of collecting the wide variety of industrial policies in a consistent fashion has hindered systematic analysis.
Using a new hand-collected database of industrial policies used in the steel sector in major steel-producing countries, the author of this new study is able to overcome a number of these data difficulties and provide estimates of industrial policy effects in one of the sectors most often targeted by governments for industrial policies.
Because steel is a primary input in so many manufactured goods, the research focuses on how industrial policies in a country’s steel sector affect the export competitiveness of downstream manufacturing sectors that use steel. Professor Blonigen finds that:
• The use of industrial policies is harmful to downstream sectors. A one standard deviation increase in steel industrial policy usage leads to an immediate 1.2% decline in export competitiveness for the average downstream manufacturing sector.
• This effect is five times higher (or roughly 6%) for major steel-using downstream sectors, such as fabricated metals and machinery.
• The long-run effect of increased industrial policy usage for the average downstream sector is over a 15% decline in their exports.
• These industrial policy effects on downstream export performance are largely driven by less developed countries in the sample, though country-by-country regressions show a negative and significant effects of steel industry policies on downstream competitiveness in a few developed countries as well.
• In general, the negative effect of industrial policies on downstream export values operates through lowered export quantities. But there is also evidence that export prices increase (or do not fall as much) in differentiated goods sectors from higher input prices from the steel industry policies, which is most likely due to market power effects.
• Exploring the heterogeneous effects of different types of industrial policy, the research finds that export subsidies and government ownership have the most harmful effects on downstream export competitiveness.

Links for 09-24-16

Friday, September 23, 2016

Paul Krugman: The Lying Game

 

The press needs to tell the truth about lies:

The Lying Game, by Paul Krugman, NY Times: Here’s what we can be fairly sure will happen in Monday’s presidential debate: Donald Trump will lie repeatedly and grotesquely, on a variety of subjects. Meanwhile, Hillary Clinton might say a couple of untrue things. Or she might not.
Here’s what we don’t know: Will the moderators step in when Mr. Trump delivers one of his well-known, often reiterated falsehoods? If he claims, yet again, to have opposed the Iraq war from the beginning ... will he be called on it? If he claims to have renounced birtherism years ago, will the moderators note that he was still at it just a few months ago? (In fact, he already seems to be walking back his admission last week that President Obama was indeed born in America.) If he says one more time that America is the world’s most highly taxed country — which it isn’t — will anyone other than Mrs. Clinton say that it isn’t? And will media coverage after the debate convey the asymmetry of what went down?
You might ask how I can be sure that one candidate will be so much more dishonest than the other. ... PolitiFact has examined 258 Trump statements and 255 Clinton statements and classified them on a scale ranging from “True” to “Pants on Fire.” ... And they show two candidates living in different moral universes when it comes to truth-telling. Mr. Trump had 48 Pants on Fire ratings, Mrs. Clinton just six; the G.O.P. nominee had 89 False ratings, the Democrat 27. ...
And if the debate looks anything like the campaign so far, we know what that will mean: a news analysis that devotes at least five times as much space to Mr. Trump’s falsehoods as to Mrs. Clinton’s.
If your reaction is, “Oh, they can’t do that — it would look like partisan bias,” you have just demonstrated the huge problem with news coverage during this election. For I am not calling on the news media to take a side; I’m just calling on it to report what is actually happening, without regard for party. In fact, any reporting that doesn’t accurately reflect the huge honesty gap between the candidates amounts to misleading readers, giving them a distorted picture that favors the biggest liar. ...
I’m not calling on the news media to take sides; journalists should simply do their job, which is to report the facts. ...

Why Trump’s Economic Policies Would Be a Disaster

I have a new column:

4 Reasons Trump’s Economic Policies Would Be a Disaster: Donald Trump’s chances of becoming president are higher than I ever expected them to be, and there is a chance that he will be able to put his economic plans into place. He claims his economic policies will be good for the working class, but in reality his plans for high income tax cuts and deregulation adhere closely to standard Republican ideology that has favored the wealthy and powerful. Even his plans for international trade, an area where he claims populist support, would hurt far more people than it would help. Here are the four areas where Trump’s economic plans concern me the most...

[One of the four echoes what I wrote about yesterday at CBS.]

Links for 09-23-16

Thursday, September 22, 2016

Estate Tax a Key Tool for Fighting US Inequality

Caroline Freund at PIIE:

Estate Tax a Key Tool for Fighting US Inequality: This year marks the 100th anniversary of the US estate tax, which affects only the ultra-wealthy. Given the rising focus on American income inequality, the tax should be on solid ground. Not so.
Republican presidential candidate Donald Trump has vowed to eliminate the estate tax, while Democrat candidate Hillary Clinton wants to revive it ...
There are good reasons to support this tax:
As I have pointed out previously, there is no productive activity in inheriting a large sum of money, so it does little to distort the economy.
Estate taxes also raise revenue and redistribute wealth. ...
Historically such taxes have worked well in the United States. ...
The future of the estate tax will depend heavily on the upcoming presidential election. Donald Trump would like to see it gone. This is not unthinkable, since in a largely symbolic vote last year the House of Representatives voted to abolish it. ...
Hillary Clinton proposes higher estate tax brackets as wealth increases, reaching 65 percent for a billionaire couple. My guess is that if people really understood the incidence of the tax, 99.8 percent of the population would support her proposal.

The Curious Confidence of Charlatans and Cranks

Paul Krugman:

The Curious Confidence of Charlatans and Cranks: Brad DeLong tells us about a letter being circulated by economists for Trump — although, as he notes, they don’t dare say that, and describe themselves only as critics of Clinton. Several things are notable about the letter, including the absence of many usually reliable Republican hired guns economists. But they do have a Nobelist, Eugene Fama, at the top. And the substance of the letter — government bad! taxes and regulation bad! free markets rool like Reagan! — is pretty standard.
What’s curious is why, exactly, anyone should believe this story. In recent memory, GW Bush failed to deliver the promised Bush boom and eventually presided over disaster; the Obama economy has not been all one might have hoped, but as many have noted, the job growth of the past three years and the income growth that has finally emerged would have been hailed as triumphs if Mitt Romney were president. Taking the longer view, Clinton > Reagan and Obama > Bush, by almost any measure. Why doesn’t this reality seem to register?
One big answer, I think, lies in profound ignorance, in the insistence that history is what it was supposed to be, not what it was. ...
And let’s be clear: this is a problem that won’t go away even if Trump goes down to defeat. People like Paul Ryan are barely more in touch with reality...

