Month: January 2015

The Macroeconomic Situation and Macroeconomic Policy: Insiders and Outsiders: Focus

Posted on by Brad DeLong

Somebody Is Inside an Echo Chamber. But Who?

Paul Krugman fears that somebody is trapped inside an echo chamber, hearing only things that confirm what they already believe:

Disagreement… over US monetary policy… [between those] very worried that the Fed may be gearing up to raise rates too soon… [and the] sanguine… seems to depend on one thing: whether the economist in question is currently in a policy position…. We don’t have access to different facts; we don’t, in any fundamental sense, have different economic models…

But how can we tell which side has lost contact with the reality out there?

Well, I think–as does Paul–that it is the “insiders” who are being optimistic and unrealistic in their plans to start raising short-term safe interest rates from zero in June 2015 and then, if past tightenings are any guide, raise them to what they regard as a full-employment growth-along-the-potential-path level of 5%/year or so by the end of 2017. One reason is that I do not see a strong world and a weak dollar that would produce a stronger export boom relative to potential, do not see a recovery of relative government purchases to normal levels, cannot envision much stronger business investment without support from other strong components of demand, cannot see the restructuring of housing market finance that would produce even a normal pace of housing construction, cannot see where else durable demand expansion could come from, and fear adverse shocks.

FRED Graph FRED St Louis Fed

But I do not think we have to decide. I think that even if we are uncertain whether the optimistic “insiders” or the pessimistic “outsiders” are correct, elementary prudent optimal-control theory tells us that we should act as if the “outsiders” are right.

But I have gotten ahead of myself:

Tim Duy says:

Tim Duy: Policy Divergence: “The Federal Reserve stands…

…in stark contrast with its… counterparts…. The ECB… quantitative easing, the Bank of England… more dovish… Denmark joined the Swiss in cutting rates… the Bank of Canada…. How long can the Fed continue to stand against this tide?… The Fed should of course be cautious…. But how does the Fed communicate such caution?

The challenge I see for the Fed is that they will want to hold the statement fairly steady…. Such a steady hand, however, may be viewed as hawkish, which is also a message the Fed does not want to send…. Bullard wants to ignore the market-based inflation metrics that would have in the past told him to hold off on any tightening. He really, really wants to liftoff from the zero bound, the sooner the better. I don’t think this level of immediacy is felt by other FOMC members, but I do think they are hoping and praying the data gives them enough to move by mid-year…

And:

Tim Duy: While We Wait For Yet Another FOMC Statement: “The Fed recognizes that hiking rates prematurely…

…to ‘give them room’ in the next recession is of course self-defeating. They are not going to invite a recession simply to prove they have the tools to deal with another recession. The reasons the Fed wants to normalize policy are, I fear, a bit more mundane: (1) They believe the economy is approaching a more normal environment with solid GDP growth and near-NAIRU unemployment. They do not believe such an environment is consistent with zero rates. (2) They believe that monetary policy operates with long and variable lags. Consequently, they need to act before inflation hits 2% if they do not want to overshoot their target. And they in fact have no intention of overshooting their target. (3) They do not believe in the secular stagnation story. They do not believe that the estimate of the neutral Fed Funds rate should be revised sharply downward. Hence 25bp, or 50bp, or even 100bp still represents loose monetary policy by their definition. I am currently of the opinion that there is a reasonable chance the Fed is wrong on the third point, and that they have less room to maneuver than they believe.

Paul Krugman says:

Paul Krugman: Insiders, Outsiders, and U.S. Monetary Policy: “even smart, flexible people can fall prey…

…to incestuous amplification…. I worry that this is what is happening to the insiders. On the whole, it seems less likely for the outsiders, although it’s true that the Keynesian econoblogs form what amounts to a tight ongoing discussion group that could be doing some amplification of its own…

And:

Unusually, Olivier [Blanchard] and I… have a… disagreement… over US monetary policy…. I’m very worried that the Fed may be gearing up to raise rates too soon; he’s sanguine… part of a wider split… [that] seems to depend on one thing: whether the economist in question is currently in a policy position. Larry [Summers]… sounds exactly like me:

Deflation and secular stagnation are the threats of our time. The risks are enormously asymmetric…. The Fed should not be fighting against inflation until it sees the whites of its eyes….

We don’t have access to different facts; we don’t, in any fundamental sense, have different economic models…. If you ask me, there’s a worrying complacency among the insiders right now, and I would urge them to consider the potential consequences…

So how would we tell whether, right now, it is the outsiders are overstating the dangers to premature tightening, or it is the insiders who are understating the dangers to premature tightening here in the United States?

To answer this question, I think we need to consider five points–the first about our decision procedure, the second about the level of spending consistent with full employment, the third about the degree of uncertainty and variability, the fourth about the vulnerabilities of the economy to spending deviations above and below the projected current-policy path, and the fifth about the effectiveness of our optimal-control levers in different scenarios.

The first point is that if it turns out that we cannot tell–that we have to split the difference–then the considerations that rule are the asymmetries in the situation.

The second point is that no one right now has a good and convincing read on what, exactly, the level of spending consistent with full employment at the currently-projected price level is. Uncertainty is rife: if there was ever a time for considering not just the central tendency of the forecast but the risks on either side and taking optimal control appropriately valuing these risks seriously, it is right now.

The third point is that we are not just uncertain about what the proper full-employment path for demand is, we have much more than the usual amount of uncertainty about nearly all other dimensions of the structure of the economy. To suppose that any of the emergent properties that are policy multipliers can be estimated from data collected during “normal” times is to make an enormous leap of faith.

The fourth point is that downside risks to the forecast greatly exceed upside opportunities. The inflation rate is so low that marginal deviations from the target on the upside have little cost. The employment-to-population ratio is so low that marginal deviations of it on the downside from its projected current-policy path are very costly.

And the fifth point is that, while the Federal Reserve has powerful levers to restrict demand if spending shoots above the desired policy path, its levers to expand demand if spending falls below have been demonstrated over the past six years to be relatively weak.

Thus, if it turns out that we cannot tell–and we cannot tell–then it is not correct that we should split the difference. The considerations that rule are then the asymmetries in the situation. It is, right now, much worse to undershoot than to overshoot full-employment demand: the one causes extra and pointless unemployment, the second disappoints the rentier, and we live in a poor world in which the first is more of a policy error than the second. It is, right now, true that entral banks have a very easy time restricting aggregate demand via contractionary policy but–at and near the zero lower bound, at least–a hell of a time boosting aggregate demand via expansionary policy.

These asymmetries mean that, as far as policy is concerned, the “outsiders” win any tie and win any near-tie: the “insiders” should govern what policy should be only if there is not just a preponderance of the but clear and convincing evidence on their side.

Yet the Federal Reserve appears to have decided:

  • that those who think that the economy is near full employment and is in a durable recovery have by far the better of the argument as to what the central tendency projected current-policy demand path is.
  • that it is appropriate to make policy via certainty-equivalance.

Given the inability of the Federal Reserve to attain traction at the ZLB, its current frame of mind–which appears to be doing certainty-equivalence policy–makes no sense to me. Certainty-equivalence is appropriate only with a symmetric loss function and a symmetric ability to compensate for deviations on either side of the target. We do not have either of those.

Has there been an explanation of why the Federal Reserve’s policy is appropriate, given the uncertainties, given the asymmetry of the loss function, and given the asymmetry of the control levers, that I have missed? If so, where is it?

1644 words

Macroeconomics: Listening to Reality: A Note from Twitter I Want to Save

Posted on by Brad DeLong

.@MikePMoffatt: Things like this have raised and greatly sharpened my estimate of current ZLB fiscal multiplier: http://delong.typepad.com/sdj/2015/01/over-at-equitable-growth-yes-the-past-four-years-are-powerful-evidence-for-the-keynesian-view-of-what-happens-at-the-zero-l.html

Since 2007, reality has spoken. Since 2007, reality has raised my estimate of the U.S. fiscal multiplier from 1.5 to 2.5, and sharpened it. Since 2007, reality has raised my estimate of the U.S. debt capacity from 75% of a year’s GDP to >150%. Since 2007, reality has left my very fuzzy estimate that the effects of QE are small unchanged.

Now Scott Sumner says 2013-14 a huge surprise that should have shifted my estimates again, substantially. And I really do not see why…

.@cellsatwork There’s an extended substantive pre-response [by Krugman to Sumner]:

    • .

