Category: Equitablog

Should-Read: Martin Sandbu: Donald Trump’s Love of Manufacturing Is Misguided

Posted on by Brad DeLong

Should-Read: Martin Sandbu: Donald Trump’s Love of Manufacturing Is Misguided: “Donald Trump and his economic team love manufacturing…

…Peter Navarro’s attacks on Germany and stated goal to repatriate international supply chains…. The high productivity of manufacturing means a country with a large proportion of its workforce in factories needs to ship a lot of its output abroad: it will simply be producing too many goods for its own population to consume…. On a global level, there are… only so many manufacturing jobs to be had…. There are three countries that have traditionally been goods producers to the world: Germany, Japan and China…. The economic nationalism of President Trump and Messrs Navarro and Bannon can be described as Germany-envy….

But… manufacturing machismo itself is a handicap when it comes to grasping the opportunities for a thriving economy. By far the largest number of jobs to be created in the US over the next decade will be in services, in particular the caring professions…. Regardless of trade, automation is reducing the need for manufacturing jobs everywhere. As the economist Brad DeLong pointed out in a recent essay, that is true in Germany, too, which has seen a fall in factory employment almost as sharp as in the US (the same holds for Japan)…. Many German workers have faced long wage stagnation. And all the big industrial economies have chosen to internationalise their supply chains….

It gets worse. If the factory fetishists are obsessed enough to throw themselves into a battle for a steadily shrinking type of employment, they may well find that their most obvious weapons are doubled-edged at best. Suppose the Trump administration forced through changes in the North American Free Trade Agreement so as to repatriate all parts of the car production process, the most salient of the supply chains Mr Navarro says he wants to bring back. The result will be to make US-produced cars more expensive. How is that going to help expand American car exports?… Protectionist policies are likely to shrink imports and exports, leaving the protected economy worse off than before and in no better position even by the misguided measures of the manufacturing fetishists themselves.

Should-Reads: February 14, 2017

Posted on by Brad DeLong

Interesting Reads:

Should-Read: Peter Orszag: Here’s How Trump Will Change Obamacare

Posted on by Brad DeLong

Should-Read: Peter Orszag: Here’s How Trump Will Change Obamacare: “I expect to see Republicans stage a dramatic early vote to repeal…

…just for show…. The Republicans’ desire to hold an early partisan vote repealing the ACA… seems too strong to resist. The repeal will probably be set to become effective in the future, perhaps 2019 or 2020. This vote will probably be closer than many people think…. For the White House, however, the closeness of the vote will be a feature rather than a bug, because it will create the impression that the vote is significant….

The hard work of a creating comprehensive replacement is then likely to get bogged down in legislative muck. But the administration can use its expansive waiver authority to allow states to experiment with both Medicaid and the individual insurance markets. As these 50 flowers bloom, President Trump could at some point declare victory and assert that the ACA has been sufficiently reformed…. In response to any particular complaint in a specific state, the administration could simply shrug its shoulders and direct the inquiry to the relevant governor.

Should-Read: Anton Cheremukhin et al. (2013): Was Stalin Necessary for Russia’s Economic Development?

Posted on by Brad DeLong

Should-Read: Joachim Voth and I both focused on how Tsarist industrialization was hindered by monopoly power in manufacturing, and on the absence of a special bonus for the Stalinist construction of a heavy industrial sector in Magnitogorsk and elsewhere very far in the interior. The destruction of monopoly power via planning–along with the destruction of the peasant-collective barriers to mobility–was a big plus that largely offset the inefficiencies of central planning. The creation of a heavy industrial complex in Magnitogorsk was a priceless asset for the world come World War II.

