Brad DeLong: Worthy reads on equitable growth, September 6–13, 2019

Worthy reads from Equitable Growth:

1. Diverse scholars at conferences ask different questions—questions as, if not more, important than the mainstream. Will McGrew reports on this year’s “National Economic Association and the American Society of Hispanic Economists Work to Diversify and Strengthen Economics Research,” writing: “Last month, the National Economic Association and the American Society of Hispanic Economists hosted the sixth annual NEA-ASHE Freedom and Justice Conference at University of New Mexico’s Department of Economics. As in previous years, this conference provided an invaluable contribution to the field by elevating new communities, topics, and methodologies within economics research. Indeed, the papers presented at the conference painted a fuller picture of the current state of the U.S. economy and provided empirically grounded recommendations for a stronger and fairer economic future.”
2. Very good advice for California now—and for future congressional majority leaders and speakers and presidents who might represent the large majorities of American voters who want these problems addressed sensibly and substantially. Read Heather Boushey’s “Equitable Growth CEO’s Written Testimony at California Future of Work Commission,” in which she writes: “The monopoly power problem … exacerbates inequality, contributes to wage stagnation, limits entrepreneurship, increases the cost of living, and stifles innovation … Industry concentration and declining economic dynamism reduces wages by limiting workers’ employment options and opportunities for advancement, and allows firms to use their increasing power to squeeze worker compensation in favor of greater profits. Workplace fissuring, through the rise of independent contractors, franchisors, and contingent hiring, prevents workers from accessing career ladders, matching into the jobs they are best suited for, and gaining sufficient bargaining power to unlock wage increases. Persistent historical disparities such as wage discrimination and social norms reinforce occupational segregation into jobs that don’t pay well enough and offer little room for advancement. Yet policymaking over the past several decades has been moving in the wrong direction. Specifically: Antitrust law now allows firms to accrue and abuse monopoly power, not just over consumers but also in many cases over workers. Successive rounds of tax cuts, including the Tax Cuts and Jobs Act of 2017 and several tax cuts under the George W. Bush administration, have lowered the progressivity of the tax code and greatly decreased taxes on wealth, capital, inheritances, and corporate profits. Outdated labor law provides insufficient protection of workers and has facilitated the long decline of unions, traditionally the most vocal and ardent advocates for the middle class. We have an opportunity right now to take a step back to look at the scale and scope of the problems and develop real solutions.”
3. These two are Equitable Growth’s not-so-secret but very powerful intellectual weapons on issue of public finance. Read Greg Leiserson and Will McGrew, “Taxing Wealth by Taxing Investment Income: An Introduction to Mark-To-Market Taxation,” who write: “The sharp increase in U.S. wealth inequality in recent decades has spurred interest in increasing taxes on wealth. This issue brief introduces mark-to-market taxation, one approach to raising taxes on wealth by reforming the taxation of investment income. In a system of mark-to-market taxation, investors pay tax on the increase in the value of their investments each year rather than deferring tax until those investments are sold, as they do under current law. This issue brief first defines investment income and explains how mark-to-market taxation works. It then reviews the revenue potential of this approach to taxing investment income, explaining why a mark-to-market system can raise substantial revenues. Finally, it summarizes the distribution of the burden that would result, which would fall overwhelmingly on wealthy individuals.”

Worthy reads not from Equitable Growth:

1. Listen to a conversation between Reed Hundt and me about the “limits of, and challenges to, free-market economics,” with Joshua Cohen, co-editor of Boston Review, “Neoliberalism and Its Discontents,” which is prefaced on the web pages of the host of the discussion, the Commonwealth Club: “At the end of the Carter administration and throughout the Reagan Revolution, belief in the power of markets became America’s preferred economic policy doctrine. President Bill Clinton all but announced the triumph of free markets when he declared that ‘the era of big government is over.’ President Barack Obama faced the worst economic crisis since the Great Depression and pushed a recovery plan that was more limited than many had hoped, seeming to protect the very sectors that had created it … In his new book, A Crisis Wasted, Reed Hundt … makes the argument that Obama missed an opportunity to push for a new progressive era of governance, a miscalculation that ultimately hobbled his administration.”
2. A more sophisticated model says that the 2 percentage point drop in the Wicksellian equilibrium real interest rate due to the coming of the low interest rates of “secular stagnation” should have triggered a 2 percentage point increase in the Federal Reserve’s inflation target. I think this is probably right. It mirrors the conclusion of a less-sophisticated model—one in which proper policy simply seeks to keep inflation as low as is consistent with not exceeding a fixed small probability of hitting the zero lower bound on interest rates. Read Philippe Andrade, Jordi Galí, Hervé Le Bihan, and Julien Matheron, “The Optimal Inflation Target and the Natural Rate of Interest,” in which they write: “Starting from pre-crisis values, a 1 percentage point decline in the natural rate should be accommodated by an increase in the optimal inflation target of about 0.9 to 1 percentage point.”
3. The interest rate is an optimal-control variable. Almost always, in an optimal control problem—like in steering a boat—you are doing one of two things: as much as you can (wheel hard left or hard right), or staying the course (wheel center, unsure whether your next move will be to nudge it left or right, but certainly your next move will be small). Only when something special is going on—like following a narrow channel or passing a reef—do you tend to deviate from that rule. The Fed knows that its next move is highly likely to be a rate cut. I see no reef. I see no island. Why has the rate cut not happened already? What is the reason? Read Tim Duy, “Gearing Up For A Rate Cut,” in which he writes: “One take on the numbers is fairly positive. The economy continues to generate jobs at a pace sufficient to either lower unemployment further or encourage more people to enter the labor force. The jump in wage growth might even suggest that the economy is finally bumping up against full capacity and that is the primary culprit behind slower job growth. And maybe the August jobs number is revised up. Another take is less positive. The job market has clearly slowed, and, after accounting for the [U.S.] Census [Bureau] hires, may have slowed very close to the point where unemployment at best holds steady. That significant downshift in momentum is very worrisome. The second derivative here is not our friend. Moreover, don’t take too much comfort in the stronger wage numbers, as that can easily be a lagging variable; wages might not take a hit until unemployment starts rising … [Gross Domestic Product] tracking measures from the New York and Atlanta Federal Reserve Banks are both at a below trend 1.5 percent for the third quarter. New York is looking at 1.1 percent growth for the fourth quarter. Most definitely nothing to write home about.”