: : Startup Geometry Podcast EP 004: Brad DeLong:
http://traffic.libsyn.com/windcastle/Startup_Geometry_EP_004__Brad_DeLong.mp3
Month: June 2015
Must-Read: Òscar Jorda et al.: Leveraged Bubbles
Must-Read: : Leveraged Bubbles: “The critical assumption was that central banks would be in a position to manage the macroeconomic fall-out….
They could clean-up after the mess. While the aftermath of the dotcom bubble seemed to offer support for this rosy view of central bank capabilities, the 2008 global financial crisis dealt a severe blow to the assumption that the fall-out of asset price bubbles was always and everywhere a manageable phenomenon. This observation meshes well with the key finding of this paper: not all bubbles are created equal…. When credit growth fuels asset price bubbles, the dangers for the financial sector and the real economy are much more substantial. The damage done to the economy by the bursting of credit-boom bubbles is significant and long-lasting. These findings can inform ongoing efforts to devise better guides to macro-financial policies at a time when policymakers are searching for new approaches in the aftermath of the Great Recession.
Must-Read: Simon Wren-Lewis: Speak for Yourself
Must-Read: : Speak for Yourself, or Why Anti-Keynesian Views Survive: “[Russ Roberts:] ‘The evidence for the Keynesian worldview is very mixed…
…Most economists come down in favor or against it because of their prior ideological beliefs. Krugman is a Keynesian because he wants bigger government. I’m an anti-Keynesian because I want smaller government.’
Statements like this tell us rather a lot about those who make them. As statements about why people hold macroeconomic views they are wide of the mark…. The big/small government idea makes no theoretical sense. Why would wanting a larger state make someone a Keynesian? Many Keynesians, and most New Keynesians, nowadays acknowledge that monetary policy should be used to manage demand when it can. They also know that any fiscal stimulus only works, or at least works best, if it involves temporary increases in government spending. So being a Keynesian is not a very effective way of getting a larger state. It is also obviously false empirically…. Central bank models are typically Keynesian. Does that mean central banks want a larger state? No, it means the evidence suggests Keynesian economics works.
Russ Roberts says more recently:
The evidence is a mess leaving each of us free to cherry-pick what sustains our worldview be it ideological or philosophical or just consistent with our flavor of economics.
Ryan Bourne of the Institute of Economic Affairs goes further:
when the facts change, the Keynesians don’t change their minds.
To illustrate their belief that Keynesians ignore awkward facts both the authors above use the example of US growth following the 2013 sequester. (In my experience anti-Keynesians tend to shy away from data series, and especially econometrics, and prefer evidence of the ‘they said this, and it didn’t happen’ kind–particularly if ‘they’ happens to be Paul Krugman.) The problem is that this episode actually illustrates the opposite: that anti-Keynesians are so keen to grasp anything that appears to conflict with Keynesian ideas that they fail to do simple analysis and ignore others that do….
Why do we have to go over, yet again, that the clear majority of studies show that Obama’s stimulus worked? Why do we have to keep going over why UK growth in 2013 does not prove austerity works? Why do these people never mention the meta studies that confirm basic Keynesian analysis of fiscal policy? Because they want to believe that the ‘evidence is a mess’…. When anti-Keynesians tell you that support or otherwise for Keynesian macroeconomics depends on belief about the size of the state, they are telling something about where their own views come from. When they tell you everyone ignores evidence that conflicts with their views, they are telling you how they treat evidence. And the fact that some on the right take this position tells you why anti-Keynesian views continue to survive despite overwhelming evidence in favour of Keynesian theory.
Bolstering the bottom by indexing the minimum wage to the median wage
The federal minimum wage today stands at $7.25 an hour, unchanged since 2009 despite rising prices and rising nominal wages for other workers. Without legislative action by Congress every year—a very difficult policy endeavor—the minimum wage for the nation will continue to stagnate. New legislation now before Congress seeks to overcome that perennial policy hurdle by proposing to index the minimum wage to the median wage—the exact middle point in the overall distribution of wages in the U.S. economy—after first raising it to $12 an hour in 2020.
