Category: Equitablog

Should-Read: Barry Eichengreen et al.: On the fickleness of capital flows

Posted on by Brad DeLong

…Focusing on emerging markets, this column argues that despite recent structural and regulatory changes, much of this wisdom still holds today. Foreign direct investment inflows are more stable than non-FDI inflows. Within non-FDI inflows, portfolio debt and bank-intermediated flows are most volatile. Meanwhile, FDI and bank-related outflows from emerging markets have grown and become increasingly volatile. This finding underscores the need for greater attention from analysts and policymakers to the capital outflow side.

B Eichengreen and P Gupta (2016), “Managing Sudden Stops,” World Bank Policy Research Paper 7639.

B Eichengreen, P Gupta, and O Masetti (2017), “Are Capital Flows Fickle? Increasingly? And Does the Answer Still Depend on Type?” World Bank Policy Research Paper, 7972.

What’s the problem a U.S. corporate tax cut will solve?

Posted on by Bridget Ansel
Photo of the Internal Revenue Service Building in Washington.

Pretty much the entire conversation around possible U.S. tax reform this year has been around the idea of introducing a border adjustment tax to the corporate income tax by taxing imports and offering a deduction for exports. But there’s a lot more going on in the proposals to overhaul corporate taxation, never mind the planned changes for the individual tax code.

The tax reform proposal from House Republicans would reduce the corporate rate from 35 percent to 20 percent and allow for the immediate and full expensing of capital investments. Both of these changes have been pitched as ways to boost business investment and overall economic growth. Given previous tax reform efforts and trends among corporations, policymakers should be skeptical that these changes will do much on the growth front.

Before turning to the reasons for skepticism, a quick note on how the corporate income tax interacts with investment decisions today. As Kyle Pomerleau of the Tax Foundation explains, the corporate tax can be separated into two pieces: a tax on net profits that will fall on shareholders and a tax on new investments, as capital outlays can’t be immediately written off. Whether capital (investors) or labor (workers) bear relatively more or less of that tax depends on whether investment decisions are affected much by the tax on new investments. The more of a response, the more the tax falls on labor, as less investment means lower productivity and lower wages.

If a lower corporate tax rate and the full expensing of investment can boost investment growth, then we’d expect not only higher growth but also higher wages as workers are more productive. Furthermore, as the tax wouldn’t affect investment decisions and potentially fall on labor, it would fall more on capital via the tax on net profits. Yet there’s reason to be skeptical that such reforms are going to lead to such positive changes.

First, the United States tried in the recent past to boost investment by reducing the cost of capital. During 2003, the federal government cut the tax rate on dividends to help spur investment. Research by Danny Yagan of the University of California-Berkeley, however, found no such impact. Neither investment nor employee compensation changed much in response to the dividend tax cut.

Even more questionable is the idea that the cost of capital is of much concern these days. Corporations can borrow at very low interest rates, but they have become net lenders to the rest of the economy. Corporations across high-income countries have boosted their savings rates since the early 1980s and haven’t boosted investment much. Research looking at the reason for this corporate savings glut haven’t pointed to tax rates but instead at increased business concentration and increased payouts to shareholders.

The dearth of business investment in the United States and across high-income countries is a troubling trend. Less investment means slower productivity growth and a poorer future as living standards can’t grow as quickly. Policymakers in the House should be applauded for wanting to give corporations a kick start. But their preferred method of motivation might not be as strong as they would like.

Should-Read: Simon Wren-Lewis: The academic consensus on austerity solidifies, but policymakers go their own sweet way

Posted on by Brad DeLong

Should-Read: Simon Wren-Lewis: The academic consensus on austerity solidifies, but policymakers go their own sweet way: “Any fiscal expansion in the US would not be for Keynesian reasons…

…There remains a clear and rather urgent need for a large increase in public investment financed by borrowing, but that seems unlikely to happen. What we are sure to get is tax cuts….