    Sumner doesn’t seem to have read any of it…

The federal budget, interest rates, and savings gluts

Posted on by Bridget Ansel

The U.S. Congressional Budget Office yesterday released its updated Budget and Economic Outlook for the period between 2015 and 2025. As usually happens when CBO releases a document about the federal budget, most of the conversation focuses on the levels of spending and taxation the agency projects will happen in the future, particularly the difference between the level of spending and the level of taxation, better known as the budget deficit.

Perhaps a more interesting conversation would be about what CBO projects about the future path of interest rates, something that caught the eye of Matthew C. Klein at FT Alphaville. Despite CBO heralding increased budget deficits due to rising health care costs and an aging population, Klein sees that the projections of higher deficits are almost entirely about higher interest payments on debt the U.S. government already owes. In other words, the projections of a larger budget deficit are contingent on the path of future interest rates.

Specifically, CBO projects that the interest rate on a 10-year Treasury note will be 4.6 percent starting in 2020. For context, the 10-year interest rate in June 2007, before the damaged inflicted by the bursting of the housing bubble became apparent, was about 5 percent. And today the interest rate is about 1.8 percent.

Of course, very low rates today are a sign of concerns about economic growth outside of the United States, particularly in the European economies that use the euro. But how much higher can we expect long-term interest rates to rise? CBO projects that the 10-year rate will jump to 3.0 percent in 2015. There is cause to question such a quick pick-up in rates.

First, according to CBO’s own projections the overall growth rate of the economy is supposed to be below its potential growth rate for most of the 10-year window. Only in 2017 and 2018 does GDP reach its potential growth rate according to CBO. The rest of the time it’s below that rate.

Secondly, there are broader forces that inhibit rising long-term interest rates. The last time the U.S. Federal Reserve tried to raise interest rates, in 2004 there was no appreciable increase in the long-term rates. That phenomenon in part led then Fed Governor Ben Bernanke to coin the term “global savings glut” almost 10 years ago. The idea posits that the amount of savings in the global economy has increased so much that it has outpaced demand and interest rates across the world are held down. And while the source of the glut may be changing, it appears to still be around.

Of course, when talking about U.S. interest rates the decisions of the Federal Reserve have to be considered. Its policy-setting arm, the Federal Open Markets Committee, is currently meeting, but is not expected to start raising interest rates. Or at least not yet. But those moves should only affect short-term rates. As for the long-run, we all, including CBO, will just have to wait.

Morning Must-Read: Tim Duy: While We Wait For Yet Another FOMC Statement

Posted on by Brad DeLong

Given the inability of the Federal Reserve to attain traction at the ZLB, its current frame of mind–which appears to be doing certainty-equivalence policy–makes no sense to me. Certainty-equivalence is appropriate only with a symmetric loss function and a symmetric ability to compensate for deviations on either side of the target. We do not have either of those.

Has there been an explanation of why the Federal Reserve’s policy is appropriate given the asymmetry of the loss function and the asymmetry of the control levers that I have missed? If so, where is it?

Tim Duy: While We Wait For Yet Another FOMC Statement: “The Fed recognizes that hiking rates prematurely…

…to ‘give them room’ in the next recession is of course self-defeating. They are not going to invite a recession simply to prove they have the tools to deal with another recession. The reasons the Fed wants to normalize policy are, I fear, a bit more mundane: (1) They believe the economy is approaching a more normal environment with solid GDP growth and near-NAIRU unemployment. They do not believe such an environment is consistent with zero rates. (2) They believe that monetary policy operates with long and variable lags. Consequently, they need to act before inflation hits 2% if they do not want to overshoot their target. And they in fact have no intention of overshooting their target. (3) They do not believe in the secular stagnation story. They do not believe that the estimate of the neutral Fed Funds rate should be revised sharply downward. Hence 25bp, or 50bp, or even 100bp still represents loose monetary policy by their definition. I am currently of the opinion that there is a reasonable chance the Fed is wrong on the third point, and that they have less room to maneuver than they believe.