Indexing the minimum wage to the median wage would automatically increase the minimum wage so that it keeps pace with the typical worker’s wage. Currently, 15 states and the District of Columbia index or have future plans to index the minimum wage to the annual rate of inflation, so that when prices rise each year the minimum wage rises accordingly. Indexing the minimum wage instead to the median is different because it links the minimum wage to overall conditions in the labor market rather than to the general level of prices. In this way, those earning the minimum wage experience annual wage gains according to overall demand for labor in the market rather than a less-direct measure of prices. Moreover, wage indexing improves the ability of the minimum wage to reduce inequality.
Indexing the minimum wage to the median is preferable to indexing it to the average wage. Raising the minimum wage would affect average wages, whereas pegging the minimum wage to the median wage would not. This issue brief explains all of these economic reasons for indexing the minimum wage to the median or typical worker’s wage, and shows what an indexed minimum wage would like over time.
View full PDF here alongside all endnotes
Indexing the minimum to median wage is good economics
Indexing the minimum wage to prevailing wage levels accomplishes two goals. First, indexing to wage levels increases the efficacy of the minimum wage as a policy tool to reduce wage inequality. In particular, wage indexing ensures those earning the minimum wage will not increasingly fall behind the typical worker.
Economic research on the minimum wage shows that between 1979 and 2012, more than 38 percent of the rise in inequality between the wage paid to the 10th percentile wage (the bottom ten percent of U.S. workers earn this wage or less) and the median wage is due to the minimum wage failing to keep up with the median wage. By indexing the minimum wage to the median wage, policymakers will help prevent widening disparities between those at the bottom and the middle of the wage distribution.
Second, wage indexing allows the minimum wage to rise in ways that the labor market can easily accommodate. Indexing the minimum wage to the general wage level means that roughly the same proportion of workers will earn the minimum wage year after year when the minimum wage rises. As long as underlying wage inequality does not change too much, fixing the distance between the minimum and median wage will keep constant the share of workers earning at or near the minimum wage.
What’s more, because a minimum wage increase will not alter the share of workers earning the minimum, employers will more easily adjust to regular increases in the minimum wage based on wage-indexing—as opposed to the irregular and larger increases typical of the current federal procedure, and many of the state and local procedures, for setting the minimum wage. Indexing to the median wage would require employers to raise wages for roughly the same proportion of their employees each year, whereas failing to index typically results in employers being required to raise wages for a much larger share of their workforces on less predictable basis.
What an indexed minimum wage would look like
Examining how the minimum wage would change over time if it were indexed to other measures of economic activity, such as prices or wages, is fairly straightforward. Immediately after the increase in the federal minimum wage back in 1996 and 1997, Congress could have indexed the new federal minimum wage of $5.15 an hour. Figure 1 shows how the minimum wage would have risen had it been indexed to the median wage or inflation from 1998 to 2014.
Figure 1
Because Congress did not index the minimum to either prices or wages, the federal minimum remained unchanged for a decade before increasing in three successive increases in 2007, 2008, and 2009, to a level in between where it would have been if it had followed the path traced out by either indexing policy. The same figure also illustrates that the federal minimum wage has remained flat now for six years since the 2009 increase.
The median-wage indexed minimum wage is higher today than the minimum wage indexed to the Consumer Price Index because during the late 1990s and early 2000s nominal wages grew faster than inflation, resulting in real wage growth (after accounting for inflation). As a result, the median-index minimum wage would have been more than $8.25 in 2014. The inflation-indexed minimum wage would have been just over $7.60. Either way, the current federal minimum wage is lower than both indexed minimum-wage levels, standing at $7.25 an hour.
View full PDF here alongside all endnotes
We can also consider what the minimum wage would be had we indexed it to the median wage in 1968, which was the high point of the minimum wage relative to the median wage. In 1968, the minimum wage was more than 52 percent of the median wage of full-time workers, whereas in 2014 the minimum wage is about 37 percent of the full-time median wage. If Congress had indexed the minimum wage to the median wage starting in 1968 than the minimum wage in 2014 would have been $10.21—more than 40 percent higher than the current minimum of $7.25.