Don't Believe Trump’s Tax and Spending Plans

At MoneyWatch, why I think Social Security and Medicare will be in danger of large cuts if Trump is elected:

Don't believe Trump’s tax and spending plans: Donald Trump’s new tax plan will increase the national debt between $4.4 trillion and $5.9 trillion over a decade, and that’s according to estimates from the conservative Tax Foundation. That range of $1.5 trillion is due to uncertainty about how Trump would levy some types of business taxes and how his tax cuts would be paid for.
First, the Republican candidate says, higher economic growth from lower taxes and deregulation will pay for most of the increase in the debt. According to Trump, his plan will boost output substantially, and the higher tax revenue that comes with it will offset most of the lost revenue. 
Second, his “penny plan” would make up the rest of the revenue lost to his tax cuts. This plan would cut spending on nondefense programs funded by annual appropriations by 1 percent each year. 
Since the cuts would affect only a part of the budget (defense and entitlement programs such as Medicare and Social Security are excluded), the plan would reduce spending on programs such as“veterans’ medical care…, scientific and medical research, border enforcement, education, child care, national parks, air traffic control, housing assistance for low-income families, and maintenance of harbors, dams, and waterways,” according to the Center on Budget and Policy Priorities. The total spending reduction would be approximately 25 percent over 10 years.
You should be skeptical of both claims. ...

Links for 09-22-16

Wednesday, September 21, 2016

Fed Votes 7-3 to Keep Rates on Hold

Several Fed presidents wanted a rate hike, but the Board stayed united:

Press Release, Release Date: September 21, 2016, For release at 2:00 p.m. EDT: Information received since the Federal Open Market Committee met in July indicates that the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. Although the unemployment rate is little changed in recent months, job gains have been solid, on average. Household spending has been growing strongly but business fixed investment has remained soft. Inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; James Bullard; Stanley Fischer; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action were: Esther L. George, Loretta J. Mester, and Eric Rosengren, each of whom preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.

Trouble with Macroeconomics, Update

Paul Romer:

Trouble with Macroeconomics, Update: My new working paper, The Trouble with Macroeconomics, has generated some interesting reactions. Here are a few responses...

The Latest from the Bank of Japan

Ben Bernanke:

The latest from the Bank of Japan: The Bank of Japan’s (BOJ) policy announcement today had two main parts. First, the BOJ committed itself to continue expanding the monetary base until the inflation rate “exceeds the price stability target of 2 percent and stays above the target in a stable manner.” That is, the BOJ says it wants not only to reach its 2 percent inflation target but to overshoot it. Second, in a significant change, the BOJ will begin targeting the yield on ten-year Japanese government debt (JGBs), initially at about zero percent (that is, setting a target price for bonds). ..
I think the announcements are good news overall, since they include a recommitment to the goal of ending deflation in Japan and the establishment of a new framework for pursuing that goal. ... The follow-through will indeed be crucial: Japan has made significant progress toward ending deflation, but that progress could still be lost if the public questions the BOJ’s commitment to its inflation objective. ...
The most surprising, and interesting, part of the announcement was the decision to target the ten-year JGB yield. ... Targeting a long-term yield is closely related to quantitative easing... Pegging a long-term yield ... amounts to setting a target price rather than a target quantity. ...
In general, pegging a long-term rate carries some risks. Notably, in defending a peg, a central bank gives up control over the size of its balance sheet... In the extreme case, a central bank trying to hold down yields could find itself owning most or all of the eligible securities. That risk is particularly acute if the peg is not credible ... because then bondholders will have a strong incentive to sell as quickly as possible..., in the Japanese context these risks are probably manageable. ....
The BOJ’s announcement referred to “synergy effects” between Japanese monetary and fiscal policies, but in public statements Governor Kuroda has expressed his opposition to explicit monetary financing of government spending, so-called “helicopter money.” Exactly what constitutes helicopter money is a semantic debate, but a policy of keeping the government’s borrowing rate at zero indefinitely has some elements of monetary finance. ... The resemblance would become even more pronounced if the BOJ began targeting rates on very long JGBs (the Japanese government borrows at maturities out to forty years). I suspect that the BOJ is happy for now with “synergy,” as opposed to explicit fiscal-monetary cooperation. Whether such cooperation will emerge in the future will depend on whether the new framework proves powerful enough to decisively end deflation in Japan.

See also David Beckworth.

Links for 09-21-16

Tuesday, September 20, 2016

Fed Watch: Ahead Of The FOMC Meeting

Tim Duy:

Ahead Of The FOMC Meeting, by Tim Duy: A roundup of Fed-related stories and viewpoints ahead of the FOMC meeting. First, Jeanna Smialek at Bloomberg sees danger lurking in the new dot plot:

Janet Yellen will frame a decision this week to forgo an interest-rate increase as necessary to achieve the Federal Reserve’s economic goals. Donald Trump and his supporters are likely to frame it as political.

That’s because the central bank on Wednesday will also release fresh “dot plot” projections which will probably show policy makers see one quarter-point rate hike by the end of the year. Such a forecast would be widely interpreted as a sign that a hike is coming at the Fed’s December meeting, instead of at the November gathering, which comes a week before the U.S. presidential election and isn’t accompanied by one of the chair’s quarterly press conferences.

Problem is, having the dot plot signal a December move comes with political baggage...

The political baggage is the timing of the rate hike around a presidential election. Why wait on a rate hike now only to signal that one is coming in December? Detractors will claim that the Fed doesn't want to derail the economy and with it the Democrat's hope of retaining the White House. This despite, as Joe Gagnon notes in the article, politics has little if any impact on the rate setting decision. But this isn't about reality, it is about perception. And, politically, the optics just aren't great.

It seems to me that the Fed is taking a political hit on top of what is likely to be the communications hit if, as is reasonably assumed, the dot plot signals a quarter-point hike in December. That would be a pretty strong calendar-based signal of their intentions. Given there is only a few months left in the year, they have to be pretty confident in the outlook to send such a signal. Which raises the question that if you were so confident, why not hike rates now? And if you send such a strong signal now, is that lowering the bar on the kind of data you need to support a hike? And then are you hiking because of perceived past commitment, a need to maintain "credibility," rather than the data? But doesn't that make the Fed more susceptible to policy errors?

In my opinion, the dots outlived their usefulness when they signaled a pace of policy tightening that never happened. They were a great tool for credibly committing to zero for a long period. But that very credibility made them a terrible tool when the time came for tighter policy. They were perceived as a promise because such perception followed logically from the previous promise of low rates. Now they just appear as a series of broken promises. Worse yet, the Fed might feel tied to those promises when they shouldn't be.

The Fed really needs to rethink the dot plot. Use it as a tool when it can be most effective; pull it when it detracts from the message.

Meanwhile, former Minneapolis Federal Reserve President Narayana Kocherlakota, writing at Bloomberg View, says the Fed is about to make a mistake regardless of what they do:

More than seven years after the recovery began in mid-2009, inflation remains below the central bank's 2-percent target...Worse, markets appear to be losing confidence that the Fed will ever reach its target: Yields on Treasury bonds suggest that traders expect inflation to average less than 2 percent five to 10 years from now. As the experience of the Bank of Japan indicates, restoring such confidence is not easy...The Fed is also falling short of its goal of "maximum" employment.

