Category: Equitablog

Must-Read: Dani Rodrik: A Foreword to Kari Polanyi Levitt

Posted on by Brad DeLong

Must-Read: The only big problem with this from Dani Rodrik is that Karl Polanyi got it completely wrong when he wrote that it is “democracy” striking back against the “market”. It is not “democracy” that is striking back against the “market”. To say so is to misread what is going on completely. And I think it is also to misread what went on in what my teacher Jeffrey Williamson calls the first era of “globalization backlash” from… call it 1900-1940.

And Karl Polanyi still needs somebody to play Charlie Kindleberger to his Hyman Minsky. I nominate Dani:

Dani Rodrik: A Foreword to Kari Polanyi Levitt: “I first encountered Karl Polanyi as an undergraduate, in a course on comparative politics… http://rodrik.typepad.com/dani_rodriks_weblog/2017/03/a-foreword-to-kari-polanyi-levitt.html

…“The Great Transformation” was on the course syllabus, sitting somewhat awkwardly amidst more standard political science fare. The assigned reading, on the Speenhamland system and the reform of the Poor Laws in Britain made little impression…. But over the years, I found myself coming back to the central arguments of the book: the embeddedness of a market economy in a broader set of social arrangements, the rejection of an autonomous economic sphere, the folly of treating markets as self-stabilizing. I am lucky that I had been exposed to Polanyi before I became a full-fledged economist. Looking at standard neoclassical fare from the perspective of the Great Transformation kept me alert to the hidden assumptions…. Curiously, the more I became an economist, the more Polanyi’s insights resonated. In my own writings on economic development and globalization, I felt often that I was simply restating the main themes of the Great Transformation for our current era….

It gives me great pleasure to return the favor by writing a few words about Kari Polanyi Levitt’s impressive book, From the Great Transformation to the Great Financialization…. Levitt aptly uses the term “The Great Financialization” to describe the regime that took over after the Keynesian order inscribed in the Bretton Woods arrangements collapsed…. The Bretton Woods arrangements were very much Polanyian in spirit…. Keynes sought an international regime that would be hospitable to international trade among nations, but not so intrusive that it would undercut economic management domestically.

One key requirement of such a regime was that international finance would be kept in check. Keynes made clear that controls on international capital flows were not meant to be simply a temporary expedient, to be removed once global financial stability was achieved. They were a permanent feature of the system…. After the 1980s this understanding was superseded by a new one that once again raised the market–and financial markets in particular–above the needs of society. Europe, America, and eventually most middle-income developing nations embraced financial globalization…. This wasn’t quite the Gold Standard that Karl Polanyi had held responsible for the political upheavals of the early part of the 20th century…. Nevertheless, financial globalization entailed donning the Golden Straitjacket….

As I write these words, Donald J. Trump is one month into his presidency. The reactionary backlash that Levitt foresaw, the second part of Polanyi’s double movement, is in full force not only in the United States but in a large number of European nations as well. In Levitt’s words, “market forces of polarization will disembed the economy from traditional social relations and people will seek solidarities of community, ethnicity, religious belief or other solidarities of the excluded” (p. 105). Or as she puts it elsewhere: “democracy is striking back at economics” (p. 60). We ignore Karl Polanyi at our own peril. And there is no better, richer account of why and how than this wonderful collection of essays.

Must- and Should-Reads: April 12, 2017

Posted on by Brad DeLong

Interesting Reads:

A new way to look at how U.S. firms affect their workers’ pay now and in the future

Posted on by Emilie Openchowski
Window washers clean windows on a building in Washington.

Economists and other social scientists have spent years focused almost solely on changes in the attributes of workers in their efforts to understand rising inequality in the United States, examining workers’ ages, education levels, occupations, and union status. More recently, however, economists have set their eyes on the firm as a major source of income inequality.

Recent research on what’s known in economics as “interfirm inequality” shows that differences in wages across firms can explain why workers who appear to be very similar based on their worker attributes can end up being paid very different salaries. Economists’ estimates of the role of interfirm inequality put it at about two-thirds of the overall increase in income inequality. Yet new research highlights another way that firms affect workers’ incomes. Employers affect their workers’ earnings not only now, but into the future as well.

The new paper by economists John M. Abowd of Cornell University and the U.S. Census Bureau, Kevin L. McKinney of Census, and Nellie L. Zhao of Cornell looks at the current wage effect of firms and how a current employer results in higher or lower future wages for workers. To understand their findings, think of the U.S. labor market as a series of ladders, with firms being different ladders and wage levels corresponding to rungs on the ladders. A strong firm effect means that similar workers end up on different rungs of their respective firm ladders. The authors of this paper find that firms can also change the rate at which workers are climbing up their ladders.

Consider three workers who fall into the middle of the skill distribution (skill being the return on things that economists can’t observe in the data) and the wage distribution. Each worker gets put on a different ladder, representing each working for different firms. These employees not only get placed at different rungs on the ladders due to differences in how the firms pay, but also climb up the ladders at different rates.

The first worker, who’s employed by a low-wage firm, has less than a 1 percent chance of getting to the top fifth of his or her firm’s ladder. The second worker, employed at a medium-wage firm, has about a 3 percent chance of getting to the top 20 percent of the rungs. But a worker at a high-wage firm has an almost 12 percent chance of getting near the top of the ladder. The probability of moving up is also better for high-skilled workers at high-wage firms—about 33 percent. This compares to the roughly 5 percent and 14.5 percent chances at low- and medium-wage firms, respectively, for high-skilled workers.

As Peter Orzsag points out at Bloomberg View while writing about this research, policymakers have ignored the importance of what’s going on inside firms for far too long. Concerns about firm behavior often coalesce around its effect on prices. But in an era of increasing business consolidation and seemingly increased market power, policymakers should also be aware of the ability of firms to impact workers’ ascent up an already-rickety job ladder.

There Is an Old Joke About Economists, Keys, and Lampposts That Comes to Mind Here…

Posted on by Brad DeLong
Cursor and Lamppost 2 jpg

This is an interesting, if an Aesopian, article by Olivier Blanchard…

He says that we need five kinds of macroeconomic models. He then gives examples of the five kinds. The examples of four of the kinds track—foundational, policy, toy, and forecasting—and we do indeed need those four kinds.

Then we come to the fifth kind, which Blanchard introduces by saying that we need:

DSGE models. The purpose of these models is to explore the macro implications of distortions or set of distortions. To allow for a productive discussion, they must be built around a largely agreed upon common core, with each model then exploring additional distortions…

But two paragraphs down he writes, of all existing DSGE models:

The current core, roughly an RBC (real business cycle) structure with one main distortion, nominal rigidities, seems too much at odds with reality… the Euler equation for consumers and the pricing equation for price-setters…

What is he saying? That all existing DSGE models are worthless. We should throw them away, and start over with respect to building this fifth kind of model. We can call it “DSGE”, but it will not be what has—hitherto at least—been “DSGE”. In his view, it will have to have “nominal rigidities, bounded rationality and limited horizons, incomplete markets and the role of debt”—i.e., real rather than fake microfoundations.

The problem, of course, is that we cannot (yet) set out such a model in a sufficiently tractable form. Thus I think that one inescapable conclusion that we need to draw from Blanchard is that, for now, we need to keep using our four useful kinds of models—foundational, policy, toy, and forecasting. And I think a second inescapable conclusion we need to draw is that we should stop doing DSGE models which involve looking under the lamppost for the key where it is not. We need, rather, to disassemble the lamppost. And then some of us can use its pieces to try to build another lamppost, but this time locate it in a less silly and useless place.

Olivier Blanchard: On the Need for (At Least) Five Classes of Macro Models https://piie.com/blogs/realtime-economic-issues-watch/need-least-five-classes-macro-models: “We need different… five types…

…[of] general equilibrium models….

  1. Foundational models… the consumption-loan model of Paul Samuelson, the overlapping generations model of Peter Diamond…

  2. DSGE models… to explore the macro implications of distortions or set of distortions… built around a largely agreed upon common core, with each model then exploring additional distortions…. The current core, roughly an RBC… seems too much at odds with reality to be the best starting point…. How close [should] these models… be to reality[?]… They should obviously aim to be close, but not through ad-hoc additions and repairs, such as arbitrary and undocumented higher-order costs introduced only to deliver more realistic lag structures…

  3. Policy models. (Simon Wren-Lewis prefers to call them structural econometric models.)… For this class of models, the rules of the game must be different than for DSGEs. Does the model fit well, for example, in the sense of being consistent with the dynamics of a VAR characterization? Does it capture well the effects of past policies? Does it allow one to think about alternative policies?

  4. Toy models… IS-LM… Mundell-Fleming… RBC… New Keynesian model…. [To] allow for a quick first pass at some question, or present the essence of the answer from a more complicated model or class of models….

  5. Forecasting models. The purpose of these models is straightforward: Give the best forecasts…

All models should be built on solid partial equilibrium foundations and empirical evidence.