Indexing the minimum to the median wage in 1998 or 1968 would have obtained substantially different minimum wages in 2014. The $10.21 minimum wage resulting from an increase in 1968 would have been almost 24 percent larger than the $8.26 that would have resulted from an increase in 1998. This underscores the importance of setting the appropriate level of the minimum wage before indexing it to the median wage. The minimum wage will only help a small portion of the workforce if it is set at a low fraction of the median wage and subsequently indexed. Wage indexing only maintains the position of the minimum wage relative to the typical wage, but indexing does not help set the initial level of the minimum wage.
By linking the minimum wage to the median wage, wage indexing keeps the minimum from falling to levels that many consider to be unfairly low or out of step with broader wage growth in the labor market. In addition, economists and political scientists alike recognize that economic fairness—and specifically the relationship between the minimum wage and the overall distribution of wages in the U.S. economy—is a major determinant of what the American public thinks is appropriate minimum wage policy.
There are precedents for wage indexing the minimum wage
Using the median wage as an index is natural to economists because they typically compare the minimum wage to the median wage in order to gauge the strength of the minimum wage. Where the minimum wage lies in the overall distribution of wages across the economy is central to contemporary economic theory. Academic research on so-called wage-spillover effects relies on comparisons of the minimum to the median wage. And when assessing the strength of minimum-wage policies across countries and across time periods, economists contrast national minimum-to-median wage ratios.
Keeping the minimum from slipping away from the typical wage also has policy precedents. In the run-up to increase minimum wages in the late 1980s and early 1990s, congressional bills included provisions to index the minimum wage to 50 percent of the average wage. And in the United Kingdom today there is an independent body called the Low Pay Commission, which advises the government on the appropriate annual minimum wage increase by factoring in the distance of the minimum wage to the to the median wage.
The median wage is the best wage to use as an index
To index the minimum wage to the general wage level, policymakers should use the median hourly wage instead of the average wage. The median wage is a good index because it is unaffected by the minimum wage. Minimum wages in the United States today cover less than ten percent of the workforce. When the minimum wage rises, it directly increases the wages of these low-paid workers. It also indirectly increases the wages of many of the workers who earn above minimum wage but still fall within the bottom 25 percent of wage earners, leaving the middle or median of the wage distribution unaffected.
This approach is better than using the average wage, or mean wage, as the peg for the index. If the minimum is indexed to the mean wage, when minimum-wage workers receive a raise, the average wage rises, which then increases minimum wages, and so on. Over time this process increases the share of the workforce earning the minimum wage, compelling employers to bear continually larger increases in labor costs.
In contrast, if the minimum is increased in line with the median wage, then the share of the workforce earning the minimum wage will remain roughly constant over time. This is because the median wage moves independently of the minimum wage. The benefit of keeping the minimum wage constant as a share of overall wages is that workers competing for low-wage jobs would find demand for their labor among employers equally constant.
In practice, the potential feedback effects from indexing to the average wage are small in a given year, but they may accumulate to economically meaningful sizes over time. Similar feedback effects would also be present in initiatives to index the minimum wage to the Consumer Price Index. If employers pass minimum wage increases onto their customers as price increases, then the minimum wage would indirectly affect the rate of inflation. These inflationary feedback effects, however, would be much smaller than feedback effects of indexing the minimum wage to the average wage because labor costs comprise only a part of the total costs of the production of goods and services.
The lack of any feedback effects from indexing the minimum wage to the median wage is yet another point in favor of this method of raising the minimum wage on an annual basis. Policymakers in Congress should seriously consider such legislation now in order to institute this new way of raising the minimum wage beginning in 2020.
Must-Read: Glenn Hubbard: Taking Capital’s Gains
Must-Read: Glenn Hubbard: Taking Capital’s Gains:
Capital’s Ideas and Tax Policy in the Twenty-First Century, 68 National Tax Journal, 409–424 (June 2015): “This essay examines Thomas Piketty’s proposal in Capital in the Twenty-First Century for wealth taxation…
…as a policy tool for addressing rising wealth inequality. In so doing, I also address portions of his other two contributions — a history of inequality and wealth and a forecast for how wealth shares will evolve. While Piketty’s scope impresses, his tax policy conclusions miss the mark. Not only does his core analytical apparatus fail to bolster the case for greater taxation of capital, but familiar contemporary policy discussions of social insurance and consumption taxation better address the concerns he raises.
