Category: Equitablog

Was This the Greatest Failure of the Obama Administration?

Posted on by Brad DeLong
Preview of Was This the Greatest Failure of the Obama Administration

Not running the table in January 2009 to make a V-shaped recovery all but inevitable, but instead trusting to good luck and the accuracy of the forecast. An obvious mistake then. An obvious mistake now. And I have never heard a good account of why it was made–other than that Obama, Emmanuel, Plouffe, and Axelrod bonded with Geithner, and that Geithner is always “let’s do less”, no matter how strong the arguments to do more are:

Paul Krugman (2010-07-09): What Went Wrong?: “It’s now obvious that the stimulus was much too small…

…The administration has chosen to deal with this by… condemning Republicans, rightly, for obstructionism, while at the same time claiming, falsely, that we’re still on the right track. How did things end up this way? We’ll never know whether the administration could have passed a bigger plan; we do know that it didn’t try…. It looks as if top advisers convinced themselves that even in the absence of stimulus the slump would be nasty, brutish, but not too long…. [But] even before the severity of the financial crisis was fully apparent, the recent history of recessions suggested that the jobs picture would continue to worsen long after the recession was technically over. And by the winter of 2008-2009, it was obvious that this was the Big One…. Those concerns were what had me fairly frantic….

And here we are. From a strictly economic point of view, we could still fix this: a second big stimulus, plus much more aggressive Fed policy. But politically, we’re stuck: even if the Democrats hold the House in November, they won’t have the votes to do anything major. I’d like to say something uplifting here; but right now I’m feeling pretty bleak.

Paul Krugman (2013-01-06): The Big Fail: “If you had polled… economists… meeting three years ago…

…most of them would surely have predicted that by now we’d be talking about how the great slump ended, not why it still continues. So what went wrong?… Mainly, is the triumph of bad ideas…. Standard [textbook] economics offered good answers, but political leaders—and all too many economists—chose to forget or ignore what they should have known…. A smaller financial shock, like the dot-com bust at the end of the 1990s, can be met by cutting interest rates. But the crisis of 2008 was far bigger, and even cutting rates all the way to zero wasn’t nearly enough. At that point governments needed to step in, spending to support their economies while the private sector regained its balance. And to some extent that did happen: revenue dropped sharply in the slump, but spending actually rose as programs like unemployment insurance expanded and temporary economic stimulus went into effect. Budget deficits rose, but this was actually a good thing, probably the most important reason we didn’t have a full replay of the Great Depression.

But it all went wrong in 2010…. Greece was taken, wrongly, as a sign that all governments had better slash spending and deficits right away…. The warnings of some (but not enough) economists that austerity would derail recovery were ignored. For example, the president of the European Central Bank confidently asserted that “the idea that austerity measures could trigger stagnation is incorrect.” Well, someone was incorrect, all right…. Blanchard and… Leigh… not just that austerity has a depressing effect on weak economies, but that the adverse effect is much stronger than previously believed. The premature turn to austerity, it turns out, was a terrible mistake…. The fund was actually less enthusiastic about austerity than other major players. To the extent that it says it was wrong, it’s also saying that everyone else (except those skeptical economists) was even more wrong. And it deserves credit for being willing to rethink its position in the light of evidence. The really bad news is how few other players are doing the same…. The truth is that we’ve just experienced a colossal failure of economic policy—and far too many of those responsible for that failure both retain power and refuse to learn from experience.

Must-Read: Mark Thoma: Why Trump Needs to Take the Economy More Seriously

Posted on by Brad DeLong

Must-Read: The first hint of what the Trump administration will be like is right now being provided by the health-care debate. It does not look at all pretty. I would have thought that Jared Kushner, at least, would understand that good technocratic policies have a higher chance of working, and that Trump desperately needs policies to work. But no…

Mark Thoma: Why Trump Needs to Take the Economy More Seriously: Trump’s habit of claiming more credit than he deserves stands in sharp contrast to President Obama’s inability to communicate all of the good things that have happened during his presidency…

…The Obama administration’s lack of effective communication with the public was a big mistake. When Bill Clinton was president, it seemed like you could hardly turn on the TV without seeing someone vigorously and effectively defending his administration, and there was certainly no shortage of people defending George Bush. But, at least as I see it, the Obama administration did not benefit as much as it should have from effective spokespeople in the media (and where were members of the House and Senate for the past 8 years, they dropped the ball too). There is a way in which the Obama administration communicated admirably, but unfortunately, it was mostly with policy wonks. What I will miss the most when Obama leaves office is the excellent work performed by his Council of Economic Advisers. The role of the CEA is to provide objective economic analysis that the president can use to make informed decisions….

What we seem to be getting from the Trump administration, which has floated Larry Kudlow as head of the CEA–he has no formal training in economics–is a slate of appointments that will provide political cover for whatever the administration wants to do. I find that distressing. One of the most important roles of the CEA is to shut down bad ideas, but it looks as if it will be transformed into a cheerleading agency for whatever Trump proposes…. There is a substantial body of both theoretical and empirical analysis of policies such as tax cuts for the rich, the imposition of tariffs, infrastructure spending, shutting down immigration, and the other things Trump has talked about. Even with policies I disagree with, there are good and bad ways to put them into place. Ignoring what economists have learned would be a big mistake. Even with policies I disagree with, there are good and bad ways to put them into place. Ignoring what economists have learned would be a big mistake.

