…The tasks we used to do can now be done more cheaply by lower-paid workers abroad or by computer-driven machines. My solution—and I’m hardly alone in suggesting this—has been an activist government that raises taxes on the wealthy, invests the proceeds in excellent schools and other means people need to become more productive, and redistributes to the needy. These recommendations have been vigorously opposed by those who believe the economy will function better for everyone if government is smaller and if taxes and redistributions are curtailed. While the explanation I offered a quarter-century ago… has become… standard, widely accepted…. I’ve come to believe it overlooks a critically important phenomenon: the increasing concentration of political power in a corporate and financial elite that has been able to influence the rules….
[The] market view… fails to account for much… doesn’t clarify why the transformation occurred so suddenly… [cannot] account for why other advanced economies facing similar forces of globalization and technological change did not succumb to them as readily… why the compensation packages of the top executives of big companies soared… the [recent] decline in wages of recent college graduates…. A deeper understanding of what has happened to American incomes over the last 25 years requires an examination of changes in the organization of the market… stem[ming] from a dramatic increase in the political power of large corporations and Wall Street…. Rising job insecurity can also be traced to high levels of unemployment. Here, too, government policies have played a significant role…. Reversing the scourge of widening inequality requires reversing the upward distributions within the rules of the market, and giving workers the bargaining leverage they need to get a larger share of the gains from growth. Yet neither will be possible as long as large corporations and Wall Street have the power to prevent such a restructuring…
Month: April 2015
Must-Read: Ravi Kanbur and Joseph Stiglitz: Dynastic Inequality, Mobility and Equality of Opportunity
…is that it is wrong to focus on inequality of outcomes in a ‘snapshot.’ Intergenerational mobility and ‘equality of opportunity’, so the argument goes, is what matters for normative evaluation. We ask what pattern of intergenerational mobility leads to lower inequality not between individuals but between the dynasties to which they belong? And how does this pattern in turn relate to commonly held views on what constitutes equality of opportunity? Focusing on bistochastic transition matrices in order to hold constant the steady state snapshot income distribution, we develop an explicit partial ordering which ranks matrices on the criterion of inequality between infinitely lived dynasties.
Things to Read on the Afternoon of April 27, 2015
Must- and Should-Reads:
- Must-Must-Read: The Good Inequality :
- Must-Read: What Is the Right Size and Purpose of the U.S. Financial System? :
- Must-Read: The Machines Are Coming :
- Must-Read: The Trans-Pacific Partnership: Great for Elites. Is It Good for Anyone Else? :
- The Politics of Financial Insecurity: A Democratic Tilt, Undercut by Low Participation
- “It only took 15 years, but the Nasdaq has finally set a new record high…. So, what can we learn from this grueling 15 year round trip? 1) Diversification Works…. 2) Price Compression Creates Tail Risk…. 3) Stop Chasing the Next Hot Thing in the Pursuit of Maximizing Returns…” :
- “Kansas is in the midst of a grim experiment putting crackpot supply-side economic theories into practice… [with] devastating results for poor people… [and a] government more intrusive into the private lives of the state’s citizens…. Since the election of Brownback, Kansas has gone full Tea Party. Kansas Republicans have enacted massive upper-class tax cuts, with the idea that they would produce such an explosion of economic growth that the state would actually gain revenues…. Kansas Republicans certainly have no intention of taking responsibility for this disaster, which means a search for scapegoats. The targets should not be surprising: poor people, women, and gay people…” :
- We Really, Seriously, Don’t Want Currency Manipulation Provisions In Trade Deals :
- This Wasn’t the PhD Advice You Were Looking for :
- Macroeconomics of Persistent Slumps :
Might Like to Be Aware of:
- A Taste of Cosmology :
- The Resentment Machine :
- Marco Rubio Rakes In Donor Money By Touting Immigration Record–Behind Closed Doors :
- Adagio Teas: Imperial Radch :
- Fashionable Bashing: ‘New York’ Columnist [Jonathan Chait] Knows Little But Talks Big :
- Guided by the Beauty of Their Weapons: An Analysis of Theodore Beale and his Supporters :
- An Introvert’s Guide to Greeting Strangers, Vague Acquaintances, and Friends :
What Has Happened to the Middle Class, Anyway?
A nice piece by Patricia Cohen in the New York Times with good quotes from Cornell’s Thomas Hirschl.
One thing going on is that the major lifestyle and utility improvements of the past generation–really cheap access to communication, information, and entertainment–are overwhelmingly available to pretty much everyone. On the one hand, this means that recent economic growth assessed in terms of individual utility and well-being is much more equal then when assessed in terms of income. On the other hand, it means that access these benefits seems much more like simply the air we breathe then as a marker of class status, or achievement.
Thus a loss of the ability to securely attain enough of economic security to firmly hold the indicators of what past generations saw as middle-class life shows itself as a loss. And those who focus on security rather than on utility do not see these as offset buy the information revolution.
People who thought they were upwardly mobile are finding themselves with no-higher real incomes [than their parents]. And people who thought they were sociologically stable are finding themselves poorer.