Things to Read on the Morning of June 17, 2015
Must- and Should-Reads:
- : Parsing the US Investment Position
- : Osborne plan has no basis in economics
- Must-Read: : A Vital Dashboard Indicator For Monetary Policy: Nominal Wage Targets
- : Long-Term Budget Outlook 2015
- Must-Read: : Divorce Greece in Haste, Repent at Leisure
Might Like to Be Aware of:
Must-Read: Martin Wolf: Divorce Greece in Haste, Repent at Leisure
Must-Read: : Divorce Greece in Haste, Repent at Leisure: “Some argue… Greece at least would be far better off…
…after a default and exit… a default to its public creditors… a new currency, a big devaluation (accompanied by sound monetary and fiscal policies), maintenance of an open economy, structural reforms and institutional improvements would mark a turn for the better…. [But a] Greece that could manage exit well would have also avoided today’s plight.
Neither side should underestimate the risks. It is also crucial to avoid the contempt so characteristic of the frayed nerves caused by failing negotiations. Fecklessness may be a grievous fault, but grievously have the Greeks answered it. As the Irish economist, Karl Whelan, points out in a blistering response to Mr Giavazzi… from peak to trough, aggregate real gross domestic product fell by 27 per cent…. The unemployment rate reached 28 per cent in 2013…. Europeans are now dealing with Syriza because of this calamity. But they are also dealing with Syriza because of the refusal to write down more of the debt in 2010. This was a huge error, made far worse by the subsequent collapse of the Greek economy. Indeed, the vast bulk of the official loans to Greece were not made for its benefit at all, but for that of its feckless private creditors. Creditors, too, have a duty to take care….
It is tragic that the breakdown might occur now, after so much pain has already been suffered…. The parameters of such a deal are also clear: a small primary surplus in the short run, a decision by the eurozone to pay off the IMF and the ECB, accompanied by long-term debt relief, and a strong commitment to bold structural reforms by the Greek government…. Right now, however, the aim must still be to cool down and secure a deal. Yet, in the current mood of anger and recrimination, reaching one now seems ever more unlikely…. It might be a relief to divorce a difficult partner. But the partner will still exist…. Greece will remain strategically located and even inside the EU. Neither the Greeks nor their partners should imagine a clean break. The relationship will continue. It will just be poisonous…
The Past Two Decades: The Coming of the Information Economy Looks to Have Doubled Our True Rate of Economic Growth
Over at Bloomberg View, smart young whippersnapper Noah Smith weighs in on the relationship between measured GDP at factor cost and societal well-being–including consumer surplus–in the information age:
: The Internet’s Hidden Wealth: “The stagnationists… claim to have the numbers on their side…
…People spend a relatively small fraction of their income on online services…. For products such as cable Internet and Samsung Galaxy smartphones, a small rise in price results in a big drop in demand. That’s very different from, say, the air, which you would keep breathing in just about the same amount no matter how expensive it got. If people are willing to abandon products just to save a few bucks, the hidden benefit of those products just can’t be that high. But… when we’re asking about the consumer surplus created by the Internet, we should look at the price elasticity of the entire Internet. How much would people collectively pay to avoid being utterly, totally cut off?… It’s obvious that we spend a lot of time online….
Austan Goolsbee and Peter Klenow… 2006… consumer surplus from Internet… in… time and money… 2 percent of… income. But… 2006, when fewer people… online… less time online… before the explosive growth of social media… the widespread adoption of smartphones…. streaming became big…. [Perhaps] our economy hasn’t stagnated nearly as much in the past decade as the headline numbers seem to suggest.
The conventional economic growth accounting tells us that consumption expenditures on telecommunications, information processing, and audiovisual entertainment are 2% and net investment in information processing equipment and software 3% of output. That means that a price fall of 10%/year in that category of high-tech goods contributes 0.2%+0.3%=0.5%/year to economic growth in standards of living.
But information-age services are also time- and attention-intensive. Suppose the coming of the broadband internet since 1995 has doubled the utility that humans get out of the 700 hours a year those of us in the North Atlantic typically spend interacting with our audio-visual technologies. If we are willing to guess that each hour’s activities contribute equally, doubling value for an amount of time equal to 0.35 of time spent working over twenty years boosts societal well-being at an extra rate of 1.75%/year.