Not all of the Eurozone’s problems are due to a failure to recognise Keynesian macro…. [But] a failure to understand Keynesian economics contributes to this lack of understanding…. Some key actors, even in EC institutions and governments, are beginning to see how austerity policies may only encourage the rise of the populist right. But that is a long way from the key reform… required… replacing the existing fiscal architecture with something more Keynesian….

Equally disappointing has been the complacency of independent central banks. We have had the most prolonged recovery from recession, with lasting damage to long run supply, but you might be forgiven for thinking that we were still in the Great Moderation. Central banks should be busy comparing the four main ways of avoiding another Zero Lower Bound episode: a higher inflation target, negative nominal rates, nominal GDP targets or helicopter money. They also have to stop being so discreet about fiscal policy. Keeping quiet itself makes another ZLB episode more dangerous…. Occasionally people ask why my blogs seem to be as much about politics as economics these days. I agree…. [But] writing about the finer details of estimated multipliers can seem like rearranging the deckchairs on the Titanic.

The U.S. minimum wage improves access to traditional lines of credit

Posted on by Nick Bunker

Economists have studied the employment effects of the minimum wage for more than a century. A fair reading of the full body of research suggests that increases in the minimum wage along the lines experienced in the United States over the past five decades have little or no impact on employment, though there are some holdouts among researchers.

The effects of mandated wage floors, however, almost certainly go well beyond any potential impact on jobs. Two Federal Reserve Board economists, Lisa Dettling and Joanne Hsu, have produced the latest piece of research that takes a broader view of the minimum wage. They find that minimum-wage increases appear to have a large and beneficial impact on access to credit for low-income households.

In a working paper released last month, Dettling and Hsu use detailed data on credit card mailing offers, credit reports, and households’ use of “alternative financial services” (such as payday and pawnshop loans) to see how lenders and low-income workers respond to increases over the past decade and a half in the minimum wage across U.S. states and the District of Columbia.

Their statistical analysis suggests that a one-dollar increase in a state’s minimum wage leads to a substantial improvement in the credit situation facing workers in low-income households. Specifically, they find:

  • Credit card offers increase by 7 percent
  • Borrowing limits on credit card offers increase by between 5 percent and 10 percent
  • Interest rate terms improve
  • The number of credit cards held increases by 0.8 percent
  • Delinquency rates fall by 7.2 percent (9 percent for borrowers with new cards)
  • Use of “alternative financial services” falls by between 40 percent and 45 percent

These striking findings have at least two important implications for the policy debate around the minimum wage.

First, cost-benefit analysis of the minimum wage should factor in the impact of the minimum wage outside of its consequences on the labor market. Some research has looked at the way higher wages at the bottom might boost employment by increasing consumer demand, but little research has looked at ways in which the minimum wage might affect credit markets. (An important exception is some earlier research by another group of economists at the Fed.)  As Dettling and Hsu note: “our results hint that minimum wage policy could have persistent positive ripple effects on household welfare and financial health through…credit markets.”

Second, increases in the minimum wage may be a more effective tool in the fight against predatory forms of credit, including payday loans, rent-to-own plans, and pawn shops. Dettling and Hsu’s findings suggest that even relatively modest increases in the minimum wage may have a bigger impact on reducing demand for far more costly alternative financial services than other legislative approaches that are more directly aimed at restricting the supply of these same services.

Major Malinvestments Do Not Have to Produce Large Depressions

Posted on by Brad DeLong

The United States had an immense boom in the 1990s. That was in the end financial disappointing for those who invested in it, but not because the technologies they were investing in did not pan out as technologies, not because the technologies deliver enormous amounts of well-being to humans, but because it turned out to be devil’s own task to monetize any portion of the consumer surplus generated by the provision of information goods.

Huge investments in high tech and communications. Huge amounts of utility generated. Little financial return. $4 trillion of investors’ wealth destroyed as assets were revalued. That is something like 8 times the fundamental losses we saw in subprime mortgages and home equity loans made on houses in the desert between Los Angeles and Albuquerque from mid 2006-mid 2008.

