- It’s the “new mediocre”, not a global recession - Gavyn Davies
- The Badger - Economic Principals
- German Weakness - Paul Krugman
- Emergentism and generationism - Understanding Society
- Illustrating Asymptotic Behaviour - Part II - Dave Giles
- The riddle of black America’s rising woes - FT.com
- A simple route to climate disaster - John Quiggin
- Do we dare to question economic growth? - The Guardian
- The State of Macroeconomic Analysis - askblog
- Ukipanic - mainly macro
Monday, October 13, 2014
Sunday, October 12, 2014
In case you missed this from Paul Krugman:
In Defense of Obama, by Paul Krugman, Rolling Stone: When it comes to Barack Obama, I've always been out of sync. Back in 2008, when many liberals were wildly enthusiastic about his candidacy and his press was strongly favorable, I was skeptical. I worried that he was naive, that his talk about transcending the political divide was a dangerous illusion given the unyielding extremism of the modern American right. Furthermore, it seemed clear to me that, far from being the transformational figure his supporters imagined, he was rather conventional-minded: Even before taking office, he showed signs of paying far too much attention to what some of us would later take to calling Very Serious People, people who regarded cutting budget deficits and a willingness to slash Social Security as the very essence of political virtue.
And I wasn't wrong. Obama was indeed naive: He faced scorched-earth Republican opposition from Day One, and it took him years to start dealing with that opposition realistically. Furthermore, he came perilously close to doing terrible things to the U.S. safety net in pursuit of a budget Grand Bargain; we were saved from significant cuts to Social Security and a rise in the Medicare age only by Republican greed, the GOP's unwillingness to make even token concessions.
But now the shoe is on the other foot: Obama faces trash talk left, right and center – literally – and doesn't deserve it. Despite bitter opposition, despite having come close to self-inflicted disaster, Obama has emerged as one of the most consequential and, yes, successful presidents in American history. His health reform is imperfect but still a huge step forward – and it's working better than anyone expected. Financial reform fell far short of what should have happened, but it's much more effective than you'd think. Economic management has been half-crippled by Republican obstruction, but has nonetheless been much better than in other advanced countries. And environmental policy is starting to look like it could be a major legacy.
I'll go through those achievements shortly. First, however, let's take a moment to talk about the current wave of Obama-bashing. ...
Lower oil prices: For the last 3 years, European Brent has mostly traded in a range of $100-$120 with West Texas intermediate selling at a $5 to $20 discount. But in September Brent started moving below $100 and now stands at $90 a barrel, and the spread over U.S. domestic crude has narrowed. Here I take a look at some of the factors behind these developments. ...
One factor has been weakness in Europe and Japan, which means lower demand for commodities as well as a strengthening dollar. ...
In terms of factors specific to the oil market, one important development has been the recovery of oil production from Libya. ...
But the biggest story is still the United States. Thanks to horizontal drilling to get oil out of tight underground formations... Just how low the price can go before some of the frackers start to drop out is subject to some debate. ...
"This column turns to economic history to investigate whether the financial sector is too big":
The great mortgaging, by Òscar Jordà, Alan Taylor, Moritz Schularick, Vox EU: Understanding the causes and consequences of the rise of finance is a first order concern for macroeconomists and policymakers. The increasing size and leverage of the financial sector has been interpreted as an indicator of excessive risk taking1 and has been linked to the increase in income inequality in advanced economies,2 as well as to the growing political influence of the financial industry (Johnson and Kwak 2010). Yet surprisingly little is known about the driving forces behind these trends.
In our recent research we turn to economic history. We build on our earlier work that first demonstrated the dramatic growth of the balance sheets of financial intermediaries in the second half of the 20th century and how periods of rapid credit growth were often followed by systemic financial crises and severe recessions (Schularick and Taylor 2012, Jordà, Schularick, and Taylor 2013).
We unveil a new long-run dataset covering disaggregated bank credit for 17 advanced economies from 1870 to today (Jordà, Schularick, and Taylor 2014). The new data allow us to delve much deeper than has been previously possible into the forces driving the growth of finance. For the first time we can construct the share of mortgage loans in total bank lending for most countries back to the 19th century. In addition, we can calculate the share of bank credit to business and households for most countries for the decades after WW2, and back to the 19th century for a handful of countries. ...
In the second half of the 20th century, banks and households have been heavily leveraging up through mortgages. Mortgage credit on the balance sheets of banks has been the driving force behind the increasing financialisation of advanced economies. Our research shows that this great mortgaging has been a major influence on financial fragility in advanced economies, and has also increasingly left its mark on business cycle dynamics.
[There is quite a bit more discussion and evidence in the article.]
- The Federal Reserve and the Global Economy - Stanley Fischer
- Illustrating Asymptotic Behaviour - Part I - Dave Giles
- Regulators Are in the Dark on Shadow Banking, Says BOE’s Cunliffe - WSJ
- Fed Can’t Keep Falling Short of Inflation Goal, Says Evans - WSJ
- The Employment-Population Ratio Puzzle - CityEconomist
- Sinking, fast and slow - The Irish Economy
- More on the Origins of the Free Rider Idea - Tim Taylor
Saturday, October 11, 2014
Barkley Rosser feels "sorry for Fred." Sort of:
Hiatt Hysterical Over Losing His Schtick: Poor Fred Hiatt. For years, this Editor of the Editorial page of the Washington Post has made his named appearances on the editorial page (he daily bloviates the main ed lead anonymously) only to call for cutting Social Security, and occasionally Medicare as well. This has been his schtick for many years. Now it is over, but he fails to recognize it. ...
So, I feel sorry for Fred. Beating up on seniors who have paid in their taxes for what they are getting has been the one an only topic that has inspired him to write columns under his own name for many years. The new projections of lower deficits, good news to most of us, simply do not register with him. Actually, they probably do. But Krugman is right. As much as anybody, he is the longstanding VSP in DC who has been whining for years about cutting Social Security and Medicare, whose excuse for this argument has simply disappeared, but he and his pals simply are not willing to face the new facts.
Steve Waldman has a nice discussion of a recent debate:
Scale, progressivity, and socioeconomic cohesion, Interfluidity: Today seems to be the day to talk about whether those of us concerned with poverty and inequality should focus on progressive taxation. Edward D. Kleinbard in the New York Times and Cathie Jo Martin and Alexander Hertel-Fernandez at Vox argue that focusing on progressivity can be counterproductive. Jared Bernstein, Matt Bruenig, and Mike Konczal offer responses offer responses that examine what “progressivity” really means and offer support for taxing the rich more heavily than the poor. This is an intramural fight. All of these writers presume a shared goal of reducing inequality and increasing socioeconomic cohesion. Me too.
I don’t think we should be very categorical about the question of tax progressivity. We should recognize that, as a political matter, there may be tradeoffs between the scale of benefits and progressivity of the taxation that helps support them. We should be willing to trade some progressivity for a larger scale. Reducing inequality requires a large transfers footprint more than it requires steeply increasing tax rates. But, ceteris paribus, increasing tax rates do help. Also, high marginal tax rates may have indirect effects, especially on corporate behavior, that are socially valuable. We should be willing sometimes to trade tax progressivity for scale. But we should drive a hard bargain.
First, let’s define some terms...
Paul Krugman is getting worried about Europe again:
The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.
And so it is with the latest euro crisis. Not that long ago the austerians who had dictated macro policy in the euro area were strutting around, proclaiming victory on the basis of a modest uptick in growth. Then inflation plunged and the eurozone economy began to sputter — and perhaps more important, everyone looked at the fundamentals again and realized that the situation remains extremely dire.
Now, things looked very dire in the summer of 2012, too, and Mario Draghi pulled Europe back from the brink. And maybe, just maybe, he can do it again. But the task looks much harder. ...
Europe has surprised many people, myself included, with its resilience. And I do think the Draghi-era ECB has become a major source of strength. But I (and others I talk to) are having an ever harder time seeing how this ends — or rather, how it ends non-catastrophically. You may find a story in which Marine Le Pen takes France out of both the euro and the EU implausible; but what’s your scenario?
- Does the USA Really Soak the Rich? - Mike Konczal
- The economics of parenting - vox
- Why is the recovery so weak? It’s the austerity, stupid. - Matt O'Brien
- Thoughts on Financial Stability and Monetary Policy - Brad DeLong
- Are DSGE models distorting policy? - a test case - mainly macro
- Gaming in the U.S. and State Revenues. - Oregon Office of Economic Analysis
- Limits to Growth One More Time - EconoSpeak
- Review of Books by Kleinbard and Madrick - The Washington Post
- The new way forward - Jamie Galbraith
- The man who will not win the Nobel - INET
- Heat Wave: Rising Financial Risks in the United States - iMFdirect
- Helicopters, redemption, and the target - Nick Rowe
- The Federal Budget Deficit Is Back to Normal - NYTimes.com
- Will U.S. Workers Start Going Abroad? - Tim Taylor
- About Rationalizability - The Leisure of the Theory Class
- Historical Echoes: “Burns Money” on What’s My Line? - Liberty Street
- It’s Draghi versus Weidmann on ECB QE - Gavyn Davies
- Our Misguided Obsession with the Tax Code - Justin Fox
- Steaming slowly toward the limits of growth - Mark Buchanan
Friday, October 10, 2014
Jared Bernstein wants to correct a potential "misimpression" of an op-ed by Ed Kleinbard (this was in today's links):
No, Ed Kleinbard Does Not Want a Less Progressive Tax System: I favorably reviewed Ed Kleinbard’s book here the other day so I’m obliged to step in a correct what looks to me like a misimpression growing out of an oped he has in today’s NYT.
Because the oped is entitled “Don’t Soak the Rich” and because Ed, IMHO, doesn’t articulate the nuances in his argument the way he needs to, the oped is being misrepresented as a call for a less progressive tax system (I also think Ed’s mistaken in his claim that the US tax system, all in, is the most progressive across advanced economies—in fact, it’s only mildly progressive…but more on that later).
For example, responding to the oped, Len Berman, a DC tax expert, tweeted “a progressive’s call for less progressive taxation.”
I can see where Len gets that from the piece, and obviously Ed will have to speak for himself, but Ed’s book clearly supports progressive taxation. He may not see the need to make the tax system more progressive, though his book calls for just that in ways I’ll note in a moment. But he certainly does not call for less progressivity. ...
Why isn't America celebrating the large fall in the deficit?:
Secret Deficit Lovers, by Paul Krugman, Commentary, NY Times: What if they balanced the budget and nobody knew or cared?
O.K., the federal budget hasn’t actually been balanced. But the Congressional Budget Office has tallied up the totals for fiscal 2014..., and reports that the deficit plunge of the past several years continues. ...
So where are the ticker-tape parades? For that matter, where are the front-page news reports? After all, talk about the evils of deficits and the grave fiscal danger facing America dominated Washington for years. Shouldn’t we be making a big deal of the fact that the alleged crisis is over?
Well, we aren’t, and once you understand why, you also understand what fiscal hysteria was really about.
First, ordinary Americans aren’t celebrating the deficit’s decline because they don’t know about it. That’s not mere speculation...
Why doesn’t the public know better? Probably because of the way much of the news media report this and other issues, with bad news played up and good news downplayed if it’s reported at all.
This has been glaringly obvious in the case of health reform, where every problem ... has been the subject of headlines, while in right-wing media — and to some extent in mainstream news sources — favorable developments go unremarked. As a result, many people — even, in my experience, liberals — have the impression that the rollout of Obamacare has been a disaster, and have no idea that enrollment is above expectations, costs are lower than expected, and the number of Americans without insurance has dropped sharply. Surely something similar has happened on the budget deficit. ...
Deficit scolds actually love big budget deficits, and hate it when those deficits get smaller. Why? Because fears of a fiscal crisis — fears that they feed assiduously — are their best hope of getting what they really want: big cuts in social programs. ...
But isn’t the falling deficit just a short-term blip, with the long-run outlook as dire as ever? Actually, no..., there has ... been a dramatic slowdown in the growth of health spending — and if that continues, the long-run fiscal outlook is much better than anyone thought possible not long ago. ...
So let’s say goodbye to fiscal hysteria. I know that the deficit scolds are having a hard time letting go; they’re still trying to bring back the days when Bowles and Simpson bestrode the Beltway like colossi. But those days aren’t coming back, and we should be glad.
- Bernanke defends AIG bailout in court - FT.com
- Deficit anxiety is not the answer - The Washington Post
- The Establishment: a review - Stumbling and Mumbling
- The Freelance Economy Still Runs on Word of Mouth - Justin Fox
- Cultural Capture and the Financial Crisis - The Baseline Scenario
- Inequality and the Fourth Estate - Roger Farmer
- Don’t Soak the Rich - NYTimes.com
- Wage-Price Inflation and the Way Things Work In Economics - Beat the Press
- Is the US economy finally about to break free of the Oil choke collar? - NDD
- Blame dysfunctional markets for our economic malaise - David Cay Johnston
- Weekly Initial Unemployment Claims decrease to 287,000 - Calculated Risk
- Child Mortality, Inequality, and the ACA Medicaid Expansion - Jared Bernstein
- Medieval Venice’s Response to Globalization - A Fine Theorem
Thursday, October 09, 2014
Busy day today -- a couple of quick ones for now. This is Tim Taylor:
The Light Bulb Cartel and Planned Obsolescence: The old 1951 movie "The Man in the White Suit," starring Alec Guinness, is both an entertaining adventure/comedy and a meditation on technology and planned obsolescence. The Alec Guinness character invents a wonderful new fabric that will never get dirty and never wear out. He sees a future where ordinary people will save money on clothes and cleaning expenses. People marvel at the invention at first, but soon everyone is against him: the textile and clothing companies fear his cloth will put them out of business, the workers in those companies fear losing their jobs, and those who do the washing fear losing work, too. Near the end of the movie, one character notes wryly that markets won't function if the products work too well. He says: “What do you think happened to all the other things? The razor blade that doesn’t get blunt? The car that runs on water with a pinch of something else?”
It's harder to come up with clear-cut real-world example of where companies sought to reduce the quality of a product in order to boost sales. After all, in real-world markets there should usually be a mixture of lower-quality, lower-price products and higher-quality, higher-price products, and what people want to buy will have a substantial effect on what gets produced. But in the October 2014 issue of IEEE Spectrum, Markus Krajewski tells the story of "The Great Lightbulb Conspiracy: The Phoebus cartel engineered a shorter-lived lightbulb and gave birth to planned obsolescence." ...
Do we need a crisis to reduce the deficit?: The macroeconomic case for not cutting the deficit straight after a major recession is as watertight as these things get, at least outside of the Eurozone. (It is also true for the Eurozone, but just a bit more complicated, so its easier to just focus on the US and UK in this post.) If you want to bring the government deficit and debt down, you do so when interest rates are free to counter the impact on aggregate demand. As the problems of high government debt are long term there is no urgency for debt reduction, so the problem can wait. The costs of fiscal consolidation in a liquidity trap are large and immediate, as we have experienced to our cost.
Sometimes austerity proponents will admit this basic macroeconomic truth, but say that it ignores the politics. Politics means that it is very difficult for governments to reduce debt during booms, they say. Although it would be nice to wait for interest rates to rise before cutting the deficit, it will not happen if we do, so we have to cut now. Like all good myths, this is based on a half truth: in the 30 years before the recession, debt tended to rise as a share of GDP in most OECD countries. And it always sounds wise to say you cannot trust politicians.
However both the UK and US show that this is not some kind of iron law of politics. ...
- The Deficit Is Down, and Nobody Knows or Cares - Paul Krugman
- FOMC Minutes - Calculated Risk
- Drug quality and global trade - vox
- Ukraine: A stress test of IMF credibility - vox
- Rational != Self-interested - Andrew Gelman
- Inflationistas Are Guilty of Derp - Noah Smith
- Defining price stability - mainly macro
- Aggregate Demand and Coordination Failures - Uneasy Money
- The Pretty Good, The Not So Bad, And The Ugly - Paul Krugman
- Demographic Trends and Growth in Japan and the US - Liberty Street
- Don’t call the helicopters yet! - longandvariable
- How the IMF Can Save the Global Economy - Mohamed El-Erian
- Disinvestment Madness - Paul Krugman
- Free markets need socialism - Stumbling and Mumbling
- Verisimilitude in models and simulations - Understanding Society
- Readers Respond: On Paulus Krugmanus - NYTimes.com
Wednesday, October 08, 2014
Carter Price and Heather Boushey:
How are economic inequality and growth connected?, by Carter C. Price and Heather Boushey: ... In the past several decades, economic inequality in the United States and other wealthy nations has risen sharply, spurring renewed interest in the question of whether and how changes in income distributions affect economic wellbeing. Over the same time period, economic inequality has persisted and even grown in many poorer economies.
These trends have sparked economists to conduct empirical studies, analyzing data across states and countries, to see if there is a direct relationship between economic inequality, and economic growth and stability. Early empirical work on this question generally found inequality is harmful for economic growth. Improved data and techniques added to this body of research, but the newer literature was generally inconclusive, with some finding a negative relationship between economic growth and inequality while others finding the opposite.
The latest research, however, provides nuance that can explain many of the conflicting trends within the earlier body of research. There is growing evidence that inequality is bad for growth in the long run. Specifically, a number of studies show that higher inequality is associated with slower income gains among those not at the top of the income and wealth spectrum. ...
In this paper, we review the recent empirical economic literature that specifically examines the effect inequality has on economic growth, wellbeing, or stability. This newly available research looks across developing and advanced countries and within the United States. Most research shows that, in the long term, inequality is negatively related to economic growth and that countries with less disparity and a larger middle class boast stronger and more stable growth. Some studies do suggest that in the short run, inequality may spur growth before hindering it over the longer term, but overall there is growing evidence that, in the long run, more equitable societies are associated with higher rates of growth. ...
Important as well for the purposes of this paper is this—the latest economic research we reviewed only examines the outcome of whether there are results for regressions that demonstrate positive or negative relationships between inequality and economic growth and stability. This means the paper cannot provide clear guidance for policymakers on exactly how to address inequality or mitigate its effects on growth. In other words, the research examined in this paper generally does not identify the channels or mechanisms by which inequality affects growth. ...
This paper does not contain policy advice. Instead, it contains analysis that largely demonstrates there are direct, and possibly causal, relationships between economic inequality and growth—places that begin with a lower level of inequality subsequently tend to grow faster and have longer periods of growth than those with a higher level of inequality. In future research, we will focus on the channels...
I've noted this several times in the past, but it's worth pointing out again. The problems in the shadow banking sector are still present for the most part. From Tim Taylor:
Shadow Banking: U.S. Risks Persist: ...A "shadow bank" is any financial institution that gets funds from customers and then in some way lends the money to borrowers. However, a shadow bank doesn't have deposit insurance. And while the shadow bank often faces some regulation, it typically falls well short of the detailed level of risk regulation that real banks face. In this post in May, I tried to explain how shadow banking works in more detail. Many of the financial institutions at the heart of the financial crisis were "shadow banks." ...
Five years past the end of the Great Recession, how vulnerable is the U.S. and the world economy to instability from shadow banking? ... The IMF devotes a chapter in its October 2014 Global Financial Stability Report to "Shadow Banking Around the Globe: How Large, and How Risky?" ...