This, however, requires that we be or become the type of people whose lives are truly enriched by our kindles and our tablets and our computers and our smartphones–that we value Netflix and Youtube and Google’s window into the online library of humanity and Facebook and the rest as massively superior to the ways we previously learned, gossiped, listened, and watched. But we are such people, or are rapidly becoming such people. You can argue over whether there is ultimate value in such a concentration of effort in more intensively engaging in activities that are basically snooping on and gossiping about our imaginary (and real) friends. But we, at least, like to do this. And information-age technologies enable us to do it very well.
So figure on not 1.75%/year but rather 3.5%/year as the true rate of increase of the American economy’s productivity over the past two decades…
Must-Read: Josh Bivens: A Vital Dashboard Indicator For Monetary Policy: Nominal Wage Targets
Must-Read: : A Vital Dashboard Indicator For Monetary Policy: Nominal Wage Targets: “The fact that wage inflation, and not any quantity measure of labor market slack…
…is the most direct intermediating link between interest rate increases and lower price inflation further suggests that policymakers should focus on this link explicitly. If the trend in productivity growth is fairly stable, then fairly precise wage targets can be estimated. Specifically, for a 2 percent price inflation target, 1.5 percent trend productivity growth is consistent with nominal wage growth of 3.5 percent. Since the recovery from the Great Recession began, however, nominal wage growth has stayed well under 2.5 percent and shows few signs of accelerating. Policymakers may even want to allow real… wage growth to exceed productivity growth for an extended, albeit temporary, period to allow normalization of the labor share of income…. A period of real wage growth exceeding productivity growth is actually a normal phase of recovery…
What is predistribution?
One of the many threads in the debates about rising income inequality is the broad strategy by which policymakers should attempt to reduce inequality. There are two schools of thought in the debate. The first group consists of people who believe that helping the less well-off through the redistribution of income through taxes and government programs—referred to as tax-and transfer programs in economic policy jargon—is the best path forward. The second camp is comprised of researchers and commentators who instead think the best path forward is to deal with the underlying market forces that cause inequality in the first place. One camp favors redistribution, the other predistribution.
Predistribution is a rather opaque buzzword. So let’s take a deeper look at what it means and why it might matter for our thinking efficiency and reducing income inequality.
The term originated in an essay by Yale University professor Jacob Hacker and has caught on more in the United Kingdom than in the United States. In short, this approach prioritizes policies that more directly intervene in the labor market to reduce income inequality over polices that redistribute incomes after taxes are levied. For policymakers concerned about the incomes of those at the bottom of the income ladder, a predistributionist approach would favor raising wages, perhaps by increasing the minimum wage, over increasing government transfers to those workers in the form of, say, earned income tax credits.
So why might we think that intervening directly in the labor market would be preferable to increasing taxes and transferring some of those proceeds to workers further down the income ladder? First of all, the United States has a much more unequal distribution of market incomes than other advanced economies. In order to achieve a less unequal distribution of income, U.S. policymakers would have to increase post-tax-and-transfer income for those further down the income ladder more than those other advanced countries do. While there is a debate about how costly such an approach might be, the question, then, is which method is the most efficient way to reduce inequality: raising market incomes or raising incomes after taxes and transfers.
For a while, the assumption was that redistribution was less costly than fiddling with the mechanisms of the labor market. But there’s growing evidence that the labor market isn’t perfectly competitive and therefore pre-tax-and-transfer labor market policies wouldn’t be as costly as previously thought. The debates about the minimum wage are, again, a good example. If moderate increases in the minimum wage don’t lead to increases in unemployment then raising the minimum wage doesn’t reduce efficiency as much as previously thought. In fact, the losses in economic efficiency from raising revenues from high-earning workers and then transferring them to low- and moderate-wage earners may be more costly.
Researchers and policymakers should weigh the relative merits of each approach, redistribution and predistribution. Given the new emerging consensus about the labor market, focusing on labor market reforms that help workers earn higher incomes directly might come out as the better option more than previously thought.