A 1.5%-point rise in the unemployment rate after 2000 is not nothing–it is a bad thing. But it is not a 7%-point rise. And it is not a failure to close any of the gap vis-a-vis the pre-crisis trend of potential thereafter and a dark shadow over economic growth for a generation thereafter. Yet the fundamental shock from dot-com looks to me 8 times as large as the fundamental shock from subprime.

That tells me that we can deal with such shocks to private sector credit that go wrong: Have them be to equity wealth in the first place, or rapidly transform all the financial asset claims affected into equity on the fly as the crisis hits. Easy to say. Hard to do. We make sure they are diversified. And we do not, not, not, not, not, not let the people in Basle get too clever with their ideas of what reserves and capital structure look like, and allow core reserves to be placed in assets that are not AAA–even if some ratings agency whose revenues depend on pleasing investment banks has labeled them as AAA.

Axel Weber tells this story:

In Davos, I was invited to a group of banks–now Deutsche Bundesbank is frequently mixed up in invitations with Deutsche Bank. I was the only central banker sitting on the panel. It was all banks. It was about securitizations. I asked my people to prepare. I asked the typical macro question: who are the twenty biggest suppliers of securitization products, and who are the twenty biggest buyers. I got a paper, and they were both the same set of institutions. When I was at this meeting–and I really should have been at these meetings earlier–I was talking to the banks, and I said: “It looks to me that since the buyers and the sellers are the same institutions, as a system they have not diversified”.

That was one of the things that struck me: that the industry was not aware at the time that while its treasury department was reporting that it bought all these products its credit department was reporting that it had sold off all the risk because they had securitized them.

What was missing–and I think that is important for the view of what could be learned in economics–is that finance and banking was too-much viewed as a microeconomic issue that could be analyzed by writing a lot of books about the details of microeconomic banking. And there was too little systemic views of banking and what the system as a whole would develop like. The whole view of a systemic crisis was just basically locked out of the discussions and textbooks…

Axel Weber knew that this was a dangerous situation. Of course, he had no idea how dangerous it was. Barry Eichengreen, Alan Taylor, and Kevin O’Rourke think that, once the run on the shadow banking system was underway, this was the largest shock relative to the size of the market financial markets have ever experienced. We could have avoided this. If we had done our surveillance sufficiently deeper, we would have seen that this might be coming…

But, even so there was nothing baked in the cake of the housing bubble that in any sense required what the world economy has gone through in the past decade.

Indeed, John Maynard Keynes had a good deal to say about this in Notes on the Trade Cycle:

The preceding analysis may appear to be in conformity with the view of those who hold that over-investment is the characteristic of the boom, that the avoidance of this over-investment is the only possible remedy for the ensuing slump, and that, whilst for the reasons given above the slump cannot be prevented by a low rate of interest, nevertheless the boom can be avoided by a high rate of interest. There is, indeed, force in the argument that a high rate of interest is much more effective against a boom than a low rate of interest against a slump.

To infer these conclusions from the above would, however, misinterpret my analysis; and would, according to my way of thinking, involve serious error. For the term over-investment is ambiguous. It may refer to investments which are destined to disappoint the expectations which prompted them or for which there is no use in conditions of severe unemployment, or it may indicate a state of affairs where every kind of capital-goods is so abundant that there is no new investment which is expected, even in conditions of full employment, to earn in the course of its life more than its replacement cost. It is only the latter state of affairs which is one of over-investment, strictly speaking, in the sense that any further investment would be a sheer waste of resources.[4] Moreover, even if over-investment in this sense was a normal characteristic of the boom, the remedy would not lie in clapping on a high rate of interest which would probably deter some useful investments and might further diminish the propensity to consume, but in taking drastic steps, by redistributing incomes or otherwise, to stimulate the propensity to consume.

According to my analysis, however, it is only in the former sense that the boom can be said to be characterised by over-investment. The situation, which I am indicating as typical, is not one in which capital is so abundant that the community as a whole has no reasonable use for any more, but where investment is being made in conditions which are unstable and cannot endure, because it is prompted by expectations which are destined to disappointment.