Must- and Should-Reads: January 10, 2017

Posted on by Brad DeLong

Interesting Reads:

Should-Read: Nils Gilman: The Twin Insurgency]

Posted on by Brad DeLong

Should-Read: Nils Gilman: The Twin Insurgency: “By the 1970s,… the social modernist states were increasingly failing to deliver

…In the West, inflation eroded the technical foundations of the Bretton Woods financial order, and economic stagnation undermined the technocratic consensus in favor of Keynesian demand management and the political consensus in favor of sharing productivity gains between labor and capital. In the East, centrally planned economies were revealing themselves not only as politically repressive but also as economically inefficient and environmentally catastrophic. In the “Global South”… industrialization by means of import substitution failed to sustain growth, and the debt crisis of the early 1980s put to rest any dreams of a new international economic order….

It wasn’t just that the state “retreated” from the “commanding heights” of the economy, to use Daniel Yergin’s terms, but also that the very ambition of the state receded. Many states stopped even pretending they wanted to create a more egalitarian society and instead sought to legitimate themselves by claiming they were maximizing individual opportunity. For proponents of this perspective, the rise of new plutocrats counted not as a defeat, but as a success for the new model of governance…. Fukuyama proposed… universal agreement that liberal, democratic capitalism was… the only reasonable form of socio-political-economic organization…. Williamson… [a] “post-historical” policy consensus… [of] fiscal discipline, the redirection of public spending away from subsidies, the rollback of progressive tax codes, the floating of currencies, the liberalization of trade and cross-border investment, the privatization of state enterprises and deregulation of private ones, and above all the sanctification of private property rights…. The programs associated with the Washington Consensus—above all, the privatization of national industrial assets (especially of state-owned firms and utilities) and deregulation (especially of financial firms)—soon became the model…. As Dani Rodrik concluded, “‘Stabilize, privatize, and liberalize’ became the mantra of a generation of technocrats who cut their teeth in the developing world and of the political leaders they counseled.”

This transformation of the role of the state in the wake of the Cold War has dramatically increased the precariousness of the lives of the middle classes within most societies…

Must-Read: Christopher Boone et al.: Unemployment Insurance and Employment

Posted on by Brad DeLong

Must-Read: Christopher Boone et al.: Unemployment Insurance and Employment: “The Unemployment Insurance programme in the US was significantly expanded during between 2008 and 2014…

…This column examines the effect of unemployment insurance duration on aggregate employment during the Great Recession using state-level expansions and contractions in insurance generosity. It finds a positive but not statistically significant employment impact of expanding the insurance. This suggests that the substantial insurance value of the extensions during the Great Recession was not offset in any meaningful way by any costs from weaker job growth.  

Should-Read: Yair Field et al.: Detection of human adaptation during the past 2000 years

Posted on by Brad DeLong

Should-Read: Blond hair and blue eyes driven by connections with Vitamin D uptake, or sexual selection–but where would that come from? Spending more energy and sophistication in the MHC driven by increased vulnerability to diseases as we crowd together? The evolution of lactose tolerance is the only one that seems intuitive to me…

Yair Field et al.: Detection of human adaptation during the past 2000 years: “in the ancestors of modern Britons during the past ~2,000-3,000 years…

…we see strong signals of selection at lactase and the MHC, and in favor of blond hair and blue eyes. For polygenic adaptation we find that recent selection for increased height has driven allele frequency shifts across most of the genome. Moreover, we identify shifts associated with other complex traits, suggesting that polygenic adaptation has played a pervasive role in shaping genotypic and phenotypic variation in modern humans.

Must- and Should-Reads: January 9, 2017

Posted on by Brad DeLong

Interesting Reads:

Must-Read: Antonio Fatás and Lawrence H. Summers: The Permanent Effects of Fiscal Consolidations

Posted on by Brad DeLong

Must-Read: Very interesting. But do we have a read on what productive capacity is in Europe these days outside of Germany and Holland? Isn’t everybody else still substantially depressed. So it is clear that Fatás and Summers are estimating something very important and interesting here. It is not clear that it is Larry’s and my influence-of-slack-demand-on-the-supply-side-in-the-long-run parameter η:

Antonio Fatás and Lawrence H. Summers: The Permanent Effects of Fiscal Consolidations: “The global financial crisis has permanently lowered the path of GDP in all advanced economies…

…At the same time, and in response to rising government debt levels, many of these countries have been engaging in fiscal consolidations that have had a negative impact on growth rates. We empirically explore the connections between these two facts by extending to longer horizons the methodology of Blanchard and Leigh (2013) regarding fiscal policy multipliers. Our results provide support for the presence of strong hysteresis effects of fiscal policy. The large size of the effects points in the direction of self-defeating fiscal consolidations as suggested by DