Category: Equitablog

Weekend reading: the #WorkingPaperTuesday edition

Posted on by Kavya Vaghul

This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth published this week and the second is the work we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.

Equitable Growth round-up

Building off a piece from last week, Nick Bunker takes a second look at a new research on income inequality in the United States, which explores some reasons for why one-year income inequality has increased while lifetime income inequality has not changed too much.

Equitable Growth released two new working papers, one of which takes a look at the consequences that bad credit reports have on credit and the labor market, while the other discusses some of the contradictions present in a well-known critique of Keynesian economics.

Researchers and policymakers generally agree that the benefits of early childhood education make it a worthwhile investment in the United States. But there is much less agreement on how to build high-quality programs and sustain the cognitive gains made in preschool. Kavya Vaghul explains that another important consideration that is often missing from the conversation is preschool classroom diversity.

A new issue brief dives into the importance of raising the minimum wage to spur far-reaching economic growth in the United States, surveying the work of several academics in Equitable Growth’s network of scholars. Together, the work helps elucidate whether and how the minimum wage affects family incomes and job opportunities and offers ideas for how to structure future minimum wage policies.

“After Piketty: The Agenda for Economics and Inequality,” a new book published by Harvard University Press, was released this week, featuring several essays reflecting on what gaps still remain to be researched following economist Thomas Piketty’s best-seller “Capital in the Twenty-First Century.” See an excerpt from one of the essays by Suresh Naidu here.

What were the economic ramifications of opening up the United States to more trade with China in 2000? According to new research, one consequence may have been fuel added to the housing bubble as increased competition from Chinese imports weakened the labor market. Nick Bunker further explores the connection.

Links from around the web

Through a series of interviews, Matthew Desmond tackles the relationship between homeownership and inequality in the United States, highlighting how the benefits of home mortgage interest and other real estate tax deductions overwhelmingly accrue to the upper-middle class and the wealthy. [new york times]

Speaking of housing, it may be surprising that the quality of subsidized or assisted housing conditions are pretty equal for children of different races. The problem, however, as Gene Demby points out, is that the location of subsidized housing significantly varies for black and white children, which ultimately influences their life outcomes. [npr]

The “robot apocalypse,” the idea that technologies and automation could increasingly push out workers, is not in fact coming, argues Greg Ip. It may actually be that many low-productivity sectors need to start adopting them to improve the productivity and living standards of workers. [the wall street journal]

Leila Morsy highlights new research on the connection between parents’ incarceration and their child’s cognitive and behavior outcomes, suggesting that mass incarceration may be intrinsically linked to education policy. [the american prospect]

With Mother’s Day around the corner, Valerie Wilson analyzes the Current Population Survey to show the unique role that African American mothers play in the economic well-being of their families. Black moms work more hours and are much more likely to work. [epi]

Friday figure

Featured in “The importance of raising the minimum wage to boost broad-based U.S. economic growth” and originally from “How raising the minimum wage ripples through the workforce”

Should-Read: Sarah Kliff: Donald Trump has no idea what health insurance costs

Posted on by Brad DeLong

Should-Read: Sarah Kliff: Donald Trump has no idea what health insurance costs: “The Economist asked the president about the fact that many Americans are expected to lose coverage… https://www.vox.com/policy-and-politics/2017/5/11/15624328/trump-health-insurance-costs

…This was Trump’s response:

The state governments are in much better position to, you know, help people. In terms of, you know, just the size, the mere size of it. But we’re putting in $8bn and you’re going to have absolute coverage. You’re going to have absolute guaranteed coverage…

Trump makes a promise of “guaranteed coverage.” But the Republican bill doesn’t deliver on that. When the Congressional Budget Office analyzed the last version of the American Health Care Act, it estimated that 24 million fewer Americans would have coverage…. The more recent iteration of the bill adds an additional $8 billion to fund high-risk pools… not nearly enough….

There’s also this other line in the response that caught my eye, where Trump discusses how he thinks health insurance ought to work.

Insurance is, you’re 20-years-old, you just graduated from college, and you start paying $15 a month for the rest of your life and you really need it, you’re still paying the same amount and that’s really insurance…

The fact that Trump settles on $15 as the appropriate amount to pay for health insurance betrays a lack of familiarity with the actual cost of coverage. You do not have to be a health policy expert to get this—just someone who has ever purchased a health plan.

Most voters I talk to don’t have this expectation…. They know, from their experience, that health coverage is not as cheap as $15, and have more realistic assumptions than the one Trump makes….