It may, of course, be the case — indeed it is likely to be — that the illusions of the boom cause particular types of capital-assets to be produced in such excessive abundance that some part of the output is, on any criterion, a waste of resources; — which sometimes happens, we may add, even when there is no boom. It leads, that is to say, to misdirected investment. But over and above this it is an essential characteristic of the boom that investments which will in fact yield, say, 2 per cent. in conditions of full employment are made in the expectation of a yield of, say, 6 per cent., and are valued accordingly. When the disillusion comes, this expectation is replaced by a contrary “error of pessimism”, with the result that the investments, which would in fact yield 2 per cent. in conditions of full employment, are expected to yield less than nothing; and the resulting collapse of new investment then leads to a state of unemployment in which the investments, which would have yielded 2 per cent. in conditions of full employment, in fact yield less than nothing. We reach a condition where there is a shortage of houses, but where nevertheless no one can afford to live in the houses that there are.

Thus the remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the so-called boom to last. The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom…

Fiscal Policy in the New Normal: IMF Panel

Why is collective bargaining so difficult in the United States compared to its international peers?

Posted on by Bridget Ansel
SEIU Local 1 union members protest for an increase in the minimum wage late last year at the Detroit Metropolitan Airport in Romulus, Mich.

Part of the story of why income and wealth inequality is rising is tied to the decline in the bargaining power of organized labor over the past half-century. That decline is the result of multiple complementary forces, but one of the biggest and most illustrative is the dramatic shrinking of the unionized workforce.

Two important indicators, union density and collective bargaining coverage, highlight the severity of the decline. Union density is the proportion of workers who are members of a union. Collective bargaining coverage is the proportion of workers covered by a collective bargaining agreement regardless of whether they are members of a union. Both have been dropping for decades, and those levels pale in comparison what we observe in other countries with similar standards of living as the United States.

From 1960 to 2016, the union density rate fell by more than half. In 1960, nearly one in three workers was a union member. According to the most recently released annual data from the U.S. Department of Labor’s Bureau of Labor Statistics, that number is down to just over one in ten. (See Figure 1.)

Figure 1

International comparisons shed some important light on the U.S. experience. It’s immediately obvious from comparing union density and coverage data assembled by Jelle Visser at Amsterdam Institute for Advanced Labour Studies that labor market institutions vary dramatically across a range of economies with a roughly similar standard of living as the United States. Among 21 member countries of the Organisation for Economic Co-operation and Development, the United States is 20th in union density, coming ahead of only France. Interestingly, though, France is tied for 1st with Austria in collective bargaining coverage. On that measure, the United States is last. (See Figure 2.)

Figure 2

In many OECD countries, including France as mentioned above, there are striking magnitudes of difference between union coverage and density rates. In the United States, a worker might not be a member of a union but nonetheless may be covered by a collective bargaining agreement since by law a union must represent all workers at a firm, even those who decline to join the union. Elsewhere though, as in many of these high-coverage countries, there might not be a single union member at a firm or even a contract that was negotiated at the firm level, but nonetheless those workers are covered by a collective bargaining agreement that was negotiated by representative unions across employers in most or all of the industry. Levels of union coverage observed in these countries are the result of more union-friendly legal frameworks and in some cases the administration of social insurance by unions, among other things.

Beyond instances of very high coverage levels, there are noticeable differences, for example, between countries with similar institutional arrangements. In the United States and Canada—where collective bargaining coverage within unionized firms is 100 percent and 0 percent within non-unionized firms—there is a much smaller difference between density and coverage rates. In Canada, the gap between union density and coverage is 1.8 percentage points, only slightly larger than the gap in the United States, but overall both density and coverage rates are significantly higher in Canada than in the United States.

So why might it be the case that these two neighboring countries exhibit such a dramatic difference in density and coverage? Part of the reason is the process by which workers at individual firms unionize. Modest policies that are more favorable to union formation and recognition, such as majority sign-up and first contract arbitration, can be very consequential for boosting worker power in circumstances similar to those found in both countries.