Money, of course, provides the wherewithal for acquiring what are considered the traditional bedrocks of a middle-class life: adequate health care, college for the children and retirement savings, generally with a car and a regular summer vacation thrown in.
Some version of that basket can be bought across a range of incomes, depending on location. It might include a used Pontiac instead of a late-model Lexus, or a small walk-up instead of a house with a backyard. And even though consumption was once a useful shorthand guide to a middle-class lifestyle, it is no longer as reliable in a world where cellphones and flat-screen TVs are staples in a majority of households below the poverty line and retirement savings, even among top earners, are often treated as a luxury.
There isn’t one middle class, but many middle classes. Still, what all of them ultimately require, experts say, is a sense of economic security.
“If there’s no security, there’s no middle class,” said Thomas Hirschl, a sociologist at Cornell and an author of “Chasing the American Dream.”
The types of jobs that pay middle-class wages have shifted since 1980. Fewer of these positions are in male-dominated production occupations, while a greater share are in workplaces more open to women.
That feeling of security has been eroded by several factors.
Median per capita income has basically been flat since 2000, adjusted for inflation. The typical American family makes slightly less than a typical family did 15 years ago. And while many goods have become cheaper or better, the price of three of the biggest middle-class expenditures — housing, college and health care — have gone up much faster than the rate of inflation.
Equally important, Mr. Hirschl found a high degree of income volatility among most Americans in the four decades between 1969 and 2011. At some point in their working lives, a full 70 percent earned enough to put them in the top fifth of earners, and as many as 30 percent reached the equivalent of $200,000 in 2009 dollars, or roughly the top 4 percent.
Similarly, nearly 80 percent at least temporarily plunged into a red zone, where their income dropped near or below the poverty line, or they were compelled to gain access to a social safety net program like food stamps or collect unemployment insurance. More than half of Americans ages 25 to 60 will experience at least one year hovering around the poverty line.
For most people, their 20s and 30s have traditionally been the least secure decades, with earning power building to a peak in their 40s and 50s, Mr. Hirschl said. But the recession upended that pattern for many Americans. Older workers experienced an extended bout of unemployment, often followed by a new job at a lower wage…
Must-Read: John Quiggin: Australia and the Return of the Patrimonial Society
…The fact that currently wealthy Americans have not, in general, inherited their wealth follows logically from the fact that, in their parents’ generation, there weren’t comparable accumulations…. Given the pattern of highly unequal incomes, and social immobility observed in the United States today, we can expect inheritance to play a much bigger role in explaining inequal…. Inherited advantages in the patrimonial society predicted by Piketty will include direct transfers of wealth as well as the effects of increasingly unequal access to education, early job opportunities and home ownership.
Must-Read: Katharina Knoll, Moritz Schularick and Thomas Steger: Global House Prices, 1870‐2012
Must-Read: Global House Prices, 1870‐2012: How have house prices evolved over the long‐run?…
:…This paper presents annual house prices for 14 advanced economies since 1870. Based on extensive data collection, we show that real house prices stayed constant from the 19th to the mid‐20th century, but rose strongly during the second half of the 20th century. Land prices, not replacement costs, are the key to understanding the trajectory of house prices. Rising land prices explain about 80 percent of the global house price boom that has taken place since World War II. Higher land values have pushed up wealth‐to‐income ratios in recent decades.
Today’s Must-Must-Read: Georg Graetz and Guy Michaels: Robots at Work
…there is almost no systematic empirical evidence on their economic effects. In this paper we analyze for the first time the economic impact of industrial robots, using new data on a panel of industries in 17 countries from 1993-2007. We find that industrial robots increased both labor productivity and value added. Our panel identification is robust to numerous controls, and we find similar results instrumenting increased robot use with a measure of workers’ replaceability by robots, which is based on the tasks prevalent in industries before robots were widely employed. We calculate that the increased use of robots raised countries’ average growth rates by about 0.37 percentage points. We also find that robots increased both wages and total factor productivity. While robots had no significant effect on total hours worked, there is some evidence that they reduced the hours of both low-skilled and middle-skilled workers.
The problem of too much stuff sloshing around the global economy
Sometimes there can be too much of a good thing. Right now, in the global economy, there appears to be far more commodities available than current demand merits. This glut is matched by too many available workers and too much capital sloshing around the global economy. In the Friday edition of The Wall Street Journal, Josh Zumbrun and Carolyn Cui highlight these gluts, but the question underlying the article is whether these oversupplies are the result of increasing supply or due to insufficient demand.
First, let’s point out that the trends here are certainly different for different aspects of the glut. Take oil. The rapid decline in oil prices during 2014 was one of the biggest economic stories of the year. But what exactly caused that decline? In another piece, Zumbrun highlights research from the International Monetary Fund on the cause in the decline of oil prices. According to the IMF, the decline was first caused by a slowdown in economic activity (a reduction in demand) before increased supply of oil contributed an increasingly large role in the price decline.
That explanation might not hold for other commodities in the current situation. In the copper market, for example, technology can’t lead to a sudden expansion of copper supply analogous to the rise of fracking that has contributed to the increased oil supply. The decline in copper prices is almost certainly a function of declining demand, especially from China.