Things to Read on the Afternoon of January 27, 2015

Posted on by Brad DeLong

Must- and Shall-Reads:

  • Heather Boushey: On “Capital in the Twenty-First Century”: “We… have lived through an era where the presumption is that our society marches always towards greater equality or less discrimination, even if slowly. But if Thomas is right… this era could be at an end… Downton Abbey… no other way for Grantham’s three daughters to maintain their standard of living other than marrying well. So, the show’s first season focuses on whether the eldest daughters would concede to marry her cousin Matthew. If Thomas is right, then once again, the rules over inheritances will make all the difference for the potential for women’s equality…. In 2014, only one-in-ten U.S. billionaires were women (11.4 percent) and the female share of self-made billionaires is only 3.1 percent…”
  1. Simon Wren-Lewis: Post Recession Lessons: “I regard 2010 as a fateful year for the advanced economies… the year that the US, UK and Eurozone switched from fiscal stimulus to fiscal contraction… this policy switch is directly responsible for the weak recovery in all three countries/zones. A huge amount of resources have been needlessly wasted as a result, and much misery prolonged. This post is… about… taking that as given and asking what should we conclude…. To answer that question, what happened in Greece (in 2010, not two days ago) may be critical…. Let me paint a relatively optimistic picture of the recent past. Greece had to default because previous governments had been profligate and had hidden that fact from everyone…. Recessions… tend to be when things like that get exposed. If Greece had been a country with its own exchange rate, then it would have been a footnote… fiscal stimulus that had begun in all three countries/zones in 2009 would have continued (or at least not been reversed), and the recovery would have been robust. Instead Greece was part of the Eurozone…. Policy makers in other union countries prevaricated…. So the Greek crisis became a Eurozone periphery crisis…. This led to panic not just in the Eurozone but in all the advanced economies. Stimulus turned to austerity. By the time some in organisations like the IMF began to realise that this shift to austerity had been a mistake, it was too late. The recovery had been anemic…”
  2. W. Arthur Lewis:
  3. Stephanie Lo and Kenneth Rogoff: Secular Stagnation, Debt Overhang, and Other Rationales for Sluggish Growth, Six Years on: “There is considerable controversy over why sluggish economic growth persists across many advanced economies six years after the onset of the financial crisis. Theories include a secular deficiency in aggregate demand, slowing innovation, adverse demographics, lingering policy uncertainty, post-crisis political fractionalisation, debt overhang, insufficient fiscal stimulus, excessive financial regulation, and some mix of all of the above. This paper surveys the alternative viewpoints. We argue that until significant pockets of private, external and public debt overhang further abate, the potential role of other headwinds to economic growth will be difficult to quantify.”
  4. Dean Baker: Did Cutting the Duration of Unemployment Benefits Lead to Faster Job Growth in 2014?: “Hagedorn, Manovskii, and Mitman…. The LAUS data are largely model driven… little direct data for many counties. The Bureau of Labor Statistics (BLS) generates employment estimates for these counties from a variety of variables…. The same sort of test can readily be constructed at the state level using the CES data… a much larger survey… of employers… [with] considerably less noise… measuring the number of jobs in the same states as we are measuring changes in benefit duration. Following HMM, I divided the states into a long duration group… and short duration group…. While HMM found the long duration group had a sharper uptick in job growth, the CES data show the opposite…”

Should Be Aware of:

 

  1. Greg Sargent: Republican State Officials Cast Doubts on Anti-Obamacare Lawsuit: “Several state officials who were directly involved at the highest levels… all of them Republicans or appointees of GOP governors… [say] that at no point in the decision-making process… was the possible loss of subsidies even considered as a factor. None of these officials… read the statute as the challengers do. Cindi Jones…. This week, a number of states will file a brief siding with the government, arguing that nothing in the ACA indicated opting for the federal exchange would cost them subsidies. They will argue… that the challengers’ interpretation raises serious constitutional questions: The states were never given clear warning that the failure to set up exchanges could bring them serious harm…. John Watkins…. Sandy Praeger…. Linda Sheppard…”
  2. Ogged: Have We Talked About Number Needed to Treat?: “Nice summary here. Longer Wired article here. NNT site here. Table of NNTs for common stuff here. Elegant little Wikipedia table here. Amazing how little effect so many established therapies have.”