It is discomforting to me to read that for the U.S., shadow banking risks are "slightly below precrisis levels." In general, the policy approach here is clear enough. As the IMF notes: "Overall, the continued expansion of finance outside the regulatory perimeter calls for a more encompassing approach to regulation and supervision that combines a focus on both activities and entities and places greater emphasis on systemic risk and improved transparency."
Easy for them to say! But when you dig down into the specifics of the shadow banking sector, not so easy to do.
If the number of retweets of a link is any indication, there seems to be a lot of interest in this paper:
Busts hurt more than booms help: New lessons for growth policy from global wellbeing surveys, by Jan-Emmanuel De Neve and Michael I. Norton, Vox EU: Wellbeing measures allow us to distinguish higher incomes from higher happiness. This column looks at new welfare measures and macroeconomic fluctuations. It presents evidence that the life satisfaction of individuals is between two and eight times more sensitive to negative economic growth than it is to positive economic growth. Engineering economic ‘booms’ that risk even short ‘busts’ is unlikely to improve societal wellbeing in the long run.
To say it another way, "policymakers seeking to raise wellbeing should focus more on preventing busts than inculcating booms."
- Legacies, Clouds and Uncertainties - Olivier Blanchard
- Trying to glimpse the ‘grey economy’ - vox
- Punished for the Dollar's Virtue? - Paul Krugman
- The dollar as reserve currency - Jared Bernstein
- Why Federal Aid for Higher Education Is Missing the Mark - NYT
- College is Not a Ludicrous Waste of Money - Brookings Institution
- Slow Steaming and the Supposed Limits to Growth - Paul Krugman
- Clarifying the Objectives of Monetary Policy - Narayana Kocherlakota
- Errata: Obama Beats Reagan On Private Job Growth - The Dish
- How to test whether the LMI (LMCI) is a good indicator - Nick Rowe
- Where is the wage growth? - Nick Bunker
- Co-Founder Equity Splits - Digitopoly
- Pick a fund, any fund… - Tim Harford
- The Great Wage Slowdown of the 21st Century - NYTimes.com
- Spending on Necessities and Luxuries - Tim Taylor
- The Fed Shouldn't Raise Interest Rates Too Soon - NRO
- The Fed’s Mortgage Favoritism - Jeffrey Lacker and John Weinberg
- The Kingston Heterodox Economics Business Model - longandvariable
- The mythical debt crisis - mainly macro
- Germany is stalling - Gavyn Davies
Tuesday, October 07, 2014
It’s Not a Skills Gap That’s Holding Wages Down: It's the Weak Economy, Among Other Things: The inadequate quantity and quality of American jobs is one of the most fundamental economic challenges we face. It’s not the only challenge: Poverty, inequality, and stagnant mobility loom large, as well. But in a nation like ours, where wages and salaries are key to the living standards of working-age households, all these challenges flow from the labor market problem.
OK, but this is a supposed to be an article about technology. What’s the linkage between technology and this fundamental problem? As a D.C.-based economist who’s been working on the issue of jobs and earnings for almost 25 years, trust me when I tell you that most policy makers believe the following:
“Yes, there’s a problem of job quantity and quality, but it’s largely a skills problem. Because of recent technological advances, most notably computerization, an increasing share of the workforce lacks the skills to meet the demands of today’s workplaces.
What’s more, the pace at which technology is replacing the inadequately skilled is accelerating—think robotics and artificial intelligence. These dynamics explain growing wage stagnation, wage inequality, and the structural unemployment of those without college degrees.”
Problem is, most of that is wrong.
Technology and employers’ skill demands have played a critical role in our job market forever, but they turn out to be of limited use in explaining the depressed incomes of today, or of the past decade. ...
This is part of a post from three years ago when people were making similar arguments about the skills gap (another way of saying the problem is structural, not cyclical):
I wish I'd remembered point three when I wrote recently about the difficulty of separating cyclical and structural unemployment. I was saying, essentially, the same thing that Peter Diamnond says here (via):
...Third, I am skeptical of the value of attempting to separate cyclical from structural unemployment over a business cycle.... The tighter the labor market and the more valuable the filling of a vacancy, the more a firm is willing to hire a worker who is a less good match, who may need more training.... [A] worker who might be viewed as structurally unemployed, as facing serious mismatch in the current state of the economy, may be readily employable in a tight labor market. The common practice of thinking about the extent of unemployment as a sum of frictional, structural and cyclical parts misses the point.... [D]irect measures of frictional or structural unemployment... dependent on the tightness of the labor market... have limited relevance for the role of demand stimulation policies. The idea that the US economy is not adaptable and capable of dealing with the need for skills and jobs to adapt to each other is peculiar, given the long history of unemployment going up and down. When the labor market is tight and firms have trouble finding workers, they reach out to places they have not looked before and extend training in order to find workers who can fill their needs. ...
Here's (part of) the post of mine referred to above:
Cyclical and structural unemployment can be hard to tell apart. For example, suppose that a business owner would like to hire someone to operate a complicated piece of machinery, and needs someone with experience. The owner offers $10 per hour, but, unfortunately, no one applies. Interviewed by the local paper, the owner complains that qualified workers simply aren't available.
However, that is not true. There is an unemployed worker who has been running that kind of machine for 10 years. He's good at it, and only lost his job due to the fact that the place he had worked for the last 10 years shut its doors in the recession. At $15 per hour, or more, he would have taken the job. But $10 is just not enough to pay the bills and save the house, and he decides to hold out and hope that something better comes along.
So whose fault is it? Should be blame the worker for being unwilling to take a decent job due to the fact that it doesn't pay enough (perhaps unemployment compensation is helping the worker to wait for a job that will pay enough to support the household)? Should we blame the store owner for not paying enough to attract workers with families to support? Neither, the problem is lack of demand.
If times were better, i.e. demand were stronger, the business owner could afford to pay $15, and would -- problem solved. So, all that is needed is an increase in demand for the products the business sells (demand that would exist if the worker and others like him had jobs). But at current demand levels, which are depressed, it is not worth it to pay that much. The business owner would be losing money.
So is the problem cyclical or structural? It will look like structural unemployment in the data, the owner can't find anyone who is qualified who will take the job at the wage being offered, but the heart the problem is a lack in demand. ...
Or, as I've told the story at other times, there is a worker in another city who is unemployed, well--trained for this job, but the wage that is offered does not provide enough income to justify moving. At a higher wage, it might. Again, a problem that looks structural is actually due to lack of demand. With more demand, and the ability to pay a higher wage, the firm would find the skilled worker it seeks.
But I like the way Peter Diamond said it best.
Where have I seen this game played before? This is from Chris Dillow:
In the context she's using the word, she clearly means not "fix the economy" but "fix the deficit".
Now, I had thought that Clegg had merely mis-spoke. But it's unlikely that two people would mis-speak in exactly the same way within hours of each other. I suspect something else is going on - the construction of a hyperreality.
They are trying to equate the deficit with the economy, to give the impression that good economic policy consists not in boosting real wages, cutting unemployment, or addressing the threat of secular stagnation but merely in "fixing the deficit." ...Clegg ... and Quinn ... are both in the same Bubble pushing the same quack mediamacro.
Worse still, by "fixing the deficit" they mean some type of austerity. But there's a big difference between the two. We could - perhaps - fix the deficit by state-contingent fiscal rules, or by adopting a higher inflation target (or NGDP target) and thus using monetary stimulus to inflate our way out of government debt. ...
Instead, the only economic policy permitted by the Bubble is the fake machismo of "tough choices." Not only are these tough only for other people - mostly the most vulnerable - but they don't even work in their own terms; one lesson we've learned since 2010 is that "tough decisions" to cut the deficit don't actually do so as much as their perpetrators hope. But then, in the Bubble's hyperreality, neither justice nor evidence count for anything.
It's sad that so many people think the way to fix the economy, or the deficit, is to help the people who don't need it rather than helping those who do. Austerity that hurts those in need trickles up -- austerity financed tax cuts help those at the top -- but very little trickles back down again. Tax cuts for the wealthy do little to help the economy, and tax cuts certainly don't help the deficit. The claim that they somehow pay for themselves and reduce the deficit has no foundation in actual evidence, it is also "quack mediamacro" designed to fool people into supporting policies that benefit a key GOP political contingency.
The Labor Market Conditions Index: Use With Care, by Tim Duy: I was curious to see how the press would report on the Federal Reserve Board's new Labor Market Conditions Index. My prior was that the reporting should be confusing at best. My favorite so far is from Reuters, via the WSJ:
Fed Chairwoman Janet Yellen has cited the new index as a broader gauge of employment conditions than the unemployment rate, which has fallen faster than expected in recent months. The index’s slowdown over the summer could bolster the argument that the Fed should be patient in watching the economy improve before raising rates.But its pickup last month could strengthen the case that the labor market is tightening fast and officials should consider raising rates sooner than widely expected. Many investors anticipate the Fed will make its first move in the middle of next year, a perception some top officials have encouraged.
Translation: We don't know what it means.
Now, this is not exactly the fault of the press. The Fed appears to want you to believe the LCMI is important, but they really don't give you reason to believe it should be important. They don't even release the LCMI - the charts on Business Week and US News and World Report are titled erroneously. The Fed releases the monthly change of the LCMI, as noted by Business Insider. But wait, no that's not right either. They actually release the six-month moving average of the LCMI, which means we really don't know the monthly change.1 What the Fed releases might actually be more impacted by what left the average six months ago than the reading from the most recent month. And you should recognize the danger of the six-month moving average - the longer the smoothing process, the more likely to miss turning points in the data. Unless of course the Fed released the raw data to follow as well. Which they don't.
The LCMI becomes even more confusing because it has been impressed upon the financial markets that it must have a dovish interpretation. From Business Insider:
The index was first "made famous" by Fed Chair Janet Yellen in her speech at Jackson Hole, when she said, "This broadly based metric supports the conclusion that the labor market has improved significantly over the past year, but it also suggests that the decline in the unemployment rate over this period somewhat overstates the improvement in overall labor market conditions."Recall that at Jackson Hole, Yellen spoke about the labor market puzzle of a steadily declining unemployment rate and strong payroll gains against the backdrop of declining labor force participation and flat wages.
Consider this in light of this from the Fed:
The first part of the associated commentary:
Table 2 reports the cumulative and average monthly change in the LMCI during each of the NBER-defined contractions and expansions since 1980. Over that time period, the LMCI has fallen about an average of 20 points per month during a recession and risen about 4 points per month during an expansion. In terms of the average monthly changes, then, the labor market improvement seen in the current expansion has been roughly in line with its typical pace...
If you look closely, the average monthly change during this expansion is faster than every recovery since the 1980-81 expansion. How does this fit with the conventional wisdom that we are experiencing a slow labor market recovery? Indeed, look at the chart:
According to this measure, the pace of improvement in this recovery exceeds than much of the 1990's. Think about that.
Moreover, consider the next sentence of the commentary:
...That said, the cumulative increase in the index since July 2009 (290 index points) is still smaller in magnitude than the extraordinarily large decline during the Great Recession (over 350 points from January 2008 to June 2009).
OK - so the Fed thinks the cumulative change is important. They think it is relevant that the LCMI has not retraced all of its losses. Let's take this idea further. Rather than using the recession dating, consider the even larger move from peak to trough. Between May 2007 to June 2009, the cumulative decrease in the LCMI was 398.4. Since then, the cumulative increase is 300.7, so the LCMI has retraced 75% of its losses.
Now consider the unemployment rate. The unemployment rate increased 5.6 percentage points from a low of 4.4% to a high of 10%. SInce then it has retraced 4.1 percentage points of that gain to last month's 5.9% rate. 4.1 is 73% of 5.6. In other words, the unemployment rate has retraced 73% of it losses.
The LCMI has retraced 75% of its losses. The unemployment rate has retraced 73% of it losses. So the LCMI shows the exact same amount of improvement in labor market conditions peak to trough as implied by the retracement of the unemployment rate.
You see the problem. The LCMI (or the data made available to the public) suggests the same amount of improvement in labor market conditions as implied by the unemployment rate. The LCMI suggests a faster pace of improvement than that seen in the previous three recoveries. So how exactly does Yellen reach the conclusion that "the decline in the unemployment rate over this period somewhat overstates the improvement in overall labor market conditions"? I am not seeing it on the basis of the data provided. Indeed, where exactly is the research showing the LCMI has some policy relevance?
Then again, this could be exactly why Yellen uses the modifier "somewhat" in the above quote. Perhaps she has no conviction that the LCMI provides information not already in the unemployment rate. If that's the case, then expect the LCMI to die on the vine, eventually relegated to be computed by whoever still has the p-star model on their list of assignments.
Bottom Line: Use the Fed's new labor market index with caution. Extreme caution. They are not releasing the raw data. They don't appear to have research explaining its policy relevance. Yellen's halfhearted claim that it provides information above and beyond the unemployment rate is questionable with a simple look at the cumulative change of the index compared to that of unemployment. And her halfhearted claims are even more telling given that she was the impetus for the research. If it was policy relevant, you would think she would be a little more enthusiastic (think optimal control). Moreover, the faster pace of recovery of the index compared to previous recessions - as clearly indicated by the Fed - seems completely at odds with the story it is supposed to support. Simply put, the press and financial market participants should be pushing the Fed much harder to explain exactly why this measure is important.
1. The LCMI data provided by the Fed is described as the "average monthly change." I am not sure why they don't explicitly provide the span of the averaging, but the website describes it as "Chart 1 plots the average monthly change in the LMCI since 1977. Except for the final bar, which covers the first quarter of 2014, each of the bars represents the average over a six-month period."
- Why public investment really is a free lunch - Larry Summers
- Why Weren’t Alarm Bells Ringing? - NYRB - Paul Krugman
- Has China’s Economy Become More “Standard”? - FRBSF
- The Return of Voodoo Economics - Jeffrey Frankel
- Is growth in east Africa for real? - vox
- A Gulf in Ocean Knowledge - NYTimes.com
- A hard look at corn economics - Marketplace.org
- The Relationship Between Economics and Geography - Rebecca Diamond
- Lost Consistency of European Policy Makers - Gloomy European Economist
- New theorem determines the age distribution of populations - EurekAlert
- What Can We Learn from Prior Periods of Low Volatility? - Liberty Street
- The Fed and the Secular Stagnation hypothesis - Jérémie Cohen-Setton
- Making Finance Safe - Cecchetti & Schoenholtz
- Labour market effects of migration in OECD countries - vox
- The overlooked history of African technology - MIT News
- Bond markets help lower inflation - vox
Monday, October 06, 2014
A small part of a much longer argument/post by Simon Wren-Lewis:
More asymmetries: Is Keynesian economics left wing?: ...So why is there this desire to deny the importance of Keynesian theory coming from the political right? Perhaps it is precisely because monetary policy is necessary to ensure aggregate demand is neither excessive nor deficient. Monetary policy is state intervention: by setting a market price, an arm of the state ensures the macroeconomy works. When this particular procedure fails to work, in a liquidity trap for example, state intervention of another kind is required (fiscal policy). While these statements are self-evident to many mainstream economists, to someone of a neoliberal or ordoliberal persuasion they are discomforting. At the macroeconomic level, things only work well because of state intervention. This was so discomforting that New Classical economists attempted to create an alternative theory of business cycles where booms and recessions were nothing to be concerned about, but just the optimal response of agents to exogenous shocks.
So my argument is that Keynesian theory is not left wing, because it is not about market failure - it is just about how the macroeconomy works. On the other hand anti-Keynesian views are often politically motivated, because the pivotal role the state plays in managing the macroeconomy does not fit the ideology. ...
Will Republicans "destroy the credibility of a very important institution"?:
Voodoo Economics, the Next Generation, by Paul Krugman, Commentary, NY Times: Even if Republicans take the Senate this year, gaining control of both houses of Congress, they won’t gain much in conventional terms: They’re already able to block legislation, and they still won’t be able to pass anything over the president’s veto. One thing they will be able to do, however, is impose their will on the Congressional Budget Office, heretofore a nonpartisan referee on policy proposals.
As a result, we may soon find ourselves in deep voodoo.
During his failed bid for the 1980 Republican presidential nomination George H. W. Bush famously described Ronald Reagan’s “supply side” doctrine — the claim that cutting taxes on high incomes would lead to spectacular economic growth, so that tax cuts would pay for themselves — as “voodoo economic policy.” Bush was right. ...
But now it looks as if voodoo is making a comeback. At the state level, Republican governors — and Gov. Sam Brownback of Kansas, in particular — have been going all in on tax cuts despite troubled budgets, with confident assertions that growth will solve all problems. It’s not happening... But the true believers show no sign of wavering.
Meanwhile, in Congress Paul Ryan, the chairman of the House Budget Committee, is dropping broad hints that after the election he and his colleagues will do what the Bushies never did, try to push the budget office into adopting “dynamic scoring,” that is, assuming a big economic payoff from tax cuts.
So why is this happening now? It’s not because voodoo economics has become any more credible. ... In fact,... researchers at the International Monetary Fund, surveying cross-country evidence, have found that redistribution of income from the affluent to the poor, which conservatives insist kills growth, actually seems to boost economies.
But facts won’t stop the voodoo comeback,... for years they have relied on magic asterisks — claims that they will make up for lost revenue by closing loopholes and slashing spending, details to follow. But this dodge has been losing effectiveness as the years go by and the specifics keep not coming. Inevitably, then, they’re feeling the pull of that old black magic — and if they take the Senate, they’ll be able to infuse voodoo into supposedly neutral analysis.
Would they actually do it? It would destroy the credibility of a very important institution, one that has served the country well. But have you seen any evidence that the modern conservative movement cares about such things?
- I Am Once Again Puzzled by Martin Feldstein - Brad DeLong
- Why We Allow Big Pharma to Rip Us Off - Robert Reich
- Defending Economics from Robert Samuelson - Dean Baker
- Fed Labor Market Conditions Index - Calculated Risk
- The great tuition debate: A rejoinder - Stephen Gordon
- Great minds think alike - The Bonddad Blog
- Why Democrats aren’t getting credit for the economy - Washington Post
- Salmon Roasted - EconoSpeak
- The Collapse of the Russian Ruble - EconoSpeak
- Exit, Voice and American Education - EconoSpeak
- Update on the UK Recovery - Econbrowser
Sunday, October 05, 2014
Is There a Wage Growth Puzzle?, by Tim Duy: Is there a wage growth puzzle? Justin Wolfers says there is, and uses this picture:
This puzzle isn’t entirely new, as the usual link between unemployment and the rate of wage growth has totally broken down over recent years. The recent data have made a sharp departure from the usual textbook analysis in which a tighter labor market leads to faster wage growth, and subsequent cost pressures feed through to higher inflation.
But has the link between wage growth and unemployment "totally broken down"? Eyeball econometrics alone suggests reason to be cautious with this claim as the only deviation from the typical unemployment/wage growth relationship is the "swirlogram" of fairly high wage growth relative to unemployment through the end of 2011 or so. But is this a breakdown or a typical pattern of a fairly severe recession? While, it might seem unusual if you begin the sample at 1985 as Wolfers did, so let's see what the 1980-85 episode looks like:
Same swirlogram. Compare the two recessions:
Fairly similar patterns, although in the 80-85 episode there was more room to push down the inflation expectations component of wage growth. It would appear that in the face of severe contractions, wage adjustment is slow. Now consider the 1985-1990 period:
Notice that wage growth is stagnant until unemployment moves below 6% - past experience thus suggests that we should not expect significant wage growth until we move well below 6% (you could argue the response actually began at 6.5%). Thus, it is premature to believe that there has been a breakdown in this relationship. So far, the response of wages is exactly what you should have expected in light of the 1980's dynamics. Which leads to two points:
- I am no fan of Dallas Federal Reserve President Richard Fisher. That said, he did not pick 6.1% out of a hat when he said that was the point at which wage growth has tended to accelerate in the past. That number fell out of his staff's research for a reason and surprises me not one bit.