Anton Cheremukhin et al. (2013): Was Stalin Necessary for Russia’s Economic Development?: “We construct a large dataset that covers Soviet Russia during 1928-1940 and Tsarist Russia during 1885-1913…

…We use a two-sector growth model to compute sectoral TFPs as well as distortions and wedges in the capital, labor and product markets. We find that most wedges substantially increased in 1928-1935 and then fell in 1936-1940 relative to their 1885-1913 levels, while TFP remained generally below pre-WWI trends. Under the neoclassical growth model, projections of these estimated wedges imply that Stalin’s economic policies led to welfare loss of -24 percent of consumption in 1928-1940, but a +16 percent welfare gain after 1941. A representative consumer born at the start of Stalin’s policies in 1928 experiences a reduction in welfare of -1 percent of consumption, a number that does not take into account additional costs of political repression during this time period. We provide three additional counterfactuals: comparison with Japan, comparison with the New Economic Policy (NEP), and assuming alternative post-1940 growth scenarios….

The country significantly lagged behind advanced capitalist economies, the US and UK. However, Russia’s industrialization proceeded at a speed similar to some other industrializing economies, in particular, Japan…. Most importantly, as noted by Gerschenkron (1962), reallocation of labor to industry was hindered by the prevalence of communal rather than individual ownership of land… the institutions of obschina….

The eminence of cartels (syndikaty), especially post 1899-1902 recession, in the capital goods industries (steel, coal, iron, railroad engineering). These cartels were to a large extent foreign owned. Syndikaty established prices and the market quotas. The cartelization of an important part of the heavy industries likely played an additional role in restricting the size of the manufacturing sector relative to a competitive market….

Modeling the decline in U.S. interest rates

Posted on by Bridget Ansel
Stock trader Mark Puetzer follows stock information on electronic screens at the New York Stock Exchange.

A trend as important and complex as the long-term decline in interest rates is going to attract multiple explanations, with many economists eagerly offering up their own recent models in search of answers. Understanding why interest rates have declined so much may help us understand where interest rates will head and how policy might boost the natural rate of interest. A recent paper that builds a model of secular stagnation points toward changes in demographics and declining productivity growth as the major culprits behind the decline in U.S. interest rates. But it might be worthwhile thinking through the decline in interest rates in a different framework.

A model like the one used in a paper by economists Lukasz Rachel and Thomas Smith of the Bank of England thinks of the interest rate as being determined by the interaction of desired investment and desired savings. Think of a supply-and-demand graph where the upward-sloping curve is desired savings, or the supply of savings, and the downward-sloping curve is desired investment, or the demand for savings. The horizontal axis here is savings as a share of gross domestic product and the vertical axis is the interest rate.

The Rachel and Smith paper finds that the decline in the global interest rate of interest is due about equally to a decline in both desired savings and desired investment. The result is a lower interest rate, but with no significant change in the savings as a share of gross domestic product.

But note that the analysis is just for the global interest rate. In their paper, Rachel and Smith show how the trends are slightly different for high-income countries and emerging economies. Both groups of countries saw interest rates decline, but savings as a share of GDP increased among emerging economies while declining among high-income economies. If the price and the quantity of something is down, then this means that declining “demand” (in this case desired investment) has shifted more than “supply” (desired savings). The trend holds up for the United States specifically as interest rates and investment and savings as a share of GDP have both trended downward since the 1980s.

Increased desired savings are likely to play a role as well as the U.S. population has aged. There also is the possibility that increased income inequality, particularly the rise of the top 1 percent, has increased desired savings, according to a paper by economists Adrien Auclert at Stanford University and Matthew Rognlie at the Massachusetts Institute of Technology. Increases savings by corporations also have also contributed to a shift in the savings schedule.

But if the decline in desired investment is at the heart of declining interest rates in the United States, then it may be more worthwhile to dig into the causes of that trend. One potential cause– highlighted by Rachel and Smith’s analysis – is the declining relative price of investment goods. If investment goods are less expensive, then companies will need to spend less for a given investment project. The result is that there’s a downward shift in the schedule for desired investment.

A second potential cause is the increased spread between the risk-free interest rate (the rate of the presumed safest asset) and the return on capital. This higher difference means that a decline in interest rates is less likely to reduce the required return on investment and spur investment. The result is less investment for every given interest rate level, or a downward shift in desired investment.