Afternoon Must-Read: Heather Boushey: On “Capital in the Twenty-First Century”

Posted on by Brad DeLong

Heather Boushey: On “Capital in the Twenty-First Century”: “We… have lived through an era…

…where the presumption is that our society marches always towards greater equality or less discrimination, even if slowly. But if Thomas is right… this era could be at an end… Downton Abbey… no other way for Grantham’s three daughters to maintain their standard of living other than marrying well. So, the show’s first season focuses on whether the eldest daughters would concede to marry her cousin Matthew. If Thomas is right, then once again, the rules over inheritances will make all the difference for the potential for women’s equality…. In 2014, only one-in-ten U.S. billionaires were women (11.4 percent) and the female share of self-made billionaires is only 3.1 percent…

This reminds me of what I wrote back in 2002:

Back before the industrial revolution bequests were a major component of acquired wealth. With a society-wide total capital-output ratio of 3:1 and a
generation length of 25 years, roughly 12 percent of a year’s output will change hands and pass down through the generations through inheritance every year…. My guess is that every year bequests turned over to the receiving cohort were equal to between 16 and 24 percent of annual output. This is more than ten times the contribution of net investment to wealth. Contrast the dominance of inheritance over net investment before the industrial revolution with the situation today…. Net investment… [of] between 12 percent and 16 percent of total output…. This balance between [net] accumulation and bequests is in sharp contrast
to the more than 1:10 ratio of the pre-Industrial Revolution past…

If one imagines that creative destruction shifts an extra 7% of so of today’s output from losers to winners each year, then the ratio of accumulation to bequests today is not 1:1 but rather 3:2–an even more striking contrast with the pre-industrial past.

And Thomas Piketty thinks we are likely to go back there, so that choosing the right parents and marrying well will once again be of overwhelming importance in upward (or avoiding downward) mobility…

Afternoon Must-Read: Simon Wren-Lewis: Post-Recession Lessons

Posted on by Brad DeLong

A generation or two ago, the push for central-bank independence was all about harnessing central banks’ credibility as inflation fighters in a context in which it was feared that elected legislators would lean overboard on the excessive spending side.

Today, Simon Wren-Lewis calls for transferring not just monetary policy but fiscal policy stabilization authority over to central banks, on the grounds that their technocratic chops are much better for fiscal policy then relying on elected legislators who are the prisoners of ordoliberal ideologies, the belief the governments like households need to balance their budgets, and of the austerity-loving 0.1%.

What could possibly go wrong?

Simon Wren-Lewis: Post Recession Lessons: “I regard 2010 as a fateful year for the advanced economies…

…the year that the US, UK and Eurozone switched from fiscal stimulus to fiscal contraction… this policy switch is directly responsible for the weak recovery in all three countries/zones. A huge amount of resources have been needlessly wasted as a result, and much misery prolonged. This post is… about… taking that as given and asking what should we conclude…. To answer that question, what happened in Greece (in 2010, not two days ago) may be critical…. Let me paint a relatively optimistic picture of the recent past. Greece had to default because previous governments had been profligate and had hidden that fact from everyone…. Recessions… tend to be when things like that get exposed. If Greece had been a country with its own exchange rate, then it would have been a footnote… fiscal stimulus that had begun in all three countries/zones in 2009 would have continued (or at least not been reversed), and the recovery would have been robust. Instead Greece was part of the Eurozone…. Policy makers in other union countries prevaricated…. So the Greek crisis became a Eurozone periphery crisis…. This led to panic not just in the Eurozone but in all the advanced economies. Stimulus turned to austerity. By the time some in organisations like the IMF began to realise that this shift to austerity had been a mistake, it was too late. The recovery had been anemic.

Why is that an optimistic account? Because it is basically a story of bad luck…. Now for the pessimistic version. The political right in all three countries/zones was always set against fiscal stimulus…. Without Greece, we still would have had a Conservative led government taking power in the UK in 2010, and we still would have had Republicans blocking stimulus moves and then forcing fiscal austerity. The right’s strength in the media, together with the ‘commonsense’ idea that governments like individuals need to tighten their belts in bad times… [meant] austerity was bound to prevail…. Greece may have just voted against austerity, but there is every chance that in the UK the Conservatives will retain power this year on an austerity platform and the Republicans are just the presidency away from complete control in the US. If the pessimistic account is right, then it has important implications for macroeconomics. Although it may be true that fiscal stimulus is capable of assisting monetary policy when interest rates are at the ZLB, the political economy of the situation will mean it may well not happen….

