Brad DeLong: Worthy reads on equitable growth, January 4–10, 2019

Worthy reads from Equitable Growth:

1. This is the word on how the government ought to analyze proposed tax regulations. It is indeed true, as Greg Leiserson and Adam Looney say, that the focus should be on revenues raised for the government and burdens imposed on the compliers. It is indeed true, as Greg and Adam argue, that there is no point in the government drawing a bottom line—there is insufficient consensus on the social value of revenues and on the appropriate distribution of burdens for such a bottom line to be at all useful. The agencies should set out the pieces of the analysis. They should leave other political actors to use the pieces and their own values to assemble their own estimates of net benefits or net costs: Read their analysis, “A Framework for Economic Analysis of Tax Regulations,” in which they write: “Treasury and the IRS should conduct a formal economic analysis … [a] for regulations that implement recent tax legislation … if they have substantial discretion in designing the regulation and if different ways of doing so would vary substantially in their economic effects. … [b] for regulations unrelated to recent legislation … if the regulation would have large economic effects relative to current practice.”
2. The ongoing replacement of the multidivisional firm by what David Weil calls the “fissured workplace” is one of the most important ongoing changes in the U.S. economy. It undermines the social policy strategy started by John Dunlop and the War Labor Board in the 1940s to use employers as intermediaries to deliver egalitarian social insurance benefits. If you have not read his book, The Fissured Workplace, then you should, but if you want a taste of its contents, read “In Conversation with David Weil” at Equitable Growth, in which he says: “Franchising started to spread … a form of business organization that allows you to shed and yet control … Information technology facilitated this because you have lower-cost mechanisms to monitor subsidiary organizations … The end result is you have broken apart the employment relationships … [not] just about employers trying to weasel out of their responsibilities … The difficulty of unwinding that behavior or changing that behavior in some way to deal with the consequences in the labor market.”
3. The Solow Growth Model became economists’ workhorse because it delivered the “Kaldor Facts” as immediate consequences of its specification. As long as those Kaldor Facts appeared reliable constants of growth, the Solow Growth Model rightly reigned. Starting in 1980, however, the Kaldor Facts ceased to be facts. Yet the Solow Growth Model continues to be what economists teach and use. This is a problem. Read Gauti Eggertsson, Jacob A. Robbins, and Ella Getz Wold. “Kaldor and Piketty’s facts: The rise of monopoly power in the United States,” in which they write: “The macroeconomic data of the last 30 years has overturned at least two of Kaldor’s famous stylized growth facts: constant interest rates and a constant labor share … Piketty and others … introduced several new and surprising facts: an increase in the financial wealth-to-output ratio … [and] in measured Tobin’s Q, and a divergence between the marginal and the average return on capital … These trends can be explained by an increase in market power and pure profits … along with forces that have led to a persistent long term decline in real interest rates. We make three parsimonious modifications … [and] show that our model can quantitatively match these new stylized macroeconomic facts.”

Worthy reads not from Equitable Growth:

1. This recent working paper by Bryan Kelly, Dimitris Papanikolaou, Amit Seru, and Matt Taddy is a very nice piece of work. Unfortunately, the major conclusion I draw from it is that there is much slippage between numbers of patents on the one hand and true economically relevant innovation on the other. So, I cannot see what conclusions to draw from what is a lot of hard and ingenious work. Read “Measuring Technological Innovation over the Long Run,” in which they write: “We use textual analysis of high-dimensional data from patent documents to create new indicators of technological innovation. We identify significant patents based on textual similarity of a given patent to previous and subsequent work: These patents are distinct from previous work but are related to subsequent innovations.”
2. Trying to blame poor nonwhite people and social democratic governance for the faults of Wall Street seemed, to me, several bridges too far a decade ago. Yet Steve Moore and Larry Kudlow seem to have gained rather than lost influence on the right from their eagerness to do so. The very sharp Barry Ritholtz takes exception. Read his “No, the CRA Did Not Cause the Financial Crisis,” in which he writes: “Two of Donald Trump’s economic advisers, Lawrence Kudlow and Stephen Moore … lay the blame for the credit crisis and Great Recession on the Community Reinvestment Act, a 1977 law designed in part to prevent banks from engaging in a racially discriminatory lending practice known as redlining. The reality is, of course, that the CRA wasn’t a factor … Showing that the CRA wasn’t the cause of the financial crisis is rather easy. As Warren Buffett pal Charlie Munger says, ‘Invert, always invert.’”
3. Once again: Wage growth and employment have since 2000 been much better measures of the macroeconomically relevant state of the labor market than the unemployment rate, which our former colleague Nick Bunker—now at Indeed.com—covered in his analysis “Puzzling over U.S. wage growth,” in which he wrote: “The unemployment rate is below its Great Recession levels, but wage growth hasn’t picked up in recent years. The prime employment rate may be a better predictor of wage growth than unemployment rates. The state of U.S. wage growth these days is puzzling. The unemployment rate is below where it was before the Great Recession back in 2007, but nominal wage growth is below its level that year and hasn’t picked up in recent years (according to some data series). For economists and analysts who believe that a tighter labor market should lead to higher wages, this disconnect is confusing.”