Kocherlakota concludes that the Fed should be easing policy, so holding and raising rates are both mistakes at this juncture.

But one does not have to go far for an opposing view. The editorial board at Bloomberg has a different idea:

The best it can do is press cautiously ahead on normalizing monetary policy, explain what “normal” now means, and promise to keep an open mind as new information comes in. What this requires right now, it should also say, is a quarter-point rise in interest rates.

The editorial board dismisses Kocherlakota as missing the bigger picture:

What this kind of analysis leaves out is the growing threat to future financial stability. Very low interest rates (together with a massively enlarged central-bank balance sheet, courtesy of quantitative easing) have supported demand as intended, albeit with ever-diminishing effectiveness; at the same time, however, they’ve artificially boosted financial-asset prices and distorted normal patterns of risk-taking in financial markets.

Because interest rate are low, they must be "artificially" low and thus distorting something in the economy. The insinuation is that the Fed can simply raise interest rates and the economy will jump back into a happier equilibrium with no distortions and no negative impact. Good luck with that.

If interest rates were truly too low, then their should be much more economic activity and upward pressure on inflation than currently exists. Whatever distortions currently exist must not be exerting a broad impact and thus are fairly small; monetary policy is a blunt tool to use on small distortions. Nor is it evident that even a fairly large rate hike would stop an asset bubble - at least not without a cost. San Francisco Fed researchers concluded:

What is the takeaway then? Slowing down a boom in house prices is likely to require a considerable increase in interest rates, probably by an amount that would be widely at odds with the dual mandate of full employment and price stability. Moreover, the Fed would need a crystal ball to foretell house price booms. In restraining asset prices, while the power of interest rate policy is uncontestable, its wisdom is debatable.

So hiking rates now to try to stop a bubble will likely end in lower rates later. In other words, to use rate policy to try to calm financial markets, you better be very, very sure you are actually facing a widespread threat to the economy. And I don't see anything that justifies that level of certainty. The Financial Crisis was the last war; policymakers need to be wary about always fighting the last war.

Not everyone believes the Fed will hold steady tomorrow. Via Bloomberg:

Two of the Fed’s 23 preferred bond-trading partners -- Barclays Plc and BNP Paribas SA -- are betting against their peers and the bond market by forecasting officials will raise rates Wednesday. It’s the first time more than one dealer has gone against the consensus during the week of a policy meeting since last September, data compiled by Bloomberg show. Economists at both banks say traders have too steeply discounted officials’ intent to hike after the Fed has remained on hold for longer than expected.

I think this is highly unlikely. There are some heavy hitters pushing to holding rates steady. I would not underestimate the power of a few dovish board members, especially if they don't want to roll over on a rate hike like last December. Moreover, the Fed doesn't like to surprise market participants. They don't need 100% certainty, but they need something better than the current odds hovering between 10 and 20%. The hawks know this, and don't like the outcome of the meeting being a foregone conclusion. That said, if the Fed does hike, the handful of analysts who called for a rate hike will look brilliant. And they should get the credit where credit is due in that circumstance.

And for my views on the meeting, see my piece in Bloomberg this week.

Black-White Wage Gaps Expand with Rising Wage Inequality

The EPI's Valerie Wilson and William M. Rodgers III:

Black-white wage gaps expand with rising wage inequality: What this report finds: Black-white wage gaps are larger today than they were in 1979, but the increase has not occurred along a straight line. During the early 1980s, rising unemployment, declining unionization, and policies such as the failure to raise the minimum wage and lax enforcement of anti-discrimination laws contributed to the growing black-white wage gap. During the late 1990s, the gap shrank due in part to tighter labor markets, which made discrimination more costly, and increases in the minimum wage. Since 2000 the gap has grown again. As of 2015, relative to the average hourly wages of white men with the same education, experience, metro status, and region of residence, black men make 22.0 percent less, and black women make 34.2 percent less. Black women earn 11.7 percent less than their white female counterparts. The widening gap has not affected everyone equally. Young black women (those with 0 to 10 years of experience) have been hardest hit since 2000.

Introduction and key findings ... Income inequality and slow growth in the living standards of low- and moderate-income Americans have become defining features of today’s economy, and at their root is the near stagnation of hourly wage growth for the vast majority of American workers. Since 1979, wages have grown more slowly than productivity—a measure of the potential for wage growth—for everyone except the top 5 percent of workers, while wage growth for the top 1 percent has significantly exceeded the rate of productivity growth (Bivens and Mishel 2015). This means that the majority of workers have reaped few of the economic rewards they helped to produce over the last 36 years because a disproportionate share of the benefits have gone to those at the very top. While wage growth lagging behind productivity has affected workers from all demographic groups, wage growth for African American workers has been particularly slow. As a result, large pay disparities by race have remained unchanged or even expanded.

This study describes broad trends and patterns in black-white wage inequality and examines the factors driving these trends as the growing wedge between productivity growth and wage growth has emerged. ...

Our primary finding is that there continues to be no single African American economic narrative. Black-white wage gaps are larger today than they were in 1979, but the increase has not occurred along a straight line, nor has it affected everyone equally. Indeed, the post-2000 patterns show that the diversity of experiences has expanded. While young black women newly entering the workforce have fallen furthest behind their white counterparts since 2000, the work experience of older African Americans continues to partially insulate them from macroeconomic and structural factors associated with growing racial inequality. However, this is cold comfort for members of this older cohort who experienced a major loss in their relative wages during the early 1980s, when many of them were first entering the labor market. They have yet to fully recover from the damage of the 1981–1982 recession and the cutbacks, in the 1980s, to political and financial resources to fight labor market discrimination.

We also show that changes in unobservable factors—such as racial wage discrimination, racial differences in unobserved or unmeasured skills, or racial differences in labor force attachment of less-skilled men due to incarceration—along with weakened support to fight labor market discrimination continue to be the leading factors for explaining past and now the recent deterioration in the economic position of many African Americans. ...

Links for 09-20-16

Monday, September 19, 2016

How to Build a Better Macroeconomics

Narayana Kocherlakota:

How to Build a Better Macroeconomics: Methodology Specifics I want to follow up on my comments about Paul Romer’s interesting recent piece by being more precise about how I believe macroeconomic research could be improved.

Macro papers typically proceed as follows:

  1. Question stated.
  2. Some reduced form analysis to "motivate" the question/answer.
  3. Question inputted into model. Model is a close variant of prior models grounded in four or five 1980s frameworks. The variant is generally based on introspection combined with some calibration of relevant parameters.
  4. Answer reported.

The problem is that the prior models have a host of key behavioral assumptions that have little or no empirical grounding. In this pdf, I describe one such behavioral assumption in some detail: the response of current consumption to persistent interest rate changes.