There is a lengthy exchange in the Economist interview over the future of Obamacare’s cost-sharing reduction subsidies…. This is a huge deal for insurance companies… the thing that keeps them up at night, deciding whether or not to sell Obamacare coverage in 2018. Trump’s answers here certainly won’t give the industry a better night’s sleep. Here is the exchange:

TRUMP: We’re subsidizing it and we don’t have to subsidize it. You know if I ever stop wanting to pay the subsidies, which I will.

ECONOMIST: You’d pull the plug on that? If this bill doesn’t go through you’d stop those subsidies?

TRUMP: No, this bill only gives them one month. They don’t realize that, that’s another thing. Good point. This bill gives them one month, it gave, you know the subsidy…

ECONOMIST: The continuation of the subsidy?

TRUMP: The subsidy to the insurance companies, yes. Anytime I want because actually.

ECONOMIST: But my question is if the bill doesn’t pass.

TRUMP: In actuality Congress has to approve it. Congress…

ECONOMIST: If the bill doesn’t pass would you cut the subsidies?

TRUMP: If the bill doesn’t pass, I’d be in a different position. Because, if the bill didn’t pass the Republicans would have let me down. And then I’d have to decide what I want to do because I want people to have health care.

Within the span of a few sentences, Trump seems to hint that he is ready to stop paying the subsidies—but that his course of action may be tempered by what Congress does on the Obamacare repeal strategy…. White House Chief of Staff Reince Priebus made reassuring calls to legislators that reportedly put Democratic leadership at ease. Trump, however, wants to make it clear that these payments are not a done deal[:]… he could end the subsidies “anytime I want.”… Trump is destabilizing the Obamacare marketplaces and raising the possibility of collapse. Whether he understands that is an open question…

No, Sarah, whether Trump understands it is not an open question.

Trump does not understand it.

Trump does not understand it any more than he understands that he did not invent the phrase “priming the pump”, that his plans do not do what people mean when they say “prime the pump”, nor that steam-driven catapults are not a realistic design choice to launch modern fighter jets off of Ford-class aircraft carries.

How the opening to China may have partially fueled the U.S. housing bubble

Posted on by Emilie Openchowski
Chinese workers prepare to send off goods meant for export in Beijing.

The U.S. housing bubble burst more than 10 years ago, but the exact reasons for its inflation are still under debate. Consider the timing of the bubble (roughly 2002 to 2006) with the opening of the U.S. economy in 2000 to increased trade with China. A string of recent research finds that increased competition from Chinese imports leads to a significant deterioration in local labor markets. Perhaps there was some connection between these two trends as some U.S. households loaded up on debt in response to a weaker labor market. A recent working paper makes exactly that argument.

The paper is by economists Jean-Noël Barrot and Erik Loualiche of the Massachusetts Institute of Technology, Matthew Plosser of the Federal Reserve Bank of New York, and Julien Sauvagnat of Bocconi University. The four economists look to see if there was a difference in the amount of debt that households took on depending on how much import competition increased in their local economies. For those concerned that they might be finding a relationship that isn’t causal, the authors use an instrument for increased importation—a decline in shipping costs—that shouldn’t be connected to other factors increasing household debt.

Barrot, Loualiche, Plosser, and Sauvagnat find that increased import competition does explain a good amount of the variation in household debt. Areas with higher import competition saw higher increases in household leverage. An increase in competition of about one standard deviation explains about 30 percent of the difference in the growth of household debt. To get a sense of this magnitude, the authors find that a standard deviation increase in house prices also explains about 30 percent of differences in household debt.

Looking into the kind of debt that households take on in response to this shock, the four economists find that mortgage debt is the biggest part of the increase. Specifically, refinancing existing mortgages and home equity lines of credit are the biggest part of the increase, not new mortgages. This result fits in with the hypothesis that homeowners were taking out loans to deal with the loss of a job or a weakening labor market.

Previous studies of the cause of the housing boom emphasized the increases in credit supply, including the role of mortgage securitization and foreign savings flowing in the United States. What this new paper does is look at the source of increased credit demand in some areas of the United States. For many Americans, it appears that more debt and leverage wasn’t due to a desire to simply spend more, but instead a way to deal with a significant income drop. Access to credit served as a way to paper over some of the underlying problems in local labor markets.

Of course, the household bubble eventually burst and revealed the extent of those problems—an implosion that many Americans are still struggling to overcome.

Must- and Should-Reads: May 10, 2017

Posted on by Brad DeLong

Interesting Reads:

Should-Read: Tim Duy: The Fed Is on the Right Side of Its ‘Transitory’ Bet

Posted on by Brad DeLong

Should-Read: Tim Duy: The Fed Is on the Right Side of Its ‘Transitory’ Bet: “The Fed is betting that residual seasonal adjustment issues negatively impacted the first-quarter gross domestic product and that the data does not reflect the true pace of economic growth… https://www.bloomberg.com/view/articles/2017-05-08/the-fed-is-on-the-right-side-of-its-transitory-bet

…If they are correct, then the pace will pick up over the next two months and they will likely hike rates in June…. So far it looks like the Fed is on the right side of their bet. The employment report for April reveals solid job growth and low unemployment as the economy charged into the second quarter…. [I see] a fairly large residual seasonal impact in the first quarter that has been growing over time… [with] the offset… currently concentrated in the third quarter…. This won’t be the last word on seasonal adjustment issues in the GDP data. The BEA is working on addressing these issues and may hopefully be able to resolve the situation in the near future….

Early indications… are that the data will be there to justify a June move…

Should-Read: Bill Emmott: Escaping the Wage Trap

Posted on by Brad DeLong

Should-Read: Bill Emmott: Escaping the Wage Trap: “The main reason governments are leery of intervening in labor markets… https://www.project-syndicate.org/onpoint/escaping-the-wage-trap-by-bill-emmott-2017-05

…is bad memories of failed wage and price controls during the high-inflation 1970s. But a second, more current, reason is that businesses everywhere lobby them to keep out…. It’s time to ignore the lobbies and take courage…. [That] raising the minimum wage really would risk killing employment… today… looks unlikely…. And we need more investment in new technology to raise productivity, not less. Raising minimum wages would help stimulate that investment, while boosting consumer demand.
Japan famously had an “income-doubling” plan in the 1960s. With that successful example in mind, why not introduce a “minimum wage doubling” plan, to be carried out over a period of years, thus giving business the chance to adjust?…

Should-Read: Eric Rauchway: From Scarcity to Abundance

Posted on by Brad DeLong

Should-Read: Eric Rauchway: From Scarcity to Abundance: “The recent burst of writing on the roboticization of labor… http://crookedtimber.org/2017/05/09/from-scarcity-to-abundance/

…has brought home the imminence of an era in which most of us will be economically surplus. Keynes had an idea that the abundant society would be one of leisure and widespread artistic endeavor… a fetching optimism, which appears to have no purchase on the zero-sum, inequality-hugging societies of our time….

Abundance, and the values that recognize it, is where Doctorow wants to go… a utopia that takes the blogosphere and wikis and other online communities (probably not metafilter though) as the basic model for how an abundant society might organize itself…. The key move in establishing such communities is, in Doctorow’s imagined future, turning passive-aggression into a virtue—if someone has screwed up, someone else will just fix it; don’t bother trying to hold the erring party responsible…. Walkaways—self-deportees… real-world spaces, as easily pioneered as a new WordPress blog. They would be just as easily infested by trolls, too—but Doctorow seems to think that community norms could quite readily expel such infestations. My own experience of trying to moderate comments sections makes me less optimistic than I take him to be…

Better understanding the importance of diversity in U.S. preschool programs

Posted on by Emilie Openchowski
Pre-K students walk in a line at the South Education Center in San Antonio, Texas.

There’s a general consensus that early childhood education programs are a worthwhile investment in the United States for participants, their families, and the public at large. By nurturing both cognitive and noncognitive skills, a high-quality preschool education boasts impressive long-term benefits such as increased high-school graduation rates, lower crime rates, higher earnings, and better health outcomes. What’s more, when monetized, the benefits overshadow the costs of these programs and even accelerate economic growth.

While there’s agreement on the benefits of pre-Kindergarten, there is much less of a consensus on what it should look like. Research shows that the quality of a program’s structure—student-to-teacher ratios, class size, or teacher qualifications, for example—and process—things such as classroom interactions, parental involvement, or instructional materials—certainly matter. Yet questions still remain about how preschool can help reduce the fadeout of cognitive skills and instead sustain the gains.

These typical considerations, though critical, leave out another factor: classroom diversity. A recent report by Jeanne L. Reid and Sharon Lynn Kagan of the National Center for Children and Families at Columbia University, Michael Hilton of the Poverty and Race Research Action Council, and Halley Potter of The Century Foundation tackles exactly this issue. The report not only surveys the limited research that connects socioeconomic and racial and ethnic diversity in early childhood classrooms to educational outcomes, but also highlights the importance of thinking about preschool classroom diversity as a contributor to the quality of a preschool education.

Researchers usually focus primarily on understanding how classrooms’ socioeconomic and racial and ethnic composition affects educational outcomes for students in Kindergarten through 12th grade. Through these studies, scholars have revealed that more socioeconomically diverse and more racially and ethnically diverse schools promote greater student achievement and provide a number of other benefits throughout those primary and secondary educational years. According to this report, though, there are substantially fewer studies that look at the impacts of preschool classroom composition.

One such study (co-authored by Reid and Douglas D. Ready of Columbia University) highlighted in the report observed 2,966 children in 704 pre-K classrooms and found that the children in classrooms with a middle-to-high average socioeconomic status—in short, classrooms that are more economically diverse—learned more receptive language, expressive language, and math skills than their counterparts in lower average socioeconomic status classrooms independent of the racial and ethnic diversity of their classrooms. That same study found that more racial and ethnic diversity in preschool classrooms was associated with higher language development outcomes.

Reid, Kagan, Hilton, and Potter in their report explain that the improved outcomes of students in socioeconomically and racially and ethnically diverse classrooms are likely due to peer effects. Children from higher-income backgrounds often enter pre-K more prepared than their lower-income peers. Through interactions, these higher-skilled preschoolers may help their lower-income peers learn.

Though more research is needed to understand the role that diversity plays in preschool outcomes, the reality is that preschool programs in the United States have a long way to go to becoming truly diversified classrooms. The four co-authors of the report note that most children in publicly available preschool today are segregated across income and race, with children from higher-income and non-Hispanic families most likely to enroll in the first place. To make matters worse, the data show that low-income children are often disproportionately enrolled into low-quality pre-K.

To address socioeconomic and racial and ethnic diversity concerns, researchers and policymakers have proposed implementing universal pre-K programs over ones targeted at disadvantaged children. Policies that address rising neighborhood segregation or local zoning policies also can help increase access to high-quality early childhood education and the economic diversification of classrooms starting in preschool. Moving forward, researchers and policymakers alike should incorporate concerns over diversity in preschool programs into their frameworks. After all, if the education of more productive adults begins in preschool, then equity should be integrated right from the start to ensure the future economic growth and productivity of the U.S. economy is as robust as possible.

Should Read: Aaron Reeves: Economics: The architecture of inequality

Posted on by Brad DeLong

Should Read: Aaron Reeves: Economics: The architecture of inequality: “After Piketty, edited by Heather Boushey, Bradford Delong and Marshall Steinbaum… https://www.nature.com/nature/journal/v543/n7645/full/543312a.html

…responds to what the editors describe as academic economists’ less-than-healthy reaction to Piketty. It asks an interdisciplinary crowd of social scientists to tug at the various threads of his argument to see whether it unravels. (It also includes a fascinating essay from an emboldened Piketty on issues such as the potential of collective bargaining to reduce inequality generated by capitalism.) The book serves as a fantastic introduction to Piketty’s main argument in Capital, and to some of the main criticisms, including doubt that his key equation — r > g, showing that returns on capital grow faster than the economy — will hold true in the long run.

It also contains thoughtful interventions in debates about the political economy of inequality. Economist Branko Milanović, for instance, documents how sharing capital more equally across the population could weaken the impact of a rising capital share (when those who own capital gain more of an economy’s income). Stemming the tide of rising inequality in a period of slow growth may require redistribution of capital, not just income…

Must-Read: Larry Summers: Less is more when it comes to Federal Reserve policy

Posted on by Brad DeLong

Must-Read: The Federal Reserve has managed to get the sailing ship that is the economy 200 yards from a rocky coast in hurricane season: it will be able to do little to boost demand in the event of any adverse shock. The way I see it, the Federal Reserve should be desperately trying to boost inflation now so it can raise interest rates in the future so that it has policy room to maneuver whenever the next adverse macroeconomic shock comes.

But they do not see it that way:

Larry Summers: Less is more when it comes to Federal Reserve policy: “The next couple of years are likely to see slower GDP growth and possibly a tendency to rising inflation… https://www.ft.com/content/ab77d236-318c-11e7-9555-23ef563ecf9a

…What does this mean for monetary policy? The assumption manifest in the statements of the Fed and most commentary is that policy should be tightened over time through rising interest rates and a reversal of quantitative easing. Perhaps, but tightening involves real dangers and needs to be carried out with great care. The Fed has committed itself to a symmetric 2 per cent inflation target and inflation has been below 2 per cent for eight years. If a booming economy in the ninth year of recovery with this prelude is not the time for inflation above 2 per cent, when would such a time arise?

Moreover, economists should now have great humility regarding the inflation process…. Price inflation remains very much under control…. Wage growth in excess of price growth would be desirable…. The Fed will have little room to respond if it overdoes things and the economy goes into recession. Sometimes the hardest and most important decisions in government involve doing less rather than more. This is one of those times for the Fed. Caution should be its watchword…