Brad DeLong: Worthy reads on equitable growth, February 8–14, 2019

Worthy reads from Equitable Growth:

1. It is time for Equitable Growth’s monthly charticle about the most useful monthly employment report—not the (usually) first-Friday report, but rather the JOLTS report. See Kate Bahn and Raksha Kopparam’s “JOLTS Day Graphs: December 2018 Report Edition,” in which they note: “Every month the U.S. Bureau of Labor Statistics releases data on hiring, firing, and other labor market flows from the Job Openings and Labor Turnover Survey, better known as JOLTS. Today, the BLS released the latest data for December 2018. This report doesn’t get as much attention as the monthly Employment Situation Report, but it contains useful information about the state of the U.S. labor market. Below are a few key graphs using data from the report.”
2. I must confess that my knee-jerk reaction, given my socialization into the neoliberal cult when young, to paid leave programs is to worry that loading responsibility for providing social insurance onto employers is a hazardous activity—it is not the 1920s, and we are not certain that paternalistic companies engaged in welfare capitalism can do more to enhance societal well-being than ardent socialists and social democrats. But evidence is piling up from the laboratories of social insurance that are the states that my knee-jerk reaction is wrong. Read Heather Boushey, “Increasing Evidence of the Benefits of Paid Leave Means Congress Needs to Consider a Federal Program like the FAMILY Act,” in which she writes: “The existing state programs—the oldest, in California, dates back to 2004—have provided a laboratory for researchers to study labor and health outcomes for individuals, performance and productivity outcomes for firms, and broader macroeconomic outcomes of paid family and medical leave. This work builds on a considerable body of research from long-established programs in some European countries. The answers to many questions are already coming into focus … In states with paid leave insurance programs, mothers who use paid leave are more likely to remain in the workforce in the year following a birth. The women experiencing the benefits of these new programs are more likely to be less educated, which makes sense given that they are less likely to have had access to paid leave in the absence of a state program … In instances where paid leave is provided there is less reliance on public assistance to contend with family medical emergencies. Moreover, there has been no evidence of higher employee turnover or rising wage costs for businesses. Research on parental leave programs abroad also suggests that paid leave of the length contemplated by the FAMILY Act, up to 12 weeks, has a positive effect on women’s income and likelihood of remaining in the workforce.”

Worthy reads not from Equitable Growth:

1. This paper, “Optimal Taxation of Top Labor income: A Tale of Three Elasticities,” has become a classic for all wishing to think clearly about progressive income taxation. Note that the conclusions of the authors—Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva—in favor of a high top marginal rate do rest on strong and proper state actions to close loopholes and shut down tax havens. They write: “A model where top incomes respond to marginal tax rates through … (1) the standard supply-side channel … the tax avoidance channel, [and] (3) the compensation-bargaining channel through efforts in influencing own-pay setting … The first elasticity (supply side) is the sole real factor limiting optimal top tax rates. The optimal tax system should be designed to minimize the second elasticity (avoidance) through tax enforcement and tax neutrality … in which case the second elasticity becomes irrelevant. The optimal top tax rate increases with the third elasticity (bargaining) as bargaining efforts are zero-sum in aggregate … There is a strong correlation between cuts in top tax rates and increases in top 1 percent income shares since 1975, implying that the overall elasticity is large. But top income share increases have not translated into higher economic growth, consistent with the zero-sum bargaining model. This suggests that the first elasticity is modest in size and that the overall effect comes mostly from the third elasticity. Consequently, socially optimal top tax rates might possibly be much higher than what is commonly assumed.”
2. Put me, for one, down as welcoming a sensible technocratic debts-and-deficits debate. Read Brendan Greeley, “Give the Kids Permission to Fool Around,” in which he writes: “Several weeks ago Alphaville was forwarded a panicked email from the Committee for a Responsible Federal Budget … The subject … ‘Be wary of mischaracterisations of Olivier Blanchard’s debt report … Here’s Mr. Blanchard, in his own words, talking to Alphachat … ‘use it for the right things. If the economy is very weak and monetary policy cannot be used, use it. If there is public investment to be done, the infrastructure is in terrible shape, use it … It’s a tool, it’s not a tool you should avoid to use at any price. It’s a tool you should use when you need to.’”
3. Migration—temporary and permanent—is turning out to be one of the magic bullets for global economic growth. Read Ricardo Hausmann, “The Tacit-Knowledge Economy,” in which he writes: “Know-how resides in brains, and emerging and developing countries should focus on attracting them, instead of erecting barriers to skilled immigration. Because knowledge moves when people do, they should tap into their diasporas, attract foreign direct investment in new areas, and acquire foreign firms if possible … Recent research at Harvard University’s Center for International Development (CID) suggests that tacit knowledge flows through amazingly slow and narrow channels. The productivity of Nuevo León, Mexico, is higher than in South Korea, but that of Guerrero, another Mexican state, resembles levels in Honduras. Moving knowledge across Mexican states has been difficult and slow. It is easier to move brains than it is to move tacit knowledge into brains, and not only in Mexico. For example, as the CID’s Frank Neffke has shown, when new industries are launched in German and Swedish cities, it is mostly because entrepreneurs and firms from other cities move in, bringing with them skilled workers with relevant industry experience … Knowledge moves when people do.”
4. Read Olivier Coibion, Yuriy Gorodnichenko, and Mauricio Ulate, “Is Inflation Just Around the Corner? The Phillips Curve and Global Inflationary Pressures,” in which they write: “An expectations-augmented Phillips Curve can account for inflation not just in the United States but across a range of countries, once household or firm-level inflation expectations are used … We find that the implied slack was pushing inflation below expectations in the years after the Great Recession but the global and U.S. inflation gaps have shrunk in recent years thus suggesting tighter economic conditions. While we find no evidence that inflation is on the brink of rising, the sustained deflationary pressures following the Great Recession have abated.”
5. Yes, it looks like the world economy is now entering a recession—one that the United States is, so far, escaping. Read Brad Setser, “China’s Slowdown and the World Economy,” in which he writes: “China, it now seems, has entered into a real slump … China’s total imports remained pretty strong though until the last couple of months. But they have now turned down. China (still) isn’t that important a market for the rest of the world’s manufactures. China’s overall imports (of goods) are significant, at around $2 trillion. But about a third are commodities, about a third are parts for re-export (think $800 billion of processing imports vs. exports of around $2.4 trillion), and a bit less than a third are imports of manufactures that China actually uses at home … A fall in Chinese auto demand has a big impact on Chinese domestic output (most Chinese cars are made in China, with largely Chinese parts, thanks to China’s tariff wall), a measurable impact on the profits of some foreign firms with successful Chinese JVs, a modest impact on German exports and, at the margin, a measurable impact on global growth in oil demand.”
6. There is no Phillips Curve-breakdown puzzle in the behavior of inflation over the past decade once one recognizes that (a) the employment-to-population ratio, and not the unemployment rate, is the right measure of how bad the job market is, and (b) that people have been—I think largely because of misinformation from the press—thinking that inflation is higher than it, in fact, is. Read Laurence M. Ball and Sandeep Mazumder, “The Nonpuzzling Behavior of Median Inflation,” in which they write: “Inflation behavior is easier to understand if we divide headline inflation into core and transitory components, and if core inflation is measured by the weighted median of industry inflation rates … [that] filters out large price changes in all industries. We illustrate the usefulness of the weighted median with a case study of inflation in 2017 and early 2018. We also show that a Phillips Curve relating the weighted median to unemployment appears clearly in the data for 1985–2017, with no sign of a breakdown in 2008.”