But there are many other such assumptions embedded in our models. For example, most macroeconomists study questions that depend crucially on how agents form expectations about the future. However, relatively few papers use evidence of any kind to inform their modeling of expectations formation. (And no, it’s not enough to say that Tom Sargent studied the consequences of one particular kind of learning in the late 1980s!) The point is that if your paper poses a question that depends on how agents form expectations, you should provide evidence from experimental or micro-econometric sources to justify your approach to expectation formation in your particular context.

So, I suggest the following would be a better approach:

  1. Question
  2. Thorough theoretical analysis of key mechanisms/responses that are likely to inform answer to question (perhaps via "toy" models?)
  3. Find evidence for ranges of magnitudes of relevant mechanisms/responses.
  4. Build and evaluate a range of models informed by this evidence. (Identification limitations are likely to mean that, given available data, there is a range of models that will be relevant in addressing most questions.)
  5. Range of answers to (1), given (4).

Should all this be done in one paper? Probably not. I suspect that we need a more collaborative approach to our questions - a team works on (2), another team works on (3), a third team works on (4) and we arrive at (5). I could readily see each step as being viewed as valuable contributions to economic science.

In terms of (3) - evidence - our micro colleagues can be a great source on this dimension. In my view, the most useful labor supply paper for macroeconomists in the past thirty years is this one - and it’s not written by a macroeconomist.

(If people know of existing papers that follow this approach, feel free to email me a reference at nkocherl@ur.rochester.edu.)

None of these ideas are original to me. They were actually exposited nearly forty years ago.

The central idea is that individual responses can be documented relatively cheaply, occasionally by direct experimentation, but more commonly by means of the vast number of well-documented instances of individual reactions to well-specified environmental changes made available "naturally" via censuses, panels, other surveys, and the (inappropriately maligned as "casual empiricism") method of keeping one's eyes open.

I’m not totally on board with the author in what he says here. I'm a lot less enthralled by the value of “casual empiricism” in a world in which most macroeconomists mainly spend their time with other economists, but otherwise agree wholeheartedly with these words. And I probably see more of a role for direct experimentation than the author does. But those are both quibbles.

And these words from the same article seem even more apt:

Researchers … will appreciate the extent to which … [this agenda] describes hopes for the future, not past accomplishments. These hopes might, without strain, be described as hopes for a kind of unification, not dissimilar in spirit from the hope for unification which informed the neoclassical synthesis. What I have tried to do above is to stress the empirical (as opposed to the aesthetic) character of these hopes, to try to understand how such quantitative evidence about behavior as we may reasonably expect to obtain in society as it now exists might conceivably be transformed into quantitative information about the behavior of imagined societies, different in important ways from any which have ever existed. This may seem an intimidatingly ambitious way to state the goal of an applied subfield of a marginally respectable science, but is there a less ambitious way of describing the goal of business cycle theory?

Somehow, macroeconomists have gotten derailed from this vision of a micro-founded unification and retreated into a hermetically sealed world, where past papers rely on prior papers' flawed foundations. We need to get back to the ambitious agenda that Robert Lucas put before us so many years ago.

(I admit that I'm cherry-picking like crazy from Lucas' 1980 classic JMCB piece. For example, one of Lucas' main points in that article was that he distrusted disequilibrium modeling approaches because they gave rise to too many free parameters. I don't find that argument all that relevant in 2016 - I think that we know more now than in 1980 about how micro-data can be fruitfully used to discipline our modeling of firm behavior. And I would suspect that Lucas would be less than fully supportive of what I write about expectations - but I still think I'm right!)

Links for 09-19-16

Sunday, September 18, 2016

A Giant (Firm) Problem

At The Economist:

A giant problem: Disruption may be the buzzword in boardrooms, but the most striking feature of business today is not the overturning of the established order. It is the entrenchment of a group of superstar companies at the heart of the global economy. Some of these are old firms, like GE, that have reinvented themselves. Some are emerging-market champions, like Samsung, which have seized the opportunities provided by globalisation. The elite of the elite are high-tech wizards—Google, Apple, Facebook and the rest—that have conjured up corporate empires from bits and bytes.
As our special report this week makes clear, the superstars are admirable in many ways. They churn out products that improve consumers’ lives, from smarter smartphones to sharper televisions. They provide Americans and Europeans with an estimated $280 billion-worth of “free” services—such as search or directions—a year. But they have two big faults. They are squashing competition, and they are using the darker arts of management to stay ahead. Neither is easy to solve. But failing to do so risks a backlash which will be bad for everyone. ...

Skipping to the conclusion:

The rise of the giants is a reversal of recent history. In the 1980s big companies were on the retreat, as Margaret Thatcher and Ronald Reagan took a wrecking ball to state-protected behemoths such as AT&T and British Leyland. But there are some worrying similarities to a much earlier era. In 1860-1917 the global economy was reshaped by the rise of giant new industries (steel and oil) and revolutionary new technologies (electricity and the combustion engine). These disruptions led to brief bursts of competition followed by prolonged periods of oligopoly. The business titans of that age reinforced their positions by driving their competitors out of business and cultivating close relations with politicians. The backlash that followed helped to destroy the liberal order in much of Europe.
So, by all means celebrate the astonishing achievements of today’s superstar companies. But also watch them. The world needs a healthy dose of competition to keep today’s giants on their toes and to give those in their shadow a chance to grow.

Saturday, September 17, 2016

Put Globalization to Work for Democracies

Dani Rodrik:

Put Globalization to Work for Democracies: ...We need to rescue globalization not just from populists, but also from its cheerleaders. ... Simply put, we have pushed economic globalization too far — toward an impractical version that we might call “hyperglobalization.” ...
Some simple principles would reorient us in the right direction. First, there is no single way to prosperity. Countries make their own choices about the institutions that suit them best. ...
Second, countries have the right to protect their institutional arrangements and safeguard the integrity of their regulations. Financial regulations or labor protections can be circumvented and undermined by moving operations to foreign countries... Countries should be able to prevent such “regulatory arbitrage” by placing restrictions on cross-border transactions... For example, imports from countries that are gross violators of labor rights ... may face restrictions when those imports demonstrably threaten to damage labor standards at home. ...
Third, the purpose of international economic negotiations should be to increase domestic policy autonomy, while being mindful of the possible harm to trade partners. ... Poor and rich countries alike need greater space for pursuing their objectives. The former need to restructure their economies and promote new industries, and the latter must address domestic concerns over inequality and distributive justice. Both objectives require placing some sand in the cogs of globalization. ...
Fourth, global governance should focus on enhancing democracy, not globalization. ...
And finally, nondemocratic countries like Russia, China and Saudi Arabia — where the rule of law is routinely flouted and civil liberties are not protected — should not be able to count on the same rights and privileges in the international system as democracies can. ...
When I present these ideas to globalization advocates, they say the consequence would be a dangerous slide toward protectionism. But today the risks on the other side are greater, namely that the social strains of hyperglobalization will drive a populist backlash that undermines both globalization and democracy. Basing globalization on defensible democratic principles is its best defense. ...