The reasons behind the increased interest rate spread are not completely understood, but a recent paper by Ricardo Caballero of MIT, Emmanuel Farhi of Harvard University, and Pierre-Olivier Gourinchas of the University of California-Berkeley tries to sort of the causes. The three economists find an increase in risk premiums, meaning that investors want to be compensated more for investing in riskier projects. They also point out that other factors, such as increasing economic “rents” (excessive profits) and technological change that favors capital, may also be contributing to the increased spread and declining interest rates.

Of course, slowing economic growth also could be responsible for declining investment as accelerator models of investment would indicate. But it’s not clear what the relative importance of these factors are for the United States. Better understanding how much desired investment is declining in the United States and what’s behind that trend can help policymakers not only boost short-term growth and boost productivity, but also give them greater insight into what might reverse the decline in interest rates.

The wages of care: Bargaining power, earnings and inequality

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Authors:

Nancy Folbre, Professor Emerita of Economics & Director of Research on Gender and Care Work at the Political Economy Research Institute, University of Massachusetts Amherst
Kristin Smith, Family Demographer, University of New Hampshire

Abstract:

The uneven bargaining power of both firms and workers may be contributing to increased earnings inequality in the U.S. Econometric analysis of earnings from the 2015 Current Population Survey shows that the earnings of managers and professionals employed in care industries (health, education, and social services), characterized by high levels of public and non-profit provision, are significantly lower than in other industries. Overall, earnings in care industries are more compressed, with lower ratios of earnings at the 90th percentile to those at the 50th and 10th percentiles. The specific features of care work, including moral commitments, the difficulty of capturing added value, and the importance of team work help explain these patterns.

This is a joint working paper between the Washington Center for Equitable Growth and the Political Economy Research Institute.

U.S. millennials, the racial wealth divide, and asking parents for rent

Posted on by Nick Bunker

It seems a lot of twenty-somethings in the United States who are trying to make it in the big city have a secret weapon: Mom and Dad. A new article for The Upshot by Quoctrung Bui chronicles a new survey that finds that a growing number of millennials in their twenties—40 percent—still rely on their parents to help pay their everyday living expenses, receiving an average of $3,000 a year.

In a labor market in which mobility is declining and skilled jobs are increasingly moving to expensive cities, family wealth is playing an increasing role in helping post-graduates find their footing, especially if they move to urban areas.  Of course, not every family can afford to help their adult children out. Bui doesn’t go into the demographics of who these families are, but the research tells us that they are likely disproportionately white. This means that the barriers of entry to some of the nation’s best jobs and opportunities, which are becoming concentrated in these expensive, high-rent cities, could deepen even further along racial lines.

Parents’ ability to help their children comes down how much they have in assets, and it’s no secret that a major wealth gap between white families and families of colors has persisted for years. Policies both past and present have helped build the white middle class while deepening the racial divide for black and Latino families, who now have 6 percent and 8 percent, respectively, of the wealth of a typical white household, according to a new Demos report. An influential study by the Brookings Institution’s William Gale and University of Wisconsin’s John Karl Scholz finds that 20 percent of net worth is due to non-inheritance transfers from family members throughout one’s lifetime. Wealth, as opposed to income, is important because it can serve as a springboard for the next generation’s long-term financial security.

This does not just mean that white offspring are more likely to receive a sizeable inheritance after their parents’ death. According to Brandeis University sociologist Thomas Shapiro, white children are also more often the recipients of financial assistance throughout their lifetime as well. We don’t necessarily register these “gifts” as inheritance. But whether it’s paying their children’s college tuition, covering medical expenses, or helping with rent or a down payment on a house, this head-start can help white kids find more opportunities to build wealth.

The effects of a parental safety-net—or lack thereof—also influences more immediate choices. A kid that has a parental safety net to fall back on is much more likely to be able to afford to move to a more expensive city, pay for career development activities, or go into occupations that are riskier or have higher barriers of entry. Mel Jones, writing for the Washington Monthly, calls this reality the “second racial wealth gap.”