- There is a reason the Fed picked 6.5% unemployment for the Evan's rule. There was absolutely no chance that that would be a meaningful number as far as labor market healing is concerned.
Consider now the sample since 1990:
Note four points:
- Notice the minor "swirlogram" associated with the early-90's recession. Again, not a breakdown.
- After 1992, wage growth tends to move sideways until unemployment sinks below 6%.
- Since 2012, the relationship is as traditional theory would suggest, a point that is actually evident on Wolfer's chart as well. The R-squared on the regression line is 0.75. Although notice that again, as wage growth moves into that 2.5% range, it appears to once again move mostly sideways. No mystery - nothing we haven't seen before.
- Clearly, there is some noise in the relationship. You should be able to extract away from the noise and recognize that there is no sudden acceleration in wage growth.
Now let's take another step and consider the relationship between unemployment and real wages (note that the series ends in 2014:8 - we don't have the September PCE price data yet):
The period of the Great Disinflation was generally associated with negative real wage growth. The period of the mid-90s to the Great Recession was generally associated with positive real wage growth. The swirlogram of the Great Recession is again evident, but notice that as unemployment approached the bottom end of the black regression line (R-squared = 0.65), real wage growth actually accelerated before returning to trend. I now have additional sympathy for firms that have complained in the past two years that they could not push wage growth through to higher prices. It does appear that real wage growth was faster than might be expected given the pace of economic activity and, by extension, the level of unemployment.
Oh - and real wage growth has reverted to the pre-Great Recession trend - pretty much exactly where you would expect it to be given the level of unemployment. Honestly, this one surprised me.
Which suggests that labor market healing has progressed much further than many progressives would like to admit. Many conservatives as well.
Which also means a lot of people are not going to like this chart.
And before you complain that the all-employee average wage data holds some great secret that is not in the production and nonsupervisory wage series (I have trouble taking seriously any sweeping generalizations of the business cycle dynamics of a series we only have through one business cycle), here is that version:
Same swirlogram. Pretty much the same idea with wage growth heading right back to where you would expect prior to the great recession.
Bottom Line: Be cautious in assuming that this time is different. The unemployment and wage growth dynamics to date are actually very similar to what we have seen in the past. Low wage growth to date is not the "smoking gun" of proof of the importance of underemployment measures. There very well may have been much more labor market healing that many are willing to accept, even many FOMC members. The implications for monetary policy are straightforward - it suggests the risk leans toward tighter than anticipated policy.
- Low interest rates can boost households’ consumption - vox
- Presidents and Jobs - Paul Krugman
- More progressive taxes wouldn’t raise much revenue - vox
- Narcissism, hubris and "success" - Stumbling and Mumbling
- Eurozone Asymmetries - mainly macro
- Population Share Growth in the US 1980-2010 - owenzidar
- Private sector QE can work in the euro area - Gavyn Davies
- Leveraged Loans: A Danger Spot? - Tim Taylor
- A win for Fannie Mae, Freddie Mac — and taxpayers - The Washington Post
- The new Washington consensus - time to fight rising inequality - The Guardian
Saturday, October 04, 2014
- The Real Lesson of Lehman - Jeff Madrick
- Meta-post on Robots and Jobs - Growth Economics
- How can we know if government spending is money-financed? - Nick Rowe
- Biocultural origins of human capital and growth - vox
- The US learned the wrong lessons from WWI - vox
- Nobody Understands the Liquidity Trap, Still - Paul Krugman
- The Long Cryptocon - Paul Krugman
- Economists Heart Uber - askblog
- The Sky Is Not Falling, But the Calculus Has Changed - Hale Stewart
- Wages and the Fed - Paul Krugman
- Our Misplaced Faith in Free Trade - NYTimes.com
- Trolls 2.0 - FT Alphaville
- Bill Grosses, Idealized and Actually Existing - Paul Krugman
- Wages and the Fed - Paul Krugman
- Who needs the responsibility? - Frances Woolley
- Wage Growth Continues to be Sluggish - Economic Policy Institute
- Why not wage-led growth? - Stumbling and Mumbling
- The Crisis of 1816, the Year without Sunspot Equilibria - Liberty Street
- Has Cameron blown the austerity cover? - mainly macro
- New York Fed Boss Hits Back - WSJ
Friday, October 03, 2014
Bill McBride on today's employment report:
Comments on Employment Report: Party Like it's 1999!: Earlier: September Employment Report: 248,000 Jobs, 5.9% Unemployment Rate
This was a solid report with 248,000 jobs added and combined upward revisions to July and August of 69,000. As always we shouldn't read too much into one month of data, but at the current pace (through September), the economy will add 2.72 million jobs this year (2.64 million private sector jobs). Right now 2014 is on pace to be the best year for both total and private sector job growth since 1999.
A few other positives: the unemployment rate declined to 5.9% (the lowest level since July 2008), U-6 (an alternative measure for labor underutilization) was at the lowest level since 2008, the number of part time workers for economic reasons declined slightly (lowest since October 2008), and the number of long term unemployed declined to the lowest level since January 2009.
Unfortunately wage growth is still subdued. From the BLS: "Average hourly earnings for all employees on private nonfarm payrolls, at $24.53, changed little in September (-1 cent). Over the year, average hourly earnings have risen by 2.0 percent. In September, average hourly earnings of private-sector production and nonsupervisory employees were unchanged at $20.67."
With the unemployment rate at 5.9%, there is still little upward pressure on wages. Wages should pick up as the unemployment rate falls over the next couple of years, but with the currently low inflation and little wage pressure, the Fed will likely remain patient.
A few more numbers...
[Dean Baker's comments are here.]
What is the price for getting it wrong?:
Depression Denial Syndrome, by Paul Krugman, Commentary, NY Times: Last week, Bill Gross, the so-called bond king, abruptly left Pimco, the investment firm he had managed for decades. People who follow the financial industry were shocked but not exactly surprised; tales of internal troubles at Pimco had been all over the papers. But why should you care?
The answer is that Mr. Gross’s fall is a symptom of a malady that continues to afflict major decision-makers, public and private. Call it depression denial syndrome: the refusal to acknowledge that the rules are different in a persistently depressed economy. ...
Now, we normally think of deficits as a bad thing — government borrowing competes with private borrowing, driving up interest rates, hurting investment... But, since 2008, we have ... been stuck in a liquidity trap... In this situation,... deficits needn’t cause interest rates to rise. ...
All this may sound strange and counterintuitive, but it’s what basic macroeconomic analysis tells you. ... But many, perhaps most, influential people in the alleged real world refused to believe...
Which brings me back to Mr. Gross.
For a time, Pimco — where Paul McCulley, a managing director at the time, was one of the leading voices explaining the logic of the liquidity trap — seemed admirably calm about deficits, and did very well as a result. ...
Then something changed. Mr. McCulley left Pimco at the end of 2010..., and Mr. Gross joined the deficit hysterics, declaring that low interest rates were “robbing” investors and selling off all his holdings of U.S. debt. In particular, he predicted a spike in interest rates when the Fed ended a program of debt purchases in June 2011. He was completely wrong, and neither he nor Pimco ever recovered.
So is this an edifying tale in which bad ideas were proved wrong by experience, people’s eyes were opened, and truth prevailed? Sorry, no. In fact, it’s very hard to find any examples of people who have changed their minds. People who were predicting soaring inflation and interest rates five years ago are still predicting soaring inflation and interest rates today, vigorously rejecting any suggestion that they should reconsider their views in light of experience.
And that’s what makes the Bill Gross story interesting. He’s pretty much the only major deficit hysteric to pay a price for getting it wrong (even though he remains, of course, immensely rich). Pimco has taken a hit, but everywhere else the reign of error continues undisturbed.
Thinking the Unthinkable: The Effects of a Money-Financed Fiscal Stimulus, by Jordi Galí, Vox EU: Many unconventional policies adopted by central banks in response to the Crisis failed to boost the economy. This column discusses the effects of a temporary money-financed fiscal stimulus. When a more realistic model is allowed, such a stimulus can have a strong effect on output and employment, and a mild effect on inflation.
He ends with:
The time may have come to leave old prejudices behind and come to terms with the urgent need to increase aggregate demand in a more foolproof way than tried up to now, especially in the Eurozone. The option of a money-financed fiscal stimulus should be considered seriously.
- Where danger lurks - Olivier Blanchard
- Restoring Confidence in Reference Rates - William Dudley
- One Step Up & Two Steps Back - The Berkeley Blog
- Um…maybe credit is a little too tight - Jared Bernstein
- Computational models for social phenomena - Understanding Society
- Franklin Fisher on the Stability(?) of General Equilibrium - Uneasy Money
- Competing with computers: The hollowing out effect - The Economist
- Politics, Not Economics, Impede U.S. Trade Deals - WSJ
- Privacy Research - The Leisure of the Theory Class
- Knaves, Fools, and Quantitative Easing - Paul Krugman
- Devaluing the euro is not mercantilism - CER Insights
- When a Simple Rule of Thumb Beats a Fancy Algorithm - Justin Fox
- Boeing moving 2000 jobs from Washington state - Kenneth Thomas
- Disagreements between nations - mainly macro
- For lack of social insurance MaxSpeak
- Nudges: Good and Bad - Cass R. Sunstein
- Time for an Infrastructure Push? - Tim Taylor
- Are cuts "feasible"? - Chris Dillow
- Weekly Initial Unemployment Claims decrease - Calculated Risk
Thursday, October 02, 2014
Via the Lindau blog:
The verdict: is blogging or tweeting about research papers worth it?, by Melissa Terras: Eager to find out what impact blogging and social media could have on the dissemination of her work, Melissa Terras took all of her academic research, including papers that have been available online for years, to the web and found that her audience responded with a huge leap in interest...