[Each of his five recommendations is explained in more detail in the article.]

The Downside of Upward Mobility

Branko Milanovic:

The downside of upward mobility: ...If we ... really wanted to support upward mobility or give equal chances to all there are many political measures we could enact. ...Ganesh shows how totally politically unfeasible they are: confiscatory inheritance taxes, smaller class sizes in poorer neighborhood funded from the taxes from the rich, end of tax-exempt status for the richest universities, moral suasion that rich universities annually transfer 1% of their wealth to poorer state schools, criminalization of nepotism etc. None of these proposals will have the remotest chance of being accepted by those who currently wield political and economic power. ...

If upward mobility is about the relative positions in a society, then upward mobility for some implies downward mobility for the others. But if those currently at the top have a stronghold on the top places in society, there will no upward mobility however much we clamor for it. This positional (or relative) approach to mobility is a fairly accurate description of reality in societies that are growing slowly. In societies that develop quickly even if a lot of mobility is about positional advantages (and they are by definition fixed) it can be compensated by creating enough new social layers, new jobs and by making people richer. Thus the upwardly mobile have some room to move up which does not require an equal number of people to move down.

In more stagnant societies, mobility becomes a zero-sum game. To effect real social mobility in such societies, you need revolutions that, while equalizing chances or rather improving dramatically the chances of those on the bottom, do so at the cost of those on the top. In addition, they destroy many other things including lives, not only of those on the top but also of those on the bottom. ...

It is then not surprising that, short of such massive upheavals that shake the societies to their very core, countries tend to display relatively little positional mobility. ...

I think that we are led to a very somber conclusion here. In societies with slow growth, upward mobility is limited by the lack of opportunities and the solid grip that those who are on the top keep over the chances of their children to remain on the top. It is either self-delusion or hypocrisy to believe that societies with such unevenness of chances will come close to resembling “meritocracies”. But it is also the case that true upward mobility comes with an enormous price tag of lives lost and wealth destroyed.

Links for 09-17-16

Friday, September 16, 2016

Beyond Antitrust: The Role of Competition Policy in Promoting Inclusive Growth

Jason Furman (the text of the report is 18 pages long, including figures and tables):

Beyond Antitrust: The Role of Competition Policy in Promoting Inclusive Growth: Thank you very much for inviting me to today’s conference. Discussions of competition often center on issues of antitrust enforcement. Those are important issues, but I will not address them in my remarks today because they are enforcement questions that are within the purview of the Antitrust Division of the Justice Department and the Federal Trade Commission (FTC). I will argue, though, that public policy can play an important role in promoting competition that goes well beyond traditional antitrust enforcement.
The Administration has focused on competition policy in a wide range of areas, from airport slots to standards essential patents to spectrum allocation. Most recently, this past April, the President signed an Executive Order calling on agencies to identify creative actions that they can take to promote competition. The Executive Order calls on agencies to maintain a focus on competition policy in the future by submitting proposed actions on a semi-annual basis. The Administration is currently reviewing the first set of proposals from agencies on how we can use public policy to promote competition, a number of which will be announced in the coming months.
The first action undertaken as part of this Executive Order was the Administration filing in support of the Federal Communication Commission's (FCC) proposed rule to bring increased competition to the market for cable set-top boxes. We have been pleased to see FCC Chairman Wheeler actively listen to the many stakeholders involved to improve the proposal, and believe that he is charting out a responsible way to address their meaningful concerns while being responsive to Congress's explicit directive to ensure a healthy set-top marketplace.
In conjunction with the Executive Order, the Council of Economic Advisers (CEA) released an issue brief documenting some of the evidence suggesting a reduction in competition throughout the economy. Our findings are consistent with recent arguments from academic papers such as Bennett and Gartenberg (2016), and other observers, including The Economist and the Center for American Progress (CAP), stating that competition in the U.S. economy has declined in recent years (The Economist 2016; Jarsulic et al. 2016).
Part of the underlying motivation for the Administration’s efforts is the belief that competition can play an important and broader role not just in static, allocative efficiency but also in dynamic efficiency—making the economy more innovative and increasing productivity growth. In addition, there is also increasing evidence that greater competition or more evenly balanced power in some areas could also play a role in reducing some of the causes of inequality.
In my remarks today, I will start by quickly reviewing some of the evidence for greater concentration in the economy, then provide some broad macroeconomic motivation, before discussing a few specific areas that the Administration is working on, with a focus on some of the difficult questions raised by the rapid evolution of technology in recent years.
What Is the Evidence on the Trends in Concentration?
...
Some Pro -Competition Policy Applications
To the extent that these macroeconomic trends are related to decreased competition, then pro - competitive policies have potential to not only benefit consumers but also improve the state of the macroeconomy by, for example, increasing productivity and ensuring that the benefits of growth are widely shared. For these reasons, the Administration has taken several significant policy actions to promote competition. I will next briefly touch on four examples.
Intellectual Property and Patent Reform...
Increasing the Bargaining Power of Workers...
Reforming Occupational Licensing...
Reforming Land-Use Regulation...
The Future of Competition in the Digital Age
One topic we have been grappling with in a range of economic issue areas, including competition policy, is the ever-increasing role that digitization plays in our economy. The digital age has the potential to increase competition in many ways, but at the same time, changing technology will bring new challenges to policymakers, challenges that will come increasingly to the fore as the digital economy expands.
So far, internet markets have tended to favor digital giants that hold high market shares, a characteristic that is traditionally associated with low competition in brick-and-mortar markets. However, understanding the competitive implications of these new markets requires a closer analysis. The markets of the digital economy are in many ways different from “old economy” markets. Some of those differences are differences of degree—the internet lowers many costs for small businesses, increasing their ability to rapidly and inexpensively scale up, collect information on potential consumers, and create new products and ideas. These differences do not transform the structure of the market; instead, they merely lower the cost of doing business. Other differences, however, are differences of type: business models may be dramatically different due to digitization. These differences of type warrant closer consideration.
One type of business model that has flourished with digitization is the “platform” model, which relies heavily on network effects to grow because the primary product is access to other customers. Examples include payment platforms like PayPal, sales platforms like eBay, and social networks like Facebook. Switching costs for customers are particularly high in these markets—no one wants to be the first and only user of a platform—and these network effects can act as a barrier to entry.
However, it is not as clear whether these “quasi-monopolies” pose the same harm to consumers as traditional monopolies. In these markets, highly concentrated market share might not be as detrimental to customers as in traditional markets because the services provided by these businesses are more valuable to consumers as their consumer base grows. This means that determining the optimal level of competition in these new markets is a dramatically different and harder task.
Even the task of measuring competition is complicated in digital markets. Usually, economists use prices as indicators of the level of competition, but we cannot necessarily do that here because many markets are two-sided and there are different types of consumer harm. Businesses on the internet are often complementary, so companies may subsidize one side of the market by profiting from the other side of the market. For example, social media sites often offer free services to users and charge for ads. However, the lack of high prices for consumers does not mean that consumer harms or other risks could not occur. Industry watchers have raised concerns 18 about whether the large companies that dominate search and social networking may be able to acquire inefficient power in ads or control people’s access to news. Another concern is that instead of raising prices or reducing quantity, these companies may reduce innovation. Firms holding quasi-monopolies may lose the incentive to keep improving the quality of their products.
Switching costs are traditionally an indicator of competition, and many may assume that switching costs in internet markets are virtually zero because competition is just a click away. This may have been true in the early ages of the internet, but to automatically assume zero switching costs now would be to miss a large part of what is happening. For example, the original search engines were merely directories of websites, and their quality didn’t depend on how many users they had. However, search engines today collect data on the behavior of their users and use it to improve their services and tailor those services to individual users. Thus, in order for other firms to be competitive, they need a large user base and the data that comes with it. Furthermore, for each individual user looking to switch services, the incumbent, with its existing knowledge of that user, has a significant advantage over a competitor that does not yet know the user and therefore cannot tailor services to him or her.
Lastly, digitization could bring a new level of opacity to businesses. Traditionally, price fixing and collusion could be detected in the communications between businesses. The task of detecting undesirable price behavior becomes more difficult with the use of increasingly complex algorithms for setting prices. This type of algorithmic price setting can lead to undesirable price behavior, sometimes even unintentionally. The use of advanced machine learning algorithms to set prices and adapt product functionality would further increase opacity.
Competition policy in the digital age brings with it new challenges for policymakers. It will be imperative that agencies continue the great work and creative solutions that came out of the President’s Executive Order to promote competition and inclusive growth in the digital age.
Conclusion
Recent trends in concentration in a range of industries suggest decreasing levels of competition, and many concerning macroeconomic trends seem to suggest that this decrease not just due to increases in economies of scale, but rather that increases in barriers to entry are playing a role. For the sake of both consumers and the macroeconomy as a whole, the Administration has used and will continue to use public policy to address these concerns. Increasing competition has the potential to drive faster productivity and output growth, faster real wage growth, and increased equity. We have moved forward in areas such as intellectual property and patent reform, increasing worker bargaining power, and reforming occupational licensing and land use regulations. While these are examples of positive changes, our work in promoting competition does not end here. The President’s Executive Order will continue to encourage agencies to develop creative solutions for increasing competition by soliciting new ideas on a regular basis. In considering the future of competition policy, we must also keep in mind the way in which changes in the economy, such as digitization, will affect how we evaluate competition effectively.

