Category: Equitablog

Must-Read: Noah Smith: The Ways That Pop Economics Hurt America

Posted on by Brad DeLong

Must-Read: It’s not just “pop economics” by “pop economists”. It’s bad economics by senior and (formerly) well-respected economists. Why Lucas, Fama, Prescott, Cochrane, Taylor, and all the other cheerleaders for fiscal austerity have not paid a big reputational price for their astonishingly transparent and obvious analytical blunders–what David Romer called “Econ 1-level analytical blunders” still astonishes me:

Noah Smith: The Ways That Pop Economics Hurt America: “Someone needed to write a book about how economic theory has been abused in American politics…

…And someone finally did. James Kwak’s “Economism” is a very important and timely book, and anyone who is interested in public affairs should pick up a copy and read it. Kwak… spins a tale of how simple supply-and-demand theory fed a free-market ideology that led to a financial crash, a dysfunctional health-care system, spiraling inequality and a threadbare social-safety net…. With Econ 101 as the default lens through which everyone views the world, Kwak argues, government programs and regulations start to seem dangerous and inefficient, while inequality begins to feel like the natural and just order of things. There is much truth here. When competitive free markets and rational well-informed actors are the baseline assumption, the burden of proof shifts unfairly onto anyone proposing a government policy….

Simple theories… we learn in our formative years… maintain an almost unshakeable grip…. Supply and demand… doesn’t work very well for labor markets… is incapable of simultaneously explaining both the small effect of minimum wage increases and the small impact of low-skilled immigration. Some more complicated, advanced theory is called for. But no matter how much evidence piles up, people keep talking about “the labor supply curve” and “the labor demand curve”… and… analyz[ing] policies… using the same old framework. An idea that we believe in despite all evidence to the contrary isn’t a scientific theory — it’s an infectious meme.

Academic economists are unsure about how to respond to the abuse of simplistic econ theories for political ends. On one hand, it gives them enormous prestige…. But as Kwak points out, the simple theories promulgated by politicians and on the Wall Street Journal editorial page often bear little resemblance to the sophisticated theories used by real economists…. The solution–which Kwak discusses, and which I endorse–is empirical evidence…. The cure… isn’t less economics–it’s more and better economics….

Why was economism… so successful?… Kwak chalks it all up to the purposeful influence of business leaders, the wealthy and their enablers…. [But] it seems clear to me that the real-world usefulness of a worldview or ideology really does have an effect. Russia and China have given up communism not because they stopped having working classes, but because it became obvious that their communist systems were keeping them in poverty…

As somebody who watched the war against Bernanke, the war against fiscal stimulus, and before that the wars on regulation of housing finance and the earlier war on Card and Krueger and their minimum wage studies, I think James Kwak has it right: the rich fund the lazy and ideological, and those who aren’t originally lazy and ideological fall into being so given the rewards offered…

Should-Read: Larry Summers: Economy under Trump: Plan for the Worst

Posted on by Brad DeLong

Should-Read: Larry Summers: Economy under Trump: Plan for the Worst: “There has not been so much anxiety about U.S. global leadership or about the sustainability of market-oriented democracy at any time in the past half-century…

…Many chief executives are coming to believe that, whatever the president-elect’s infirmities, the strongly pro-business attitude of his administration, combined with Republican control of Congress, will lead to a new era of support for business, along with much lower taxes and regulatory burdens. This in turn, it is argued, will drive major increases in investment and hiring, setting off a virtuous circle of economic growth and rising confidence. While… such a scenario looks more plausible today than it did on Election Day, I believe that it is very much odds-off. More likely is that the current run of happy markets and favorable sentiment will be seen, with the benefit of hindsight, as a sugar high…. The new U.S. president will be operating on a weak political foundation… unlikely to be able to deliver the results he has promised to key constituencies… likely to take dangerous gambles in the international arena. This makes it probable that a cycle of growing disillusion, disappointment and disapproval will set in within a year…

Should-Read: Francis Wilkinson: Women Delivered a Body Blow to Trump’s Populism

Posted on by Brad DeLong

Should-Read: Francis Wilkinson: Women Delivered a Body Blow to Trump’s Populism: “If Trump embodies the people, who were those millions of bodies insisting that he doesn’t represent them?…

…The White House can’t get over the disparity between Donald Trump’s modest inaugural crowd on Friday and the massive protests that took place the next day. But what matters most is not how the numbers of marchers across America surpassed the numbers celebrating the inaugural. What matters, now and over the long term, is how those protesting bodies challenged the words of Trump’s inaugural address, and neutered them. Millions of Americans took to the streets for a “Women’s March” that, in the end, had less to do with sexual politics than with a broad defiance of Trump’s new order. They turned out in Boston, Los Angeles, New York, Seattle and Washington D.C., but also in places like Boise, Idaho, and Anchorage, Alaska. Trump being Trump, he probably would’ve been unnerved by the size of the protests regardless: Size is a simple handle for an unsubtle mind. But White House strategist Steve Bannon and the shrewder members of the Trump team surely grasped that the protests had just obliterated an inaugural address that was less than 24 hours old.

In his broken beer bottle of a speech, Trump jabbed at the “establishment” he had defeated…. Like countless populists before him, Trump has set himself up as the representative, voice and will of “the people.”… The number of people marching against Trump on Saturday appears to have been north of 2 million…

Must- and Should-Reads: January 27, 2017

Posted on by Brad DeLong

Interesting Reads:

Must-Read: Dani Rodrik: What Did NAFTA Really Do?

Posted on by Brad DeLong

Must-Read: This does not seem to me to be terribly helpful. Dani Rodrik says, apropos of NAFTA:

  1. “The aggregate [distributional] effects were rather small…”
  2. “Impacts on directly affected communities were quite severe…”
  3. “Overall… a ‘welfare’ gain of 0.08% for the U.S. That is, eight-hundredth of 1 percent!…”
  4. “Trade volume impacts were much larger: a doubling of U.S. imports from Mexico…”

That is all true. But in today’s context it seems to me to be… a very partial truth… an even somewhat truthy truth… unhelpful. In my view he should, instead, have written:

  1. “NAFTA did very little to change any of the wages of unskilled labor, the wages of skilled labor, the rent of land, or the profits of capital in the U.S. The aggregate [distributional] effects were rather small…”
  2. “Impacts on directly affected communities were quite severe.” But these communities were quite small, and could have been substantially compensated–and would have been had American voters not elected Republican majorities in Congress in 1994 and thus installed Gingrich as Speaker and Dole as Majority Leader…”
  3. “Overall in an HOV or Ricardian model we calculate net a ‘welfare’ gain of 0.08% for the U.S. But we believe that there are not only “Ricardian” but substantial “Smithian” gains from trade. As a rule of thumb, each $1 of extra imports that the U.S. took in from NAFTA was paid for by products that before NAFTA had sold for some $0.75 to $0.80 cents–a good deal on average…”
  4. “U.S. imports from Mexico doubled from a low base: from about 1% to about 2% of GDP.

And, most important, Dani should not have allowed his readers to keep their illusion that NAFTA is responsible for any appreciable part of the decline in the manufacturing employment share:

Dani Rodrik: What Did NAFTA Really Do?: “The overall efficiency gains are quite small…

…the estimate that these overall gains amount to a “welfare” gain of 0.08% for the U.S. That is, eight-hundredth of 1 percent!… Trade volume impacts were much larger: a doubling of U.S. imports from Mexico…. What about the distributional impacts?… The aggregate effects were rather small (in line with other work), but that impacts on directly affected communities were quite severe…

As I wrote to Dani: The U.S. went from 30% of its nonfarm employees in manufacturing to 12% because of rapid growth in manufacturing productivity and limited demand, yes? The U.S. went from 12% to 9% because of stupid and destructive macro policies–the Reagan deficits, the strong-dollar policy pushed well past its sell-by date, too-tight monetary policy–that diverted it from its proper role as a net exporter of capital and finance to economies that need to be net sinks rather than net sources of the global flow of funds for investment, yes?

The U.S. went from 9% to 8.7% because of the extraordinarily rapid rise of China, yes?

The U.S. went from 8.7% to 8.6% because of NAFTA, yes?

And yet the American political system right now is blaming all, 100%, every piece of that decline from 30% to 8.6% and every problem that can be laid its door on brown people from Mexico.

By not making it clear that you are talking about 0.1%-points of a 21.4%-point phenomenon, I think you are enabling that. I don’t think this is a good thing to do…

And off in email I am right now grousing: And how do we convince Dani Rodrick not to be an idiot to be a positive force here? Smithian gains mean that the net benefits from trade deals are larger than the redistributions as they are calculated in a Ricardian or an HOV framework. And nobody should be allowed to say “NAFTA was a bad thing because the redistributions were huge relative to the net gains” without also saying “abrogating NAFTA would be an even worst thing because you get another batch of large redistributions, and this time the net gains are negative.”

Weekend reading: the fiscal multipliers, childcare, and maximum employment edition

Posted on by Nick Bunker

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

Recessions are risky affairs. But who is most at risk when gross domestic product fluctuates? A new paper looks at how changes in GDP translates into changes in earnings for different groups in the United States.

Equitable Growth released two new papers as part of its working paper series this week. The papers look at how workers value alternative work arrangements and the impact of fiscal stimulus.

Harvard University economist Gabriel Chodorow-Reich, the author of the second paper, writes on how taking results from studies looking at the impact of fiscal policy across places shows a large fiscal multiplier at the national level.

Does an aging population necessarily mean that economic growth will slow down? A new paper argues that robots and increased investment in technology will come to the rescue.

Bridget Ansel and Matt Markezich go to the data and show the extent to which the United States spends far less on childcare than other high-income countries.

Data on unionization membership in 2016 was released on February 26, showing a decline in the unionization rate to 10.7 percent. Heather Boushey writes on the force behind the long-term decline in unionization.

Links from around the web

The decline in the labor force participation rate for men has drawn quite a bit of attention recently. But women have been dropping out of the labor force as well. Their reasons for doing so, as Patricia Cohen explains, are very different than men’s. [nyt]

One of those reasons is prohibitively expensive child care. Bryce Covert dives into the problems with the broken system in the United States. [elle]

What do we mean by “maximum employment”? Most people define it as the rate at which inflation starts accelerating. But Ryan Avent argues that we need to come up with a new definition that considers the options workers have. [the economist]

Maximum employment is usually defined by looking at the unemployment rate. But due to changes in the labor force participation rate, the official U.S. unemployment rate might not be a great measure right now. Jordan Weissmann makes the case for looking at the prime-age employment rate instead. [slate]

There are many reasons economists are worried about the future pace of economic growth. One such reason is the decline in idea generation. Dietz Vollrath writes on a new paper looking at the decline in new ideas, but cautions that we shouldn’t panic just yet. [growth economics]

What President Trump doesn’t understand about job creation and destruction, as explained by Equitable Growth’s Nick Bunker [Vox}

Friday figure

Figure from “Falling behind the rest of the world: Childcare in the United States” by Bridget Ansel and Matt Markezich

The challenging and continuing slide in U.S. unionization rates

Posted on by Nick Bunker

Every January, the U.S. Bureau of Labor Statistics releases new data on how many workers in the United States are members of unions or are covered by union contracts. Today, we learn that union membership continues along a sloping downward trend. In 1983, the share of U.S. workers who were members of union was 20.1 percent. Today that share is down to 10.7 percent.

A low rate of union coverage does not bode well for the future of the middle class. When unions covered a high share of U.S. workers, this supported middle-class incomes. As the U.S. economy became more productive and businesses became richer, the demise of unions leaves U.S. workers without the ability to garner any of the benefits of growth.

Yet, even as the share of people covered by a union contract falls, polls consistently show that people want to be members of unions. According to Gallop, six-in-ten people approve of unions. If unions strengthen the middle class and most approve of them, then why isn’t union coverage on the rise?

First, there are some structural issues. Union density historically was highest within the manufacturing sector. The fall in union coverage for private-sector workers has paralleled the long-term decline in the number of manufacturing jobs in the United States as the share of manufacturing in the U.S. overall gross domestic product has slid. Employment has flowed into industries that were traditionally less unionized.

Why haven’t those industries seen an increase in unionization? In short, it’s become harder to organize a union and deliver a first contract. For workers to be covered by a union, they need to hold an election. That sounds like a fair process, but employers have a lot of leeway to “encourage” workers to vote against the union. Further, even if workers vote yes, it often takes years to get a first contract. Economist John-Paul Ferguson of Stanford Graduate School of Business, found that in the 44 percent of organizing drives where the union won the election (36 percent of all organizing drives), two years later, the workers still did not have a contract.

There also are a couple of interesting trends in union coverage. First, the diversity of union members has increased over time. Where unions have grown, it’s been through organizing workers who look like the U.S. population more generally. Union members are still more likely to be male but increasingly less so. As of 2016, 47 percent of those covered by a union contract are women, up from 35 percent in 1983. The same trend exists for blacks, Asians, and Hispanics and Latinos. In 2000, the first year of data available for these groups, they together comprised 29 percent of workers covered by a union. As of 2016, they now account for 35 percent of covered workers.

Second, union membership remains more common among government employees. About one third—34 percent of public-sector workers—are unionized. This rate is about five times as high as among those in the private sector, where union coverage is only about one-in-sixteen, or 6 percent. Current policy trends, however, may push against this as 27 states—Kentucky most recently—have implemented so-called “right to work” laws that prohibit unions from requiring those covered by a contract to pay full dues while federal policymakers have expressed a desire in recent Congresses to pass a national variant of such legislation.

Decades ago, the path to the middle class was through strong unions. President Trump has promised to “make America great again” in part by bringing back jobs in union-heavy industries—and he did well among union households during the election, particularly in the Midwest. It remains to be seen whether the economic policies of the current administration and Congress will focus on declining unionization rates or will be able to bring the same kinds of economic gains to workers and their families that unions brought.

Should-Read: Larry Summers: Time for Business Leaders to Wake Up

Posted on by Brad DeLong

Should-Read: Larry Summers: Time for Business Leaders to Wake Up: “I wonder what the business leaders who have been waxing enthusiastic about our new pro-business administration are thinking right now…

…Confidence and prosperity depend on a perception of government credibility and confidence. Is that present when an administration lies about readily observable facts like crowd sizes and then defends the lie with the Orwellian concept of alternative facts? Does the business community really want NAFTA to be abrogated, Asian trade architecture turned over to the Chinese or a trade war launched with China?… Do the financial cheerleaders for a business-leader dominated administration approve of the emerging combination of weak dollar rhetoric from both the president and Treasury secretary nominee along with strong dollar policy? If, as secretary designate Steven Mnuchin has just written to Congress and the president has asserted, the administration believes the dollar is too strong, why are all its policies calculated to raise the dollar:

  1. very expansionary fiscal policy
  2. complaints about easy money
  3. measures like the border tax adjustment that discourage imports and encourage exports
  4. measures to reduce capital outflows as American companies outsource?

This is the least coherent dollar policy since the Carter administration…. [Perhaps] business people are more comfortable with fellow business people than with policy people. Perhaps in forming views they should get modern and look at data. Almost 30 years ago in 1988 Roger Altman and I had a piece in the WSJ showing that in the preceding 35 years the economy and corporate profits had done much better with Democrats in power. At the time I thought the point was a valid counter to Republican rhetoric but not necessarily a strong regularity. But the best test of any statistical finding is looking at data subsequent to its publication. The recent much more thorough study by Alan Blinder and Mark Watson shows that Democrats are much better for business than Republicans.

Little is going right or giving confidence. Increasingly, I think the sugar high may be short lived. For the sake of their shareholders, corporate leaders need to stop cheerleading and start insisting that policies have a modicum of logical coherence and factual support.

Should-Read: Mark Thoma: What if “alternative facts” spread to economic data?

Posted on by Brad DeLong

Should-Read: Mark Thoma: What if “alternative facts” spread to economic data?: “Donald Trump’s inability to accept news that disagrees with [his] view…

…was on display…. He, and those speaking on his behalf, claimed falsely that “This was the largest audience ever to witness an inauguration, period, both in person and around the globe,” and then doubled down even when presented with solid evidence it wasn’t true.  Americans were told the new administration relies on “alternative facts,” which seems to mean whatever numbers it can come up with to support Mr. Trump’s claims. What worries me, among other things, is how the president will react to bad news about the economy…

Must-Read: Paul Krugman: Reagan, Trump, and Manufacturing

Posted on by Brad DeLong
Cursor and Reagan Trump and Manufacturing The New York Times

Must-Read: What produces manufacturing decline is not “trade deals” but stupid industrial and macroeconomic policies–like those of Reagan, and now Trump:

Paul Krugman: Reagan, Trump, and Manufacturing: “It’s hard to focus on ordinary economic analysis amidst this political apocalypse…

…But getting and spending will still consume most of peoples’ energy and time; furthermore, like it or not the progress of CASE NIGHTMARE ORANGE may depend on how the economy does. So, what is actually likely to happen to trade and manufacturing over the next few years?… We have what looks like an unusually good model in the Reagan years — minus the severe recession and conveniently timed recovery, which somewhat overshadowed the trade story…. A large move toward budget deficits via tax cuts and military buildup, coupled with quite a lot of protectionism… the import quota on Japanese automobiles was one of the biggest protectionist moves of the postwar era…. What happened in the Reagan years was “twin deficits”: the budget deficit pushed up interest rates, which caused a strong dollar, which caused a bigger trade deficit, mainly in manufactured goods (which are still most of what’s tradable.) This led to an accelerated decline in the industrial orientation of the U.S. economy…. Trumpism will probably follow a similar course; it will actually shrink manufacturing despite the big noise made about saving a few hundred jobs here and there…