Just one quick note. This is what happened when one person started promoting her research through social media. If everyone does it, and there is much more competition for eyeballs, the results might differ.
So why is our infant mortality so bad?: ...Everyone knows that in international comparisons, the infant mortality rate in the US is terrible. Some people think it’s because we code things differently and try harder to save premature babies. Others think that’s not true, and that this points to other problems in the health care system.
As always, though, it’s probably a mixture of many things. A new NBER working paper gets at just that. “Why is Infant Mortality Higher in the US than in Europe?” ... What did they find?
Reporting differences ... explained up to 40% of the disadvantage in US infant mortality. But that would only get us closer. It would still leave us way worse. ... What accounted for the real disadvantage was postneonatal mortality, or mortality from one month to one year of age. That difference was almost entirely due to excess inequality in the US. ...
So there are two main takeaways from this paper. The first is that although reporting differences can account for some of our worse infant mortality statistics, most of the differences we see are not due to that explanation. The second is that most of the rest of the disadvantage is due to differences in postneonatal mortality, that likely require fixes to the healthcare system. Whether the ACA does so remains to be seen.
- Ordoarithmetic - Paul Krugman
- Tax Tactics Threaten Public Funds - NYTimes.com
- The permanent scars of fiscal consolidation - Antonio Fatas
- The disappearance of routine jobs - vox
- John Cochrane’s diatribe on inequality - longandvariable
- Age Structure, Experience, Productivity…… and France! - Growth Economics
- Inflation Panic Will Kill the Recovery - Clive Crook
- What's Wrong With Ignoring Inequality - Noah Smith
- Re-basing GDP and Estimating Growth Rates - Growth Economics
- Unemployment Hurts Happiness More Than Modest Inflation - WSJ
- The Transmission of Liquidity Risk through Global Banks - Liberty Street
- Public Infrastructure Investment: IMF v. Mankiw - EconoSpeak
- Understanding China's Hard Line on Hong Kong - Justin Fox
- The torch that wouldn't burn - UCLA in 1968 - Tiago Mata
- Your Debt, Our Nation's Headache - Barry Ritholtz
- How many UK elections can a nasty party win? - mainly macro
- Caught in the social safety net - MIT News
- 2011 And All That - Paul Krugman
- On CORE - EconoSpeak
Wednesday, October 01, 2014
The fiscal impact measure shows how much federal, state, and local government taxes and spending added to or subtracted from the overall pace of economic growth. Between 2008 and 2011, fiscal impact was positive, indicating that government policy was stimulative; in recent years, it has been negative, indicating restraint. (For more detail on how this measure was constructed and how to interpret it, see our methodology.)
I'm not so sure that the solution to Americans working "strange hours" is "to revert to the shop-closing laws (Blue Laws) that prevailed in the US years ago." What do you think?:
Americans work too long (and too often at strange times), by Daniel S. Hamermesh, Elena Stancanelli, Vox EU: The facts on work hours and timing The average US workweek is 41 hours, 3 hours longer than Britain’s and even longer than in Germany, France, Spain, or the Netherlands (see the Table below).
- 32% of American employees work 45 or more hours, compared with 18% in Germany, and 4% in France.
- Only in the UK does the percentage of employees putting in these long hours approach the US one.
Over a year, the average American employee puts in 1,800 hours, which is more than any other wealthy country, even Japan. What is remarkable is the change during the past three decades. In 1979, Americans looked little different from workers in these other countries, working about the same number of hours per year as the French or the British, and many fewer hours than Japanese. Since then, employees in other countries have begun to take it easier, to enjoy their riches, but Americans have not.
The picture is even bleaker than these numbers suggest. Not only do Americans work longer hours than their European counterparts, but they are much more likely to work at night and on weekends.
- 27% of US employees perform some work between 10 p.m. and 6 a.m.
- In France, the Netherlands, Spain, and Germany the comparable fractions are much lower. Even in the UK, only 19 % of workers are on the job at night.
Work on weekends is also more common in the US than in other rich countries, with 29% of American workers doing some work on weekends, far above Germany, France, Spain, and the Netherlands; and even in the UK only 25% of employees do some work on weekends. But despite their greater likelihood of working at these strange times, those Americans who work then put in no more hours per day than the smaller numbers of European workers who are on the job at nights and weekends.
Table 1. Characteristics of work hours in the US and elsewhere: Amounts and timing
Source: Hamermesh and Stancanelli (2014)
Why these facts matter
Weekend and night work is not attractive to most workers. Unsurprisingly, therefore, it generates, on average, higher pay per hour than work at ‘normal’ times—wage differentials that compensate for the undesirability of working at unattractive hours (Kostiuk 1990). Also unsurprisingly, it attracts workers with the least human capital. In the US and Germany, young workers, those with less education, and immigrants are more likely than other employees to work at these times. In the US, minorities are also more likely to perform weekend and night work (Hamermesh 1996). The burden of working at unpleasant times falls disproportionately on those who have the least earning power.
Are the phenomena related?
If Americans’ workweeks were shortened to European levels, would their likelihood of working at these strange times drop to European levels? Do the American labour market, institutions, and culture make night and weekend work more prevalent independent of the length of the workweek?
To answer the titular question of this section, we examine the determinants of the probability of night work using data from various time-diary surveys for the US and France, Germany, the Netherlands, Spain, and the UK. For the US, we relate these probabilities to workers’ weekly work-hours and a large number of their demographic characteristics—age, immigrant and urban status, educational attainment, and others.
- Compared to those working 40 hours, American employees putting in 65+ hours per week are 44% more likely also to work on weekends, and 37% more likely to work at night. The phenomena of long hours and strange hours are related.
If we simulate what would happen to the probabilities of weekend and night work if the US had the same distributions of weekly work-hours as each of the 5 European countries, not surprisingly, those probabilities would drop -- but not very much. Even with France’s short workweeks, 25% of American employees would still be working on weekends, as high as the highest percentage in any of these 5 countries; and 22% would still be working at night, well above even the highest percentage in Europe. Even if no American worked more than 45 hours per week, the percentage performing weekend work would fall only to 24, and the percentage doing night work would fall only to 25.
Even with a reduction in American workweeks that lowered American work-hours down to European hours, Americans would be doing more night and weekend work than Europeans. Looking at time-diary data from the mid-1970s, this result should not be surprising. For example, at that time 26% of American employees worked on weekends, whereas only 14% of Dutch employees did so, both about the same as today, even though the Dutch and American workweeks were then much closer in length than they are today.
Why, and what to do (if anything)?
Why are Americans so much more likely to work at strange times than Europeans? The results here show that it is not because Americans work more than Europeans.
- One cause might be the greater inequality of earnings in the US that induces low-skilled workers -- earning relatively less than low-skilled Europeans -- to desire more work at times that pays a wage premium.
- Another possibility is cultural, so that Americans just enjoy working at these times more than their European counterparts. But citing cultural differences is an easy way to avoid thinking or doing anything about an issue.
Many European countries impose penalties on work at nights and on weekends, with some of the penalties being quite severe (Cardoso et al. 2012). The evidence in Cardoso et al. (2012) suggests that imposing penalties on night and/or weekend work will reduce its incidence. Work at different times of the week is substitutable, and employers are responsive to changing incentives to alter the timing of work. But that evidence also shows that even substantial incentives do not produce huge changes in work timing. If we really want to reduce the amount of work that occurs at times that are viewed as unpleasant, the solution may be to revert to the shop-closing laws (Blue Laws) that prevailed in the US years ago. No free-marketer would like this, but it may well be worth reviving these laws in order to get the US out of what might be a low-level, rat-race equilibrium.
Cardoso, A R, D Hamermesh and J Varejão (2012), “The Timing of Labor Demand,” Annals of Economics and Statistics, 105/106, 15-34.
Hamermesh, D (1996), Workdays, Workhours and Work Schedules: Evidence for the United States and Germany, Kalamazoo, MI: The W.E. Upjohn Institute.
Hamermesh, D and E Stancanelli (2014), “Long Workweeks and Strange Hours,” National Bureau of Economic Research, Working Paper No. 20449.
Kostiuk, P (1990), “Compensating Differentials for Shift Work,” Journal of Political Economy, 98(3), 1054-75.
Jared Bernstein says there's more slack in the labor market than you'd think from just looking at the unemployment rate:
...So why not just look at the unemployment rate and call it a day? Because special factors in play right now make the jobless rate an inadequate measure of slack. In fact, at 6.1 percent last month, it’s within spitting distance of the rate many economists consider to be consistent with full employment, about 5.5 percent (I think that’s too high, but that’s a different argument).
There are at least two special factors that are distorting the unemployment rate’s signal. First, there are over seven million involuntary part-time workers, almost 5 percent of the labor force, who want, but can’t find, full-time jobs. That’s still up two percentage points from its pre-recession trough. Importantly, the unemployment rate doesn’t capture this dimension of slack at all...
The second special factor masking the extent of slack as measured by unemployment has to do with participation in the labor force. Once you give up looking for work, you’re no longer counted in the unemployment rate, so if a bunch of people exit the labor force because of the very slack we’re trying to measure, it artificially lowers unemployment, making a weak labor market look better.
That’s certainly happened over the recession and throughout the recovery...
There's still plenty of room, and plenty of time for fiscal policymakers to do more to help the unemployed (and with infrastructure, our future economic growth at the same time). Unfortunately, Congress has been captured by other interests. As for monetary policy, let's hope that the FOMC listens to Charles Evans' call for patience. Raising rates too late and risking a temporary outbreak of inflation is far less of a mistake than raising them too early and slowing the recovery of employment. And there's this too: Unemployment Hurts Happiness More Than Modest Inflation.