Paul Krugman: Obama’s Trickle-Up Economics

Helping working families and the unemployed doesn't hurt the economy:

Obama’s Trickle-Up Economics, by Paul Krugman, NY Times: Only serious nerds like me eagerly await the annual Census Bureau reports on income, poverty and health insurance. But the just-released reports on 2015 justified the anticipation. ...
The reports showed strong progress on three fronts: rapid growth in the incomes of ordinary families — median income rose a remarkable 5.2 percent; a substantial decline in the poverty rate; and a significant further rise in health insurance coverage after 2014’s gains. ...
It’s true that the surge in median income comes after years of disappointment, and even now the typical family’s income, adjusted for inflation, is slightly lower than it was before the financial crisis. But the ... overall performance of the Obama economy has given the lie to much of the criticism leveled at President Obama’s policies. ...
Conservatives predicted disaster from these initiatives. Tax hikes on the rich, they insisted, would stall the economy. Obamacare’s combination of regulation and subsidies, they declared, would kill millions of jobs without increasing the number of Americans with insurance.
What happened instead after Mr. Obama was re-elected was the best job growth since the 1990s. But family incomes ... continued to lag. So there was still some statistical basis for the right’s Obama-bashing. Now that statistical basis is gone. ... And it should (but won’t) finally break the grip of trickle-down ideology on much of our political class.
You know how the argument goes: Any attempt to help working families directly, we’re told, will backfire by hurting the economy as a whole. So we must cut taxes on those “job creators” instead, counting on a rising tide to raise all boats.
It would be an exaggeration to say that the Obama administration has done the reverse, but there definitely was an element of trickle-up economics in its response to the Great Recession: Much of the stimulus involved expanding the social safety net, not just to protect the vulnerable, but to increase purchasing power and sustain demand. And in general Obama-era policies have tried to help families directly, rather than by showering benefits on the rich and hoping that the benefits trickle down.
Now the results of this policy experiment are in, and they’re not bad. They could have been better: The stimulus should have been bigger and more sustained, and Republican opposition hamstrung the administration’s economic policy after the first two years. Still, progressive policies have worked, and the critics of those policies have been proved wrong.

Links for 09-16-16

Thursday, September 15, 2016

We Need to Move on from Existing Theories of the Economy

Dave Elder-Vass at Understanding Society:

Guest post by Dave Elder-Vass: [Dave Elder-Vass accepted my invitation to write a response to my discussion of his recent book, Profit and Gift in the Digital Economy (link). Elder-Vass is Reader in sociology at Loughborough University and author as well of The Causal Power of Social Structures: Emergence, Structure and Agency and The Reality of Social Construction, discussed here and here. Dave has emerged as a leading voice in the philosophy of social science, especially in the context of continuing developments in the theory of critical realism. Thanks, Dave!]

We need to move on from existing theories of the economy

Let me begin by thanking Dan Little for his very perceptive review of my book Profit and Gift in the Digital Economy. As he rightly says, it’s more ambitious than the title might suggest, proposing that we should see our economy not simply as a capitalist market system but as a collection of “many distinct but interconnected practices”. Neither the traditional economist’s focus on firms in markets nor the Marxist political economist’s focus on exploitation of wage labour by capital is a viable way of understanding the real economy, and the book takes some steps towards an alternative view.

Both of those perspectives have come to narrow our view of the economy in multiple dimensions. Our very concept of the economy has been derived from the tradition that began as political economy with Ricardo and Smith then divided into the Marxist and neoclassical traditions (of course there are also others, but they are less influential). Although these conflict radically in some respects they also share some problematic assumptions, and in particular the assumption that the contemporary economy is essentially a capitalist market economy, characterised by the production of commodities for sale by businesses employing labour and capital. As Gibson-Graham argued brilliantly in their book The End Of Capitalism (As We Knew It): A Feminist Critique of Political Economy, ideas seep into the ways in which we frame the world, and when the dominant ideas and the main challengers agree on a particular framing of the world it is particularly difficult for us to think outside of the resulting box. In this case, the consequence is that even critics find it difficult to avoid thinking of the economy in market-saturated terms.