When some economists over the last few years began to push the idea of helicopter money, I was initially rather sceptical… helicopter money when you have inflation targets is identical to tax cuts plus Quantitative Easing (QE), so why not just argue for an expansionary fiscal policy?… However, if the pessimistic account is correct, then arguing with politicians for better fiscal policy is quite likely to be a waste of time…. A more robust response is to argue for institutional changes so that politicians find it much more difficult to embark on austerity at the ZLB…. Central banks have QE, but helicopter money would be a much more effective instrument. To put it another way, central bank independence was all about taking macroeconomic stabilisation away from politicians, because politicians were not very good at it. The last five years have demonstrated how bad at it they can be…

Heather Boushey on “Capital in the Twenty-First Century”

Posted on by Nick Bunker

The Schwartz Center for Economic Policy Analysis hosted a panel discussion of “Capital in the Twenty-First Century” with economist Thomas Piketty on October 3, 2014. After Piketty’s remarks, the New School’s Anwar Shaikh and Equitable Growth’s Executive Director Heather Boushey gave remarks on the book. The text of Dr. Boushey’s speech is below and a video can be found here. 

Speech As Prepared for Delivery

I want to use my 10 minutes to focus on a couple of points: What are the implications if Thomas Piketty is right? Where should we start looking for policy answers?

Thomas points his readers to the novels of Jane Austen, Henry James and Henri Balzac. I want to quote him – he says, “for Jane Austen’s heroes, the question of work did not arise; all that mattered was the size of one’s fortune, whether acquired through inheritance or marriage.” Reading Henry James and Jane Austen certainly made me glad to have been born in 1970, not 1800.These novels are a testament to the limited choices that women had.

Today, to some extent, anyone can create a decent standard of living – or become a millionaire – through accomplishment in this life, rather than what we inherited from our parents. Of course, Thomas presents evidence that the “upper classes instinctively abandoned idleness and invented meritocracy lest universal suffrage deprive them of everything they owned,” but let’s set that aside for a moment.

There’s been a gender revolution, although it remains fairly recent and still incomplete. When I went off to college, my mother admitted to me she was jealous of the opportunities that I had. She told me how when she was thinking about her college option, they were much more limited than mine. She felt that her options were only to study to become a nurse, teacher, or secretary. That wasn’t the array of opportunities that I faced or today’s young women face.

These changes have been good for our economy. According to Stanford economist Peter Klenow and his colleagues, the opening up of professions to women and minorities accounted for a fifth of growth in U.S. GDP between 1960 and 2008. A fifth! That’s non-trivial. In my own research with John Schmitt and Eileen Appelbaum, we found that the increase in women’s labor supply in the United States has added 11 percent to GDP since 1979.

We – all of us, no matter our age – have lived through an era where the presumption is that our society marches always towards great equality or less discrimination, even if slowly. But, if Thomas is right, then this era could be at an end. To get a feel for this, one could point to the PBS it Downton Abbey where Lord Grantham’s family will face eviction from their family manor when the Earl dies. There was no other way for Grantham’s three daughters to maintain their standard of living other than marrying well. So, the show’s first season focuses on whether the eldest daughters would concede to marry her cousin Matthew.

If Thomas is right, then once again, the rules over inheritances will make all the difference for the potential for women’s equality. Do inheritances go to the eldest child or to the eldest male child? What happens upon the death of a spouse – does the wife or the child inherit? I fear that the answers to these questions are not likely to be good for women because while the gender revolution has come a long way, it has stalled in recent decades. Thomas’s data makes me wonder if we’ll wish we’d solidified that more quickly.

In 2014, only one-in-ten U.S. billionaires were women (11.4 percent) and the female share of self-made billionaires is only 3.1 percent. While women have made progress in the workplace, the gender pay gap remains 78 cents on the dollar and this gap begins as soon as women enter the labor force and grows over time.

The gap in pay and labor force participation between men and women, especially here in the United States, is in no small part because we have no found sufficient ways to help workers with care responsibilities. For example, in the vast majority of workplaces neither women nor men have access to paid family leave. That is, except in California, New Jersey, and Rhode Island, where paid family and medical leave has been implemented.

The lack of a federal paid leave policy leaves female caregivers disadvantaged in the labor market. We see this when we compare the labor force participation rates of women in the United states to other OECD countries where the United States has fallen to 17th out of 22 countries. Policy plays a clear role here.

Cross-national studies on the role of policies that reconcile work and family demands have found that the work hours of women in dual-earner families are similar to those of men when child care is publicly provided. Paid maternity and parental leave also increases the employment rate of mothers and more generous paid leave benefits increase the economic contributions of wives to family earnings.