- Now Is a Good Time to Invest in Infrastructure - iMFdirect
- Helicopter money: Today’s best policy option - vox
- Lawrence Summers Says Treasury Undermined Fed - NYTimes.com
- Explaining the Hegemony of New Classical Economics - Uneasy Money
- The Pimco Perplex - Paul Krugman
- Re-discovering the Phillips curve - vox
- The deficit: blame foreigners - Chris Dillow
- Deindustrialization Redeploys Workers to Service Sector - Sposi and Grossman
- Do Unemployment Benefits Expirations Explain Job Openings? - Liberty Street
- Government Debt Management at the Zero Lower Bound - Jerome Powell
- Apple set to lose billions in EU state aid case - Kenneth Thomas
- What the left hand buyeth, the right hand issueth - longandvariable
- Energy-Efficient Appliances: Labels, not Subsidies - Tim Taylor
- Ed Yardeni is the Wanker of the Day - wage stagnation edition - Bonddad Blog
- What's the Matter With Alabama? - Paul Krugman
- How Not to Regulate - James Kwak
Tuesday, September 30, 2014
Martin Wolf, in "Why inequality is such a drag on economies":
...in 2012, says the Organisation for Economic Co-operation and Development, the US ranked highest among the high-income countries in the share of relatively low-paying jobs. ...
I have a new column:
Why Have Policymakers Abandoned the Working Class?, by Mark Thoma: The risks associated with a negative economic shock can vary widely depending on the wealth of a household. Wealthy households can, of course, absorb a shock much easier than poorer households. Thus, it’s important to think about how economic downturns impact various groups within the economy, and how policy can be used to offset the problems experienced by the most vulnerable among us.
When thinking about the effects of an increase in the Fed’s target interest rate, for example, it’s important to consider the impacts across income groups. I was very pleased to hear monetary policymakers talk about the asymmetric risks associated with increasing the interest rate too soon and slowing the recovery of employment and output, versus raising rates too late and risking inflation. ...
But there is more to it than this. ...
The silver lining in falling college enrollment, by Mark Thoma: College enrollment "declined by close to half a million (463,000) between 2012 and 2013, marking the second year in a row that a drop of this magnitude has occurred," according to a report from the Census Bureau. And it's the largest two-year drop since Census began collecting enrollment data in 1966. Notably, the decline was concentrated in two-year colleges.
It is, of course, desirable to have a more educated population, particularly in an era of globalization and technological change that makes it harder for low-skilled workers to find good jobs. But the report also has a silver lining. ...
- Revisiting the Lehman Brothers Bailout That Never Was - NYTimes.com
- Offshoring and skill-biased technical change - vox
- Americans work long and at strange times - vox
- Draghi the Euro Breaker? - Gloomy European Economist
- Modelling sticky prices and monetary shocks - vox
- Recessions result in lower birth rates in the long run - EurekAlert
- Options-Based Expectations of Future Policy Rates - FRBSF
- Nobody Could Have Predicted, Bill Gross Edition - Paul Krugman
- Is It Time? A Case for Patience on Monetary Policy - Charles Evans
- A Mind-Blowing Optimal Prediction Result - No Hesitations
- Why and how we care about inequality - John Cochrane
- Why is the Fed planning to fail? - The Economist
- On Bogs and Dots - macroblog
- Early Warnings - Economic Principals
- Is Repeating a Grade a Useful Practice? - Tim Taylor
- Health Care Affordability Gap Widens - St. Louis Fed
- Direct Purchases of Treasury Securities by Fed Banks - Liberty Street
- Key Inflation Reading Slips Further Below Fed’s 2% Target - WSJ
- The new normal of monetary policy - Jérémie Cohen-Setton
- The dollar is now everyone's problem - Cecchetti & Schoenholtz
- Need We Fear the Robot Uprising? - Brad DeLong
Monday, September 29, 2014
Why are economic forecasts wrong so often?: The Queen of England famously asked why economists failed to foresee the financial crisis in 2008. "Why did nobody notice it?" was her question when she visited the London School of Economics that year.
Economists' failure to accurately predict the economy's course isn't limited to the financial crisis and the Great Recession that followed. Macroeconomic computer models also aren't very useful for predicting how variables such as GDP, employment, interest rates and inflation will evolve over time.
Forecasting most things is fraught with difficulty. See the current dust-up between Nate Silver and Sam Wang over their conflicting predictions about the coming Senate elections. Why is forecasting so hard?
Because so many things can go wrong. For example...
New paper from Joseph Stiglitz:
Reconstructing Macroeconomic Theory to Manage Economic Policy, by Joseph E. Stiglitz, NBER Working Paper No. 20517, September 2014 NBER: Macroeconomics has not done well in recent years: The standard models didn't predict the Great Recession; and even said it couldn't happen. After the bubble burst, the models did not predict the full consequences.
The paper traces the failures to the attempts, beginning in the 1970s, to reconcile macro and microeconomics, by making the former adopt the standard competitive micro-models that were under attack even then, from theories of imperfect and asymmetric information, game theory, and behavioral economics.
The paper argues that any theory of deep downturns has to answer these questions: What is the source of the disturbances? Why do seemingly small shocks have such large effects? Why do deep downturns last so long? Why is there such persistence, when we have the same human, physical, and natural resources today as we had before the crisis?
The paper presents a variety of hypotheses which provide answers to these questions, and argues that models based on these alternative assumptions have markedly different policy implications, including large multipliers. It explains why the apparent liquidity trap today is markedly different from that envisioned by Keynes in the Great Depression, and why the Zero Lower Bound is not the central impediment to the effectiveness of monetary policy in restoring the economy to full employment.
[I couldn't find an open link.]
The difference between the rich and the poor is larger than most people realize:
Our Invisible Rich, by Paul Krugman, Commentary, NY Times: Half a century ago, a classic essay in The New Yorker titled “Our Invisible Poor” took on the then-prevalent myth that America was an affluent society with only a few “pockets of poverty.” For many, the facts about poverty came as a revelation...
I don’t think the poor are invisible today... Instead, these days it’s the rich who are invisible. ... In fact, most Americans have no idea just how unequal our society has become.
The latest piece of evidence to that effect is a survey asking people in various countries how much they thought top executives of major companies make relative to unskilled workers. In the United States the median respondent believed that chief executives make about 30 times as much as their employees, which was roughly true in the 1960s — but since then the gap has soared, so that today chief executives earn something like 300 times as much as ordinary workers.
So Americans have no idea how much the Masters of the Universe are paid, a finding very much in line with evidence that Americans vastly underestimate the concentration of wealth at the top. ...
So how can people be unaware of this development, or at least unaware of its scale? The main answer, I’d suggest, is that the truly rich are so removed from ordinary people’s lives that we never see what they have. We may notice, and feel aggrieved about, college kids driving luxury cars; but we don’t see private equity managers commuting by helicopter to their immense mansions in the Hamptons. The commanding heights of our economy are invisible because they’re lost in the clouds. ...
Does the invisibility of the very rich matter? Politically, it matters a lot. Pundits sometimes wonder why American voters don’t care more about inequality; part of the answer is that they don’t realize how extreme it is. ...
Most Americans say, if asked, that inequality is too high and something should be done about it — there is overwhelming support for higher minimum wages, and a majority favors higher taxes at the top. But at least so far confronting extreme inequality hasn’t been an election-winning issue. Maybe that would be true even if Americans knew the facts about our new Gilded Age. But we don’t know that. Today’s political balance rests on a foundation of ignorance, in which the public has no idea what our society is really like.
- Joe Stiglitz vs. the Austerity Zombies - Brad DeLong
- Perceptions of inequality in Europe and the US - vox
- Labour under-utilisation in America - Gavyn Davies
- Raising Most People's Wages - Robert Reich
- Real wages continue to fall in the UK - vox
- Finally, the Truth About the A.I.G. Bailout - NYTimes.com
- Enough With Claims That Economics Is Unscientific - Modeled Behavior
- The Geneva Report on global deleveraging - vox
- The Washington Post Is a Mess: Social Security Edition - Dean Baker
- The Fed would be crazy to worry about runaway wages - Rex Nutting
Sunday, September 28, 2014
The Fed would be crazy to worry about runaway wages: Richard Fisher and Charles Plosser, the two biggest inflation hawks at the Federal Reserve, are retiring soon. But their pernicious ideas will stay alive at the Fed and elsewhere, threatening the middle class with another lost decade of underemployment and low wages.
Fisher, Plosser and the other hawks say inflation is becoming our greatest economic worry. They want the Fed to raise interest rates soon to keep the unemployment rate from dropping too far and to prevent American workers from getting a raise.
They would rather have you to stay jobless and poor.
You may think I’m exaggerating their views, but I’m not. ...
Acemoglu, Autor, Dor, Hansen, and Price (I've noted this paper once or twice already in recent months, but thought it worthwhile to post their summary of te work):
The rise of China and the future of US manufacturing, by Daron Acemoglu, David Autor, David Dorn, Gordon H. Hanson, and Brendan Price, Vox EU: The end of the Great Recession has rekindled optimism about the future of US manufacturing. In the second quarter of 2010 the number of US workers employed in manufacturing registered positive growth – its first increase since 2006 – and subsequently recorded ten consecutive quarters of job gains, the longest expansion since the 1970s. Advocating for the potential of an industrial turnaround, some economists give a positive spin to US manufacturing’s earlier troubles: while employment may have fallen in the 2000s, value added in the sector has been growing as fast as the overall US economy. Its share of US GDP has kept stable, an achievement matched by few other high-income economies over the same period (Lawrence and Edwards 2013, Moran and Oldenski 2014). The business press has giddily coined the term ‘reshoring’ to describe the phenomenon – as yet not well documented empirically – of companies returning jobs to the United States that they had previously offshored to low-wage destinations.