The most striking problem that results from this (and one that Gibson-Graham also identified) is that we come to think that only this form of economy is really viable in our present circumstances. Alternatives are pie in the sky, utopian fantasies, which could never work, and so we must be content with some version of capitalism – until we become so disillusioned that we call for its complete overthrow, and assume that some vague label for a better system can be made real and worthwhile by whoever leads the charge on the Bastille. But we need not go down either of these paths once we recognise that the dominant discourses are wrong about the economy we already have.

To see that, we need to start defining the economy in functional terms: economic practices are those that produce and transfer things that people need, whether or not they are bought and sold. As soon as we do that, it becomes apparent that we are surrounded by non-market economic practices already. The book highlights digital gifts – all those web pages that we load without payment, Wikipedia’s free encyclopaedia pages, and open source software, for example. But in some respects these pale into insignificance next to the household and family economy, in which we constantly produce things for each other and transfer them without payment. Charities, volunteering and in many jurisdictions the donation of blood and organs are other examples.

If we are already surrounded by such practices, and if they are proliferating in the most dynamic new areas of our economy, the idea that they are unworkably utopian becomes rather ridiculous. We can then start to ask questions about what forms of organising are more desirable ethically. Here the dominant traditions are equally warped. Each has a standard argument that is trotted out at every opportunity to answer ethical questions, but in reality both standard arguments operate as means of suppressing ethical discussions about economic questions. And both are derived from an extraordinarily narrow theory of how the economy works.

For the mainstream tradition, there is one central mechanism in the economy: price equilibration in the markets, a process in which prices rise and fall to bring demand and supply into balance. If we add on an enormous list of tenuous assumptions (which economists generally admit are unjustified, and then continue to use anyway), this leads to the theory of Pareto optimality of market outcomes: the argument that if we used some other system for allocating economic benefits some people would necessarily be worse off. This in turn becomes the central justification for leaving allocation to the market (and eliminating ‘interference’ with the market).

There are many reasons why this argument is flawed. Let me mention just one. If even one market is not perfectly competitive, but instead is dominated by a monopolist or partial monopolist, then even by the standards of economists a market system does not deliver Pareto optimality, and an alternative system might be more efficient. And in practice capitalists constantly strive to create monopolies, and frequently succeed! Even the Financial Times recognises this: in today’s issue (Sep 15 2016) Philip Stevens argues, “Once in a while capitalism has to be rescued from the depredations of, well, capitalists. Unconstrained, enterprise curdles into monopoly, innovation into rent-seeking. Today’s swashbuckling “disrupters” set up tomorrow’s cosy cartels. Capitalism works when someone enforces competition; and successful capitalists do not much like competition”.

So the argument for Pareto optimality of real market systems is patently false, but it continues to be trotted out constantly. It is presented as if it provides an ethical justification for the market economy, but its real function is to suppress discussion of economic ethics: if the market is inherently good for everyone then, it seems, we don’t need to worry about the ethics of who gets what any more.

The Marxist tradition likewise sees one central mechanism in the economy: the extraction of surplus from wage labour by capitalists. Their analysis of this mechanism depends on the labour theory of value, which is no more tenable that mainstream theories of Pareto optimality (for reasons I discuss in the book). Marxists consistently argue as if any such extraction is ethically reprehensible. Marx himself never provides an ethical justification for such a view. On the contrary, he claims that this is a scientific argument and disowns any ethical intent. Yet it functions in just the same way as the argument for Pareto optimality: instead of encouraging ethical debate about who should get what in the economy, Marxists reduce economic ethics to the single question of the need to prevent exploitation (narrowly conceived) of productive workers.

We need to sweep away both of these apologetics, and recognise that questions of who gets what are ethical issues that are fundamental to justice, legitimacy, and political progress in contemporary societies. And that they are questions that don’t have easy ‘one argument fits all’ answers. To make progress on them we will have to make arguments about what people need and deserve that recognise the complexity of their social situations. But it doesn’t take a great deal of ethical sophistication to recognise that the 1% have too much when many in the lower deciles are seriously impoverished, and that the forms of impoverishment extend well beyond underpaying for productive labour.

I’m afraid that I have written much more than I intended to, and still said very little about the steps I’ve taken in the book towards a more open and plausible way of theorising how the economy works. I hope that I’ve at least added some more depth to the reasons Dan picked out for attempting that task.

Trump Campaign’s “Dynamic Scoring” of Revised Tax Plan Should Be Taken With More Than a Grain of Salt

The Trump campaign endorses a standard Republican tax con. This is from Chad Stone and Chye-Ching Huang at the CBPP:

Trump Campaign’s “Dynamic Scoring” of Revised Tax Plan Should Be Taken With More Than a Grain of Salt: The revised tax plan that Republican presidential nominee Donald Trump will release today was reportedly designed at least in part to reduce the cost of his earlier plan,[1] which would have generated very large revenue losses.[2] The revised plan now looks similar to the tax plan that House Republican leaders introduced in June, which cost less than Trump’s original plan. Moreover, like the House plan, the Trump plan takes advantage of an aggressive approach to “dynamic scoring” that the Tax Foundation uses to estimate how tax cuts affect the economy and the budget, which sharply lowers the estimated revenue loss from certain tax-cut provisions.[3] We should, however, view such large dynamic effects derived from Tax Foundation estimates with considerable skepticism. That’s because the Tax Foundation, with its unusually large dynamic estimates, is considerably outside the analytic mainstream.
In particular, the Tax Foundation assumes that certain tax cuts produce far larger increases in business investment than researchers typically find. Consequently, the Tax Foundation estimates that certain tax changes will produce far greater economic activity and a far smaller revenue loss than do Congress’s highly respected official estimating bodies — the Joint Committee on Taxation (JCT) and the Congressional Budget Office (CBO). ...
Analysts continue to debate whether and how to implement dynamic scoring.[7] It’s new and controversial: the best way to model dynamic effects remains unsettled; and the estimates produced can vary depending on the assumptions used. Mainstream analysts typically find that any additional economic activity generated by tax cuts can offset, at most, a modest portion of their cost. With that in mind, the Tax Foundation’s dynamic scoring estimates — including those that the Trump campaign is relying on for its estimates of its revised tax plan — should be viewed with particular skepticism.
For instance, in 2015, the Tax Foundation estimated that making permanent the bonus-depreciation tax break (which allows businesses to deduct a larger share of the cost of their equipment in the year they purchase it) would generate enough new revenue to pay for more than 75 percent of its costs, while JCT pegged the figure at less than 5 percent. ...
The Tax Foundation produces its dynamic scoring estimates very quickly, while JCT and CBO take much more time to develop theirs. And JCT and CBO don’t analyze tax plans from candidates, so no official analysis of the Trump plan will be available. The nonpartisan Urban Institute-Brookings Institution Tax Policy Center (TPC) provides estimates of candidates’ tax plans but usually takes some time to provide them. Thus, after Mr. Trump unveils his revised plan today, the estimate based on the Tax Foundation’s model will likely be the most widely cited one for a while.
Consequently, one should approach any forthcoming estimate based on the Tax Foundation model with considerable caution. ...