“If you have to decide between paying for a professional networking event or a cell phone bill, the latter is more likely to win out,” Jones explains. “When this happens once or twice, it’s not a big deal. It’s the collective impact of a series of decisions that matter, the result of which is displayed among ethnic and class lines.” Education only goes so far, as demonstrated by the fact that black and Latino students who want to build wealth similar to that of white high-school dropouts must not only to finish high school but also graduate from college.

When economists and other social scientists talk about the racial wealth gap, they tend to focus on the way that it’s stifled upward mobility for black and Latino households in terms of homeownership, education, and weathering periods of financial hardship. Reversing the numerous discriminatory policies that caused this to happen in the first place will help, but it won’t remove the barriers to entry that are now higher than ever because many white families are starting off far ahead. The small inequalities have always mattered, but in an era in which wealth begets wealth, they may represent an even bigger barrier to long-term economic security for communities of color.

Should-Read: Morgan Kelly and Cormac Ó Gráda: Adam Smith, Watch Prices, and the Industrial Revolution

Posted on by Brad DeLong

Should-Read: Morgan Kelly and Cormac Ó Gráda (2016): Adam Smith, Watch Prices, and the Industrial Revolution: “Watches were the first mass-produced consumer durable…

…and were Adam Smith’s preeminent example of technological progress…. Smith makes the notable claim that watch prices may have fallen by up to 95% over the preceding century…. We look at changes in the reported value of over 3,200 stolen watches from criminal trials in the Old Bailey in London from 1685 to 1810… the real price of watches in nearly all categories falls steadily by 1.3% a year… showing that sustained innovation in the production of a highly complex artifact had already appeared in one important sector of the British economy by the early eighteenth century….

Against the view of a narrowly based Industrial Revolution, our results on watchmaking support the view of a more broadly based advance across many manufacturing sectors proposed by Berg and Hudson (1992) and Temin (1997) , among others…. What distinguishes watches… is that, except for scientific instruments, watches were the most complex artifacts of their time. That is what makes their productivity growth so interesting…. Our results support the view that the roots of the Industrial Revolution stretch back further than the mid-eighteenth century. The beginnings of growth in the seventeenth century are consistent with the findings of Broadberry et al. (2015) on English GDP…. As Bailey and Barker (1969) demonstrate, the origins of watchmaking in Lancashire lie in the area’s tradition of brass making that dates back to the late sixteenth century…

Adam Smith Watch Prices and the Industrial Revolution The Quarterly Journal of Economics Oxford Academic

Should-Read: Tim Duy: Fed’s Bullard Knows His Treasury Yield Curve

Posted on by Brad DeLong

Should-Read: I agree with Tim Duy here: Bullard is looking at the right things, and that is a very good sign…

Tim Duy: Fed’s Bullard Knows His Treasury Yield Curve: “Having tipped their toes in the water with two interest-rate hikes…

…the Federal Reserve… to date… have tended to look at interest rate-policy as separate from balance-sheet policy. Once the former is heading toward normalization, then they can begin the latter. I tend to be skeptical of that strategy, largely because it risks financial destabilization by flattening the yield curve…. I would prefer an explicit policy strategy that incorporates both interest-rate and balance-sheet tools acting jointly not with the goal of “normalizing” either of those components, but aimed at meeting the Fed’s dual mandates of full employment and stable prices. Under such a framework, for example, the Fed wouldn’t need to follow through with additional rate hikes before to balance-sheet reduction. There would be no preconceived notion of the “correct” order of operations. That’s why I like what I heard in St. Louis Federal Reserve President James Bullard’s most recent speech…. Bullard still sees the balance sheet as a mechanism to normalize policy even if policy rates remain low…. Bullard is building on Yellen by saying not only is that diminishment justification for a gradual pace of rate increases, but as a replacement for rate increases. There is nothing to stop them from initiating such policy now…

Must- and Should-Reads: February 12, 2017

Posted on by Brad DeLong

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