Brad DeLong: Worthy reads on equitable growth, November 16–29, 2018

Worthy reads from Equitable Growth:

  1. An excellent paper from two of Equitable Growth’s grantees, Claire Montialoux and Ellora Derenoncourt, on the key role of the minimum wage extensions of the 1960s in reducing inequality—doing so along a pronounced racial as well as class dimension as a result of the racial skew of employment categories. It was not just that African Americans were in predominately low-wage jobs, but also that the categories of jobs they were in had previously been exempt from the minimum wage. Read “Minimum Wages and Racial Inequality,” in which the authors write: “The earnings difference between black and white workers fell dramatically in the United States in the late 1960s and early 1970s … the extension of the minimum wage played a critical role.”
  2. Americans do want inheritances to be taxed. They are much more ambivalent about taxing savings—perhaps because savings are seen as uniquely virtuous sources of income. In a working paper that Equitable Growth issued in 2017 (but that did not get the attention and resonance that I think it deserves), “Do Americans Want to Tax Capital? Evidence from Online Surveys,” Raymond Fisma, Keith Gladstone, Ilyana Kuziemko, and Suresh Naidu write: “Via a survey on Amazon’s Mechanical Turk … we provide subjects with a set of hypothetical individuals’ incomes and wealth and elicit subjects’ preferred (absolute) tax bill … unobtrusively map[ping] both income earned and accumulated wealth into desired tax levels. Our regression results yield roughly linear desired tax rates on income of about 14 percent … positive desired wealth taxation … 3 percent when the source of wealth is inheritance, far higher than the 0.8 percent rate when wealth is from savings.”
  3. Even though the unemployment rate is gratifyingly low, it is still the case that the Great Recession continues to cast a huge shadow, reducing the U.S. economy’s potential output. And we cannot confidently look forward to a time when this effect will have dissipated. The failure to make rapid employment recovery “job one” in 2009–2010 was a catastrophe, as Equitable Growth grantee Danny Yagan detailed in his 2017 working paper, “Employment Hysteresis from The Great Recession.” He writes: “This paper uses U.S. local areas as a laboratory to test whether the Great Recession depressed 2015 employment … exposure to a 1 percentage point larger 2007–2009 local unemployment shock caused working-age individuals to be 0.4 percentage points less likely to be employed at all in 2015, likely via labor force exit. These shocks also increased 2015 income inequality.”
  4. Equitable Growth Research Advisory Board Member Jesse Rothstein presents a different interpretation than former Equitable Growth Steering Committee Member Raj Chetty and his co-authors of the great American sociological deserts, out of which upward mobility is nearly unthinkable. Chetty and his colleagues focus on school—perhaps because pouring resources into schools is something we can do and would, in all likelihood, be somewhat effective. But how effective? Are schools the key link or just one of many factors? Rothstein believes the second, and I think he is right. Read his “Inequality of Educational Opportunity? Schools as Mediators of the Intergenerational Transmission of Income,” in which he writes: “I use data from several national surveys to investigate whether children’s educational outcomes (educational attainment, test scores, and noncognitive skills) mediate the relationship between parental and child income … There is … little evidence that differences in the quality of K–12 schooling are a key mechanism driving variation in intergenerational mobility.”
  5. Another piece from grant recipient Ellora Derenoncourt is, I think, the best piece I have read in the past week. It is also the most horrifyingly depressing case I have read in the past week. Derenoncourt’s thesis is that the Great Migration of African Americans from the south to the urban north set in motion political, economic, and sociological changes in local power structures that made those migration destinations poor places—and dangerous places—to raise young black men. Read her “Can You Move to Opportunity? Evidence from the Great Migration,” in which she writes: “The northern United States long served as a land of opportunity for black Americans, but today the region’s racial gap in intergenerational mobility rivals that of the South. I show that racial composition changes during the peak of the Great Migration (1940–1970) reduced upward mobility in northern cities in the long run, with the largest effects on black men.”


Worthy reads not from Equitable Growth:

  1. I do not understand why there are people claiming the U.S. economy is at full employment. Full employment is defined as the level at which nominal and real wage growth visibly accelerates. They have not yet started to do so. Maybe the U.S. economy will be at full employment next year. But the real and nominal wage series would look different if it were at full employment right now. Read Ernie Tedeschi, “Unemployment Looks Like 2000 Again. But Wage Growth Doesn’t,” in which he writes: “Trying to solve an economic mystery … This is, to put it mildly, a mystery. If workers are as scarce as the unemployment rate and many other measures suggest, employers should be raising wages to compete for them.”
  2. Similar to wood fires and nuclear fusion, ideology is a very bad master. But also similar to wood fire in nuclear fusion, ideology is a most excellent servant. Therefore, I cannot sign on to Jerry Taylor‘s decision to abandon “ideology.” The task, I think, is to make ideologies “useful” by making them self-reflective. After all, if a libertarian founder such as John Stuart Mill can say that “Positive Liberty is essential”—that the British working class of his day was “imprisoned” in spite of all their negative liberty by Malthusian poverty—there is ample space for a libertarianism that keeps its good focus on human choice, potential, and opportunity without blinding itself to a great deal of reality. Read Jerry Taylor, “The Alternative to Ideology,” in which he writes: “When we launched the Niskanen Center in January 2015, we happily identified ourselves as libertarians … heterodox libertarians … left-libertarianism concerned with social justice (a libertarian perspective that I’ve defended in debates with more orthodox libertarians here and here).”
  3. The world is becoming richer, and dire poverty is becoming rarer, but is the world becoming more equal? Smart thoughts from Dietz Vollrath, “New Evidence on Convergence,” in which he writes: “Dev Patel, Justin Sandefur, and Arvind Subramanian posted the other day some new evidence on cross-country convergence … poor countries grow faster than rich ones, on average.”
  4. A piece heading more into political sociology than I am comfortable assessing, but I trust Sandy Darity as a very thoughtful economist. Read his “The Latino Flight to Whiteness,” in which he writes: “Hispanics collectively are unlikely to share common cause with black Americans over a common racial identity … If a coalition ever forms … it will not be on the basis of linked fate or fictive kinship anchored on race.”
  5. I would find the wise and public-spirited Ricardo Haussmann more convincing here if he’d had an explanation for why mandated wage compression by John Dunlop in the United States during World War II was not a huge success. Read Ricardo Hausmann, “How Not to Fight Income Inequality,” in which he writes: “Trying to combat income inequality through mandated wage compression is not just an odd preference. It is a mistake, as Mexico’s president-elect, Andrés Manuel López Obrador, will find out in a few years, after much damage has been done.”
  6. I have never understood this argument—that raising and then lowering interest rates does more good to fight recessions than does not raising them in the first place. And, to my knowledge, there is no underlying model behind it at all. What is the mechanism by which raising interest rates now so you can lower them later beats keeping interest rates the same now and then lowering them later if both ultimately wind up at the same place? Martin Feldstein makes his case in “Raise Rates Today to Fight a Recession Tomorrow,” in which he continues to argue: “As I have argued in these pages since 2013, the Fed should have begun raising the Fed funds rate several years earlier. Doing so would have prevented the recent sharp increases in the prices of equities and other assets, which will collapse when long-term interest rates rise.”


November 29, 2018


Brad DeLong


Economic Inequality


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