After an extensive analysis and explanation, they conclude:

The initial Trump tax plan was widely estimated to lose large amounts of revenue and substantially enlarge future deficits and debt. The Trump team says that the revised plan costs substantially less. In addition to including some policy changes that lower the standard cost estimate, the Trump team will cite the estimates they have derived from Tax Foundation work to claim that the plan will produce large “dynamic” effects on economic growth and revenues.
As this analysis documents, the Tax Foundation model generates far larger economic and budgetary effects than the models of the Congressional Budget Office and Congress’s Joint Committee on Taxation, and relies on assumptions that are inconsistent with the economic evidence or well outside mainstream economic thinking. All dynamic budget estimates should be approached with caution. That admonition applies with particular force to the highly questionable dynamic estimates that the Tax Foundation model produces.

Do U.S. Economists Ignore Inequality?

Arjun Jayadev at INET:  

Do U.S. Economists Ignore Inequality?: A thought-provoking report in The Atlantic seeks to explore an apparent paradox in the practice of economics in the United States: Despite the high levels of inequality that many view as a drag on the performance of the U.S. economy — and also the increasingly volatile political effects of that inequality — the report argues that American economists have not been at the forefront of studying the distribution of wealth and income. Most of the cutting edge work has been often led by researchers from different national and cultural backgrounds.
While it’s encouraging to note that many of those cited in the piece as exemplary path-breakers in the field, such Gabriel Zucman, Steven Fazzari, and James K. Galbraith, have been supported by the Institute for New Economic Thinking, it may be overstating the case to say that American economists have not been cognizant of inequality — the widening of the wealth and income gap over the past 30 years has hardly gone unnoticed. Still, it is probably true to suggest that most explanations offered for the phenomenon have cited some combination of differential investments in human capital and/or technological changes as being primary drivers. There have always, of course, been dissenters from this approach, but analyses that identified macroeconomic factors such as weak labor markets or political factors such as the rise of a financial class remained minority views.
What is notable about some of the new research commended by the Atlantic for more boldly tackling the more politically challenging aspects of inequality is that this work has given more central causal weight to macroeconomic policy and factors such as the declining bargaining power of labor vs. capital.
For many years, to cite one example, labor shares and their decline were either treated as an artifact of the way data is collected, or as marginal to economic analysis. In the recent past however, a spate of influential papers have returned to the question of the capital-labor relations and shares of output going to each. Other influential papers have implicated the enormous growth of the financial sector as important features in the landscape of U.S. inequality. The centrality of the balance of political power in shaping income distribution was certainly a feature of U.S. academic economics until the 1980s, and work in this tradition has continued at the margins. But the new research being hailed by the Atlantic is restoring the centrality of such concerns. Economics, and the society it purports to serve, can only benefit from that development.

Links for 09-15-16

Wednesday, September 14, 2016

Safety Net Cut Poverty Nearly in Half Last Year

Danilo Trisi at the CBPP:

Safety Net Cut Poverty Nearly in Half Last Year: Safety net programs cut the poverty rate nearly in half in 2015, lifting 38 million people — including 8 million children — above the poverty line, our analysis of Census data released yesterday finds. The Census data show the impact of a broad range of government assistance, such as Social Security, SNAP (formerly food stamps), Supplemental Security Income, rent subsidies, and tax credits for working families like the Earned Income Tax Credit (EITC) and Child Tax Credit. The figures rebut claims that government programs do little to reduce poverty.
Government benefits and taxes cut the poverty rate from 26.3 percent to 14.3 percent in 2015. Among children, they cut the poverty rate from 26.8 percent to 16.1 percent... This analysis uses the Census Bureau’s Supplemental Poverty Measure (SPM), which counts various government non-cash benefits as income, as most analysts favor. ...
These figures understate the safety net’s effectiveness because they don’t correct for households’ underreporting of government... In 2012, the most recent year for which we have data corrected for such underreporting, the safety net lowered the SPM poverty rate from 29.1 percent to 13.8 percent — a poverty rate 2.2 percentage points lower than in SPM data without these corrections.
Policymakers negotiating budget and tax priorities should keep in mind that the safety net keeps millions of children, adults, and seniors of all races and ethnicities from falling below the poverty line. Deep cuts to these programs would make them much less effective at reducing poverty and would push the U.S. poverty rate substantially higher.

American Antitrust Is Having a Moment: Some Reactions to Commissioner Ohlhausen’s Recent Views

Chris Sagers at ProMarket:

American Antitrust Is Having a Moment: Some Reactions to Commissioner Ohlhausen’s Recent Views: Over the summer, Federal Trade Commissioner Maureen Ohlhausen took me and several others to task in a speech, subsequently published as a journal article... The theme we’d all written about is whether we in the United States have a “monopoly problem,” and whether federal policy should try to do something about it. ...

Commissioner Ohlhausen had some pretty strong words. ... Specifically, she implies a very strong presumption against public interference in private markets, as indicated by her argument that there is not yet sufficient evidence that we have a monopoly problem. The argument seems to be that we must wait until we are very, very sure, beyond any reasonable econometric doubt, apparently, that there’s something wrong before we step in. ...
She is mistaken, and she ignores roughly a library-full of well-known..., sophisticated empirical work. ...
In the end, the irony of these remarks is captured in this point: Commissioner Ohlhausen is pretty witheringly dismissive of a certain kind of evidence of market power, and implies that it would not support increased enforcement unless it can overcome a high methodological bar. But for her own countervailing evidence that in fact American markets are “fierce[ly] competiti[ve],” she says this:  “Consider the new economy, which is a hotbed of technological innovation. That environment does not strike me as one lacking competition.”
In other words, the presumption against antitrust is so strong that evidence of harm must meet the most exacting standards of social science. To prove that markets are in fact competitive, however, needs nothing more than seat-of-the-pants anecdotes. Again, I mean no disrespect, and I think we have an honest difference of opinion. But this stance is not social science, and it is not good, empirically founded public policy. It is just ideology. ...
It’s definitely true that the agencies have brought a bunch of challenges to a bunch of nasty mergers, and perhaps total enforcement numbers have gone up a bit. But that is because we are in the midst of a merger wave in which parties have been proposing breathtakingly massive, overwhelmingly consolidating horizontal deals. While there is a track record to be proud of in the administration’s enforcement, especially, as the commissioner observes, in the Commission’s campaign against hospital mergers, reverse-payment deals, SEP problems, and patent trolls, and who knows how many other matters, the fact remains that by and large the administration has mostly not taken action that any administration would not have taken, including the Reagan and both Bush administrations. ...

Links for 09-14-16