If we’re on the cusp of an era where wealth becomes more important, the failure to implement these policies and achieve greater equality in the preceding era are all the more urgent to address. But, Thomas also questions whether we can raise “g.” And we know, expanding opportunities to excluded groups raises productivity. So there might be some potential there.

That leads me to two aims for policymakers that I draw from the book. First, recognizing that women are an underutilized source of growth and addressing this is extremely urgent for our economy and may be imperative if we don’t want to regress on the gender progress we have made.

In Japan, in order to boost growth in the face of declining population growth, they are pursuing “womenomics’ and implementing policies to boost female labor force participation and close the gender wage gap. When I talk to policy leaders from the United Kingdom or Canada, they will make the argument to me that addressing conflicts between work and family are critical for economic productivity. Too often, I find that I have to make that argument to U.S. policymakers.

While I fear that Thomas’s analysis predicts that women may have fewer economic opportunities moving forward, I also wonder what it means to ponder an economy where dead capital could again supersede human capital. Certainly, it would imply less innovation if economic opportunities were confined to those who started with the most capital. But, is this an overreaction?

In Capital in the Twenty-First Century, Thomas focuses on the rise of the “supermanager,” which he referenced earlier. Which brings me to a second area for policy. We must consider that some of what we’re calling labor income is actually capital income or unproductive rents. This has important policy implications. We hosted a conference last week where Alan Blinder and Emmanuel Saez debated this point, noting that we don’t have data that allows us to discern whether high incomes are rents or productive. At the end of the day, this is a key piece of information we need to inform policymakers in terms of whether and how to intervene.

I have thought a lot about your wealth tax idea, Thomas, and am very taken by remarks Michael Ettlinger made at that same conference we hosted last week where he pointed out that wealth is harder to track and harder to value than income. That’s not to say we shouldn’t not seek to pursue this or try to pull together the data, but I also want us to consider a variety of other strategies that could also be effective.

I want to end by saying that I’m really pleased we are having this conversation at the New School of Social Research. To echo what Anwar said, I think it’s encouraging and exciting to see economic research that beings by seeking to understand the real world and then uses that data to inform a theoretical framework. I think that Thomas is part of a new generation of economic asking different questions than their teachers.

Many of us who came into adulthood as the 1980s turned into the 1990s begin not from President Kennedy’s dictum that a rising tide lifts all boats, but rather from the premise articulated by presidential economics advisor Gene Sperling that “the rising tide will lift some boats, but other will run aground.”

We had to begin here.

The only economic reality we’ve ever experienced is one where productivity gains go to the top while leaving the vast majority to cope with stagnant wages, greater hours of work, and, most especially in the past decades, rising debt burdens. We’ve experienced first-hand the damage this has done to our generation and the ones that follow. The idea that the real world matters was a key idea I took from my education here at the New School and I’m glad we’ve been able to be here together to discuss this important book here today.

Morning Must-Read: Stephanie Lo and Kenneth Rogoff: Secular Stagnation, Debt Overhang, and Other Rationales for Sluggish Growth, Six Years on

Posted on by Brad DeLong

I have a very easy time believing that debt overhangs–private, international, and public–can be enormous headwinds and exert substantial drag on growth and recovery. What I cannot understand is how debt can do so without also being an impaired asset to those who hold it. Debt that is painful enough to bear that it discourages enterprise and spending is also debt that may not be collected in the end, and thus debt that sells at a low price and carries a high face interest rate.

Claiming that the pieces of debt selling at record-high prices and carrying record-low face interest rates–which is the case right now for the death of credit-worthy sovereigns possessing exorbitant privilege–are in any sense a drag or a headwind seems to me to be simply wrong. I do not understand how people of note and reputation can believe it…

Stephanie Lo and Kenneth Rogoff: Secular Stagnation, Debt Overhang, and Other Rationales for Sluggish Growth, Six Years on: “There is considerable controversy…

…over why sluggish economic growth persists across many advanced economies six years after the onset of the financial crisis. Theories include a secular deficiency in aggregate demand, slowing innovation, adverse demographics, lingering policy uncertainty, post-crisis political fractionalisation, debt overhang, insufficient fiscal stimulus, excessive financial regulation, and some mix of all of the above.

This paper surveys the alternative viewpoints. We argue that until significant pockets of private, external and public debt overhang further abate, the potential role of other headwinds to economic growth will be difficult to quantify.