Should-Read: Noah Smith: Keynesian Economics Is Hot Again

Posted on by Brad DeLong

Should-Read: What Noah misses is that international macroeconomists—those who had never taken Prescott or Lucas seriously—were very well-prepared for the collapse of 2007-2010. It’s not that theories needed to be rethought: it’s that doctrines that were always bs needed to be thrown to the side:

Noah Smith: Keynesian Economics Is Hot Again https://www.bloomberg.com/view/articles/2017-04-10/keynesian-economics-is-hot-again: “Lawrence Christiano… after the Great Recession…

…the pendulum should swing decisively in the Keynesian direction:

The Great Recession was the response of the economy to a negative shock to the demand for goods all across the board. This is very much in the spirit of the traditional macroeconomic paradigm captured by the [simple Keynesian] model… The Great Recession seems impossible to understand without invoking…shocks in aggregate demand. As a consequence, the modern equivalent of the IS-LM model—the New Keynesian model—has returned to center stage.

Another way of putting this is that Paul Krugman was right…. As Christiano mentioned, the New Keynesian revolution isn’t so new. Even in the 1990s, economists like Greg Mankiw and Olivier Blanchard were arguing that monetary policy had real effects on demand. And at the same time, international macroeconomists were realizing that Japan’s post-bubble experience of slow growth, low interest rates and low inflation implied that demand shortages could last for a very long time…. Krugman, Adam Posen, Lars Svensson, and others were already referring to a Japan-type stagnation as a liquidity trap in the late 1990s, and warning that standard monetary policy of cutting interest rates wouldn’t work in that sort of situation. But the profession didn’t listen, and only the smallest deviations from the New Classical orthodoxy were accepted into the mainstream.

The idea of fiscal stimulus was still largely taboo. Nobel prizes were awarded to the economists who made theories in which demand shortages can’t exist, while no Nobels were given to New Keynesians for suggesting otherwise. When the Great Recession hit, some prominent macroeconomists pooh-poohed the idea that stimulus could help. Christiano’s essay should serve as a needed rebuke to the profession…

But it also raises an uncomfortable question: Why didn’t macroeconomists catch on until years after disaster struck? One explanation is sociological…. Robert Lucas, Thomas Sargent and Edward Prescott… anti-Keynesians who now have big gold medals from Sweden… scare[d] younger economists away…. Political considerations might have played a role as well….

But… in most scientific fields — biology or astronomy, for example — the weight of evidence is enough to overcome social fads and political bias. Even in most areas of economics, empirical results gradually push the profession in one direction or another. For example, relatively few economists now believe a $15 minimum wage is likely to reduce employment very much…. The right way forward for macro is… to adopt more public humility and caution about… theories…. Someday… macroeconomic models won’t have to be rethought every time a big recession happens.

Should-Read: David L. Ikenberry, Richard L. Shockley, and Kent L. Womack (1998): Why Active Fund Managers Often Underperform the S&P 500: The Impact of Size and Skewness

Posted on by Brad DeLong

Should-Read: David L. Ikenberry, Richard L. Shockley, and Kent L. Womack (1998): Why Active Fund Managers Often Underperform the S&P 500: The Impact of Size and Skewness http://www-2.rotman.utoronto.ca/kent.womack/publications/publications/skewness.pdf: “The S&P 500 index… comparison has generally cast an unfavorable impression of active fund managers…

…and has led many investors to embrace index funds. Systematic deviations from the benchmark are affected by two conventional practices of active fund managers: 1) equally-weighting their positions, and 2) holding small numbers of stocks. These two practices accentuate the statistical characteristics of longer-horizon stock returns and cause active manager performance to deviate predictably from broad-based benchmarks such as the S&P 500…. The size premium is not stable, and in recent years when large-cap stocks outperform small cap-stocks, equal-weighted portfolios have worked to the disadvantage of active investors. Cross-sectional skewness… provides a more subtle bias…. The “typical” median stock underperforms the mean…. On average, the impact of cross-sectional skewness appears to be about 20 basis points per annum for investors who hold 35 equal-dollar positions, and even more for less diversified portfolios…

JOLTS Day Graphs: February 2017 Report Edition

Posted on by Nick Bunker

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 February 2017. 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. 

After a jump in January, the quits rate moved down to 2.1 percent in February. Quitting is often interpreted as a sign of labor market health and recently it’s been quite steady.

One way to measure the tightness of the labor market is looking at the ratio of job seekers to available jobs. The current ratio is at pre-recession levels, but it may be able to go lower.

Data from February show that the number of hires per job opening continues a recent trend of moving sideways after years of falling after the end of the Great Recession in June 2009.