Then there’s capital. Interest rates are very low right now due to the monetary easing done to counteract the Great Recession and the weakness in many parts of the world, such as Europe. In other words, the price of capital is quite low right now because of demand. Just as the United States economy appears to be healing, Europe, China, and other weak spots could start growing at a healthy clip and that would reduce the glut of capital.
That possibility assumes that the mismatch between the supply and demand of capital is a short-term phenomenon. Given enough time, the price of capital will adjust so that’s there’s no oversupply or insufficient demand. But as Zumbrun and Cui note in their piece, there’s an argument, advanced by former Treasury Secretary Larry Summers, in which nominal interest rates need to drop below zero for the imbalance to disappear. And if you’ve paid attention to Europe in recent months, you’ve seen interest rates do exactly that.
Summers has argued that this imbalance has been a feature of the global economy for years and has been responsible for the decline in interest rates and some the bubbles of the late 20th and early 21st century. Ben Bernanke, the former Federal Reserve Chair, has argued that the imbalance is a fleeting feature of the global economy and will abate as the economy recovers.
When it comes to labor, this particular glut might be the one that is most clearly a long-run trend. The new waves of workers from the former Soviet Union, China, and India have dramatically increased the supply of labor in the global market. This increase plus the increased opening of the U.S. economy is one potential cause of the decline of the labor share of income in the United States.
Whether these gluts are something economists understand as a strange, but one-off event or as a major feature of our times will have a large impact on how we understand our economic future.
Just What Are the Risks That Alarm Ken Rogoff?
As I say, repeatedly: everything that Ken Rogoff writes is very interesting, nd almost everything is correct.
But.
This part of Ken Rogoff’s piece appears to me to be very much on the wrong track:
small changes in the market perception of tail risks can lead both to significantly lower real risk-free interest rates and a higher equity premium…. Martin Weitzman has espoused a different variant of the same idea…. Those who would argue that even a very mediocre project is worth doing when interest rates are low…. It is highly superficial and dangerous to argue that debt is basically free. To the extent that low interest rates result from fear of tail risks a la Barro-Weitzman, one has to assume that the government is not itself exposed to the kinds of risks the market is worried about, especially if overall economy-wide debt and pension obligations are near or at historic highs already. Obstfeld (2013) has argued cogently that governments in countries with large financial sectors need to have an ample cushion, as otherwise government borrowing might become very expensive in precisely the states of nature where the private sector has problems…
First, we need to be clear about what the relevant tail-risk states that Ken Rogoff is talking about are. There are definitely potential future states of the world in which nothing has value except for sewing machines, ammunition, and bottled water; in which even your gold Krugerrands are sources of risk as they attract theft and violence rather than stores of value. But those future states of the world are irrelevant for pricing financial assets because all financial assets–even government bonds–are worthless in them. Thus worry about those states of the world provides no reason for a government to issue debt. They are not the relevant tail-risk states.
The relevant tail-risk states are those in which (a) there is still an economy, (b) there is still a government, (c) the government is either imposing taxes to amortize its debt or choosing some costly and dissipative default procedure, and yet (d) investments in corporate debt (and presumably corporate equities) are strongly negative in net terms. It is those states of the world that people think that government debt provides insurance against. It is insuring against those states of the world that have driven the prices of government debt sky-high. And it is with respect to those states of the world that Ken Rogoff claims that the actual costs to the government at borrowing at those very low interest rates are high because:
the government is… itself exposed to the kinds of risks the market is worried about, especially if overall economy-wide debt and pension obligations are near or at historic highs already. Obstfeld (2013) has argued cogently that governments in countries with large financial sectors need to have an ample cushion, as otherwise government borrowing might become very expensive in precisely the states of nature where the private sector has problems…
And thus, even though it was sold at a high price and carries a low interest rate, the issuing of government debt is very expensive to the government: when the time comes in the bad state of the world for it to raise the money to amortize the debt, it finds that it really would very much rather not do so.
It is clear if you are Argentina or Greece what the risk is: it is of a large national-level terms-of-trade or political shock, something that you can insure against by investing in the ultimate reserves of the global monetary system.
If you are the United States or Germany or Japan or Britain, what is the risk?
What is the risk that cannot be handled at low real resource cost by a not-injudicious amount of inflation, or of financial repression?
Weekend reading
This is a weekly post we publish on Fridays with links to articles we think anyone interested in equitable growth should be reading. We won’t be the first to share these articles, but we hope by taking a look back at the whole week we can put them in context.
Links
Eduardo Porter argues that something has gone wrong in the labor market. [nyt]
Jared Bernstein is all for higher productivity growth, but he’s not sure it’ll necessarily resulting in higher middle-class incomes. [on the economy]
Tony Yates is, let’s say, less than convinced by John Taylor’s argument that loose monetary policy caused the Great Recession. [long and variable]
Arin Dube writes about the idea that social safety net programs are subsidies for employers. [arin dube]
The 1.5 million missing black men in the United States, an incredibly important fact for debates about inequality, highlighted by Justin Wolfers, David Leonhardt, and Kevin Quealy. [the upshot]
Friday Figure
Figure from “A post-war history of U.S. economic growth,” by Nick Bunker