Before we declare a renaissance for US manufacturing, it is worth re-examining the magnitude of the sector’s previous decline and considering the causal factors responsible for job loss. The scale of the employment decline is indeed stunning. Figure 1 shows that in 2000, 17.3 million US workers were employed in manufacturing, a level that with periodic ups and downs had changed only modestly since the early 1980s. By 2010, employment had dropped to 11.5 million workers, a 33% decrease from 2000. Strikingly, most of this decline came before the onset of the Great Recession. In the middle of 2007, on the eve of the Lehman Brothers collapse that paralysed global financial markets, US manufacturing employment had already dipped to 13.9 million workers, such that three-fifths of the job losses over the 2000 to 2010 period occurred prior to the US aggregate contraction. Figure 1 also reveals the paltriness of the recent manufacturing recovery. As of mid-2014, the number of manufacturing jobs had reached only 12.1 million, a level far below the already diminished pre-recession level.
Figure 1. US employment , 1980q1-2014q3
Source: US Bureau of Labor Statistics.
We examine the reasons behind the recent decline in US manufacturing employment (Acemoglu et al. 2014). Our point of departure is the coincidence of the 2000s swoon in US manufacturing and a significant increase in import competition from China (Bernard et al. 2006). Between 1990 and 2011 the share of global manufacturing exports originating in China surged from two to 16% (Hanson 2012). This widely heralded export boom was the outcome of deep economic reforms that China enacted in the 1980s and 1990s, which were further extended by the country’s joining the World Trade Organization in 2001 (Brandt et al. 2012, Pierce and Schott 2013). China’s share in US manufacturing imports has expanded in concert with its global presence, rising from 5% in 1991 to 11% in 2001 before leaping to 23% in 2011. Could China’s rise be behind US manufacturing’s fall?
The first step in our analysis is to estimate the direct impact of import competition from China on US manufacturing industries. Suppose that the economic opening in China allows the country to realise a comparative advantage in manufacturing that had lain dormant during the era of Maoist central planning, which entailed near prohibitive barriers to trade. As reform induces China to reallocate labour and capital from farms to factories and from inefficient state-owned enterprises to more efficient private businesses, output will expand in the sectors in which the country’s comparative advantage is strongest. China’s abundant labour supply and relatively scarce supply of arable land and natural resources make manufacturing the primary beneficiary of reform-induced industrial restructuring. The global implications of China’s reorientation toward manufacturing – strongly abetted by inflows of foreign direct investment – are immense. China accounts for three-quarters of all growth in manufacturing value added that has occurred in low and middle income economies since 1990.
For many US manufacturing firms, intensifying import competition from China means a reduction in demand for the goods they produce and a corresponding contraction in the number of workers they employ. Looking across US manufacturing industries whose outputs compete with Chinese import goods, we estimate that had import penetration from China not grown after 1999, there would have been 560,000 fewer manufacturing jobs lost through 2011. Actual US manufacturing employment declined by 5.8 million workers from 1999 to 2011, making the counterfactual job loss from the direct effect of greater Chinese import penetration amount to 10% of the realised job decline in manufacturing.
These direct effects of trade exposure do not capture the full impact of growing Chinese imports on US employment. Negative shocks to one industry are transmitted to other industries via economic linkages between sectors. One source of linkages is buyer-supplier relationships (Acemoglu et al. 2012). Rising import competition in apparel and furniture – two sectors in which China is strong – will cause these ‘downstream’ industries to reduce purchases from the ‘upstream’ sectors that supply them with fabric, lumber, and textile and woodworking machinery. Because buyers and suppliers often locate near one another, much of the impact of increased trade exposure in downstream industries is likely to transmit to suppliers in the same regional or national market. We use US input-output data to construct downstream trade shocks for both manufacturing and non-manufacturing industries. Estimates from this exercise indicate sizeable negative downstream effects. Applying the direct plus input-output measure of exposure increases our estimates of trade-induced job losses for 1999 to 2011 to 985,000 workers in manufacturing and to two million workers in the entire economy. Inter-industry linkages thus magnify the employment effects of trade shocks, almost doubling the size of the impact within manufacturing and producing an equally large employment effect outside of manufacturing.
Two additional sources of linkages between sectors operate through changes in aggregate demand and the reallocation of labour. When manufacturing contracts, workers who have lost their jobs or suffered declines in their earnings subsequently reduce their spending on goods and services. The contraction in demand is multiplied throughout the economy via standard Keynesian mechanisms, depressing aggregate consumption and investment. Helping offset these negative aggregate demand effects, workers who exit manufacturing may take up jobs in the service sector or elsewhere in the economy, replacing some of the earnings lost in trade-exposed industries. Because aggregate demand and reallocation effects work in opposing directions, we can only detect their net impact on total employment. A further complication is that these impacts operate at the level of the aggregate economy – as opposed to direct and input-output effects of trade shocks which operate at the industry level – meaning we have only as many data points to detect their presence as we have years since the China trade shock commenced. Since China’s export surge did not hit with full force until the early 1990s, the available time series for the national US economy is disconcertingly short.
To address this data challenge, we supplement our analysis of US industries with an analysis of US regional economies. We define regions to be ‘commuting zones’ which are aggregates of commercially linked counties that comprise well-defined local labour markets. Because commuting zones differ sharply in their patterns of industrial specialisation, they are differentially exposed to increased import competition from China (Autor et al. 2013). Asheville, North Carolina, is a furniture-making hub, putting it in the direct path of the China maelstrom. In contrast, Orlando, Florida (of Disney and Harry Potter World Fame), focuses on tourism, leaving it lightly affected by rising imports of manufactured goods. If the reallocation mechanism is operative, then when a local industry contracts as a result of Chinese competition, some other industry in the same commuting zone should expand. Aggregate demand effects should also operate within local labour markets, as shown by Mian and Sufi (2014) in the context of the recent US housing bust. If increased trade exposure lowers aggregate employment in a location, reduced earnings will decrease spending on non-traded local goods and services, magnifying the impact throughout the local economy.
Our estimates of the net impact of aggregate demand and reallocation effects imply that import growth from China between 1999 and 2011 led to an employment reduction of 2.4 million workers. This figure is larger than the 2.0 million job loss estimate we obtain for national industries, which only captures direct and input-output effects. But it still likely understates the full consequences of the China shock on US employment. Neither our analysis for commuting zones nor for national industries fully incorporates all of the adjustment channels encompassed by the other. The national-industry estimates exclude reallocation and aggregate demand effects, whereas the commuting-zone estimates exclude the national component of these two effects, as well as the non-local component of input-output linkage effects. Because the commuting zone estimates suggest that aggregate forces magnify rather than offset the effects of import competition, we view our industry-level estimates of employment reduction as providing a conservative lower bound.
What do our findings imply about the potential for a US manufacturing resurgence? The recent growth in manufacturing imports to the US is largely a consequence of China’s emergence on the global stage coupled with its deep comparative advantage in labour-intensive goods. The jobs in apparel, furniture, shoes, and other wage-sensitive products that the United States has lost to China are unlikely to return. Even as China’s labour costs rise, the factories that produce these goods are more likely to relocate to Bangladesh, Vietnam, or other countries rising in China’s wake than to reappear on US shores. Further, China’s impact on US manufacturing is far from complete. During the 2000s, the country rapidly expanded into the assembly of laptops and cell-phones, with production occurring increasingly under Chinese brands, such as Lenovo and Huawei. Despite this rather bleak panorama, there are sources of hope for manufacturing in the United States. Perhaps the most encouraging sign is that the response of many companies to increased trade pressure has been to increase investment in innovation (Bloom et al. 2011). The ensuing advance in technology may ultimately help create new markets for US producers. However, if the trend toward the automation of routine jobs in manufacturing continues (Autor and Dorn 2013), the application of these new technologies is likely to do much more to boost growth in value added than to expand employment on the factory floor.
Acemoglu D, V Carvalho, A Ozdaglar, and A Tahbaz-Salehi (2012), “The Network Origins of Aggregate Fluctuations.” Econometrica, 80(5): 1977-2016.
Acemoglu D, D H Autor, D Dorn, G H Hanson, and B Price (2014), “Import Competition and the Great US Employment Sag of the 2000s.” NBER Working Paper No. 20395.
Autor, D H and D Dorn (2013), “The Growth of Low Skill Service Jobs and the Polarization of the US Labor Market.” American Economic Review, 103(5), 1553-1597.
Autor D H, D Dorn, and G H Hanson (2013a) “The China Syndrome: Local Labor Market Effects of Import Competition in the United States.” American Economic Review, 103(6): 2121-2168.
Bernard A B, J B Jensen, and P K Schott (2006), “Survival of the Best Fit: Exposure to Low-Wage Countries and the (Uneven) Growth of US Manufacturing Plants.” Journal of International Economics, 68(1), 219-237.
Bloom N, M Draca, and J Van Reenen (2012), “Trade Induced Technical Change? The Impact of Chinese Imports on Innovation, IT, and Productivity.” Mimeo, Stanford University.
Brandt L, J Van Biesebroeck, and Y Zhang (2012), “Creative Accounting or Creative Destruction? Firm-Level Productivity Growth in Chinese Manufacturing.” Journal of Development Economics, 97(2): 339-351.
Hanson, G (2012), “The Rise of Middle Kingdoms: Emerging Economies in Global Trade.” Journal of Economic Perspectives, 26(2): 41-64.
Mian, A and A Sufi (2014), “What Explains the 2007-2009 Drop in Employment?” Econometrica, forthcoming.
Pierce, J R and P K Schott (2013), “The Surprisingly Swift Decline of US Manufacturing Employment.” Yale Department of Economics Working Paper, November.