Tax cuts for whom? Heterogeneous effects of income tax changes on growth and employment

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Author:

Owen Zidar, Assistant Professor of Economics, University of Chicago Booth School of Business & Faculty Research Fellow, National Bureau of Economic Research

Abstract:

This paper investigates how tax changes for different income groups affect aggregate economic activity. I construct a measure of who received (or paid for) tax changes in the postwar period using tax return data from NBER’s TAXSIM. I aggregate each tax change by income group and state. Variation in the income distribution across U.S. states and federal tax changes generate variation in regional tax shocks that I exploit to test for heterogeneous effects. I find that the positive relationship between tax cuts and employment growth is largely driven by tax cuts for lower-income groups, and that the effect of tax cuts for the top 10% on employment growth is small.

How corporate profit-shifting distorts the measurement of U.S. productivity

Posted on by Emilie Openchowski
Elliott Johns, of Boston, holds up an iPhone 4S in front of an Apple Store location in Boston.

The various ways in which companies reduce their tax bills can do some weird things to economic statistics. One startling case in point: The economies of the world appear to be in debt to some extraterrestrial creditor because total global assets are lower than total global liabilities. The reality, of course, is not that Earth owes money to Mars, but rather is due to the use of tax havens. According to Ireland’s national income statistics, the country’s economy—a well-known parking spot for corporate profits—grew at 26.3 percent in 2015.

This same kind of statistical anomaly is apparently also the case in the measurement of U.S. economic productivity. It appears that U.S. corporations’ habit of shifting profits overseas is overstating the decline in productivity growth in the United States. In a new paper, economists Fatih Guvenen of the University of Minnesota, Raymond J. Mataloni Jr. and Dyland G. Rassier of the Bureau of Economic Analysis, and Kim J. Ruhl of Pennsylvania State University look at corporate profit-shifting as a distortion of U.S. economic data. By shifting profits overseas, economic output that should be counted in the United States ends up being registered in other countries.

This shifting appears to have happened in part due to the rise in “intangible assets.” To borrow an example from the four economists, think of a simplified version of the profits from an iPhone. Employees at Apple Inc. design the phone, which is then produced abroad at a cost of $250 and sold to a customer in the United States for $750. If we assume the reason people buy iPhones is the branding and design created by Apple, then a good portion of the $500 net profit is a return on “intangible assets” produced in the United States. But if a company sells the rights to these intangible assets to a subsidiary in a low-tax country, then the profits will end up there.

The result? An increase in the Gross Domestic Product of the low-tax country and a decline in the GDP of the United States without any real change in economic activity.

To see how much U.S. economic output and productivity growth is missed due to profit-shifting, the authors of the paper use data on multinational corporations from the U.S. Department of Commerce’s Bureau of Economic Analysis, the agency that creates GDP data, which includes information on the employment, sales, and research and development expenditures of those companies. They then calculate the amount of profits from each company that could be ascribed to U.S. economy given the amount of people it employs in the country and how much of its sales are in the United States. (This process is known as formulary apportionment.)

Counting profits in this way ends up increasing economic activity by a significant amount. Total value added in the United States economy (a metric similar to GDP) is at least 2.5 percent higher in 2010 after making these adjustments. Labor productivity growth per year from 1994 to 2004 is raised by 0.1 percentage points, while productivity growth from 2004 to 2008 increased by 0.25 percentage points. The difference can be even larger at some points. Productivity growth from 2006 to 2008—after accounting for profit-shifting—was almost a full percentage point higher than unadjusted productivity.

This effect is significant—a few tenths of a percentage point difference can add up to a significant long-term effect—yet it still doesn’t fully reverse the slowdown in U.S. productivity growth since 2004. The U.S. economy could still use a boost to its productive capacity. But it could also use a tax system that doesn’t distort what’s actually happening.

Must-Read: Christina Starmans, Mark Sheskin, and Paul Bloom: Why People Prefer Unequal Societies

Posted on by Brad DeLong

Must-Read: The estimable Mark Thoma sends us to a view of the Polanyian Perplex from Nature: Human Behavior:

Christina Starmans, Mark Sheskin, and Paul Bloom: Why People Prefer Unequal Societieshttp://www.nature.com/articles/s41562-017-0082: “There is immense concern about economic inequality…

…Many insist that equality is an important social goal. However, when people are asked about the ideal distribution of wealth in their country, they actually prefer unequal societies. We suggest that these two phenomena can be reconciled by noticing that, despite appearances to the contrary, there is no evidence that people are bothered by economic inequality itself. Rather, they are bothered by something that is often confounded with inequality: economic unfairness. Drawing upon laboratory studies, cross-cultural research, and experiments with babies and young children, we argue that humans naturally favour fair distributions, not equal ones, and that when fairness and equality clash, people prefer fair inequality over unfair equality. Both psychological research and decisions by policymakers would benefit from more clearly distinguishing inequality from unfairness…