In terms of policy here in the United States, organized labor has been on the losing side of those important battles for a long time. There are now 28 “right to work” states and the political opposition to collective bargaining is intense at the federal level as well. But going forward, it’s important to keep in mind the international context. There is tremendous policy variance between the countries shown above. That variance must be thoroughly explored and considered if we’re going to make progress in bolstering the bargaining power of labor and reversing the current trend of worsening inequality.

Must- and Should-Reads: February 21, 2017

Posted on by Brad DeLong

Interesting Reads:

Must-Read: Jim Tankersley: Obama solved one economic crisis. It’s the second that haunts him

Posted on by Brad DeLong

Must-Read: Jim Tankersley: Obama solved one economic crisis. It’s the second that haunts him: “If you worked a factory shift in Michigan in January 2009…

…you were wrestling with two manners of economic crisis. One was the immediate threat to your job. If you lost it, you were in danger of losing your car, and your house too. The other… was the realization that… the economic future you were once promised was drifting away. That imminent crisis has long since receded. History will record that President Obama and his economic team presided over a historically swift end to a massive recession, along with a better rebound than any other industrialized country enjoyed at the time….

[Obama] appears to understand — to have internalized — that he was unable to soothe the longer-running sense of economic crisis in much of working-class America once the recession itself was over. Yes, income gains for the middle class were finally arriving in the last years of Obama’s presidency…. Yet they were still not nearly enough to bring the American dream comfortably into view for autoworkers in Akron, Ohio, or home health aides in Richmond, Virginia…. Real median income is just getting back to where it was in 2000…. For all of our detailed assessments and long wanderings through the Obama economic record, this remains the simplest snap assessment: He solved one crisis, but not both.

It doesn’t matter that he didn’t create the longer-term crisis…. It doesn’t matter that his record might look different if a Democrat had won a “third term” of sorts for him…. What matters is that Americans had grown accustomed to the economy delivering broad wage gains and strong job growth, in the years after World War II, of the type that lifted up workers across race, gender, and class lines, though certainly not all at the same rate…. What he did, history will record, was critical. But so was what he, and Congress, left undone…

Must-Read: Raj Chetty et al.: Mobility Report Cards: The Role of Colleges in Intergenerational Mobility

Posted on by Brad DeLong
Mobility Rates Success Rate vs Access by College www equality of opportunity org assets documents coll mrc slides pdf

Must-Read: Raj Chetty et al.: Mobility Report Cards: The Role of Colleges in Intergenerational Mobility: “We characterize rates of intergenerational income mobility at each college in the United States using administrative data for over 30 million college students from 1999-2013…

…First, access to colleges varies greatly by parent income. For example, children whose parents are in the top 1% of the income distribution are 77 times more likely to attend an Ivy League college than those whose parents are in the bottom income quintile. Second, children from low and high-income families have very similar earnings outcomes conditional on the college they attend, indicating that there is little mismatch of low socioeconomic status students to selective colleges.

Third, upward mobility rates – measured, for instance, by the fraction of students who come from families in the bottom income quintile and reach the top quintile – vary substantially across colleges. Much of this variation is driven by differences in the fraction of students from low-income families across colleges whose students have similar earnings outcomes. Mid-tier public universities such as the City University of New York and California State colleges tend to have the highest rates of bottom-to-top quintile mobility. Elite private colleges, such as Ivy League universities, have the highest rates of upper-tail (e.g., bottom quintile to top 1%) mobility.

Finally, between the 1980 and 1991 birth cohorts, the fraction of students from bottom-quintile families fell sharply at colleges with high rates of bottom-to-top- quintile mobility, and did not change substantially at elite private institutions. Although our descriptive analysis does not identify colleges’ causal effects on students’ outcomes, the publicly available statistics constructed here highlight colleges that deserve further study as potential engines of upward mobility.

The Equality of Opportunity Project Www equality of opportunity org assets documents coll mrc slides pdf Distribution of Access Across Colleges Enrollment Weighted www equality of opportunity org assets documents coll mrc slides pdf Mean Child Rank at Age 34 vs Parent Income Rank www equality of opportunity org assets documents coll mrc slides pdf Correlates of Top 20 Mobility Rate www equality of opportunity org assets documents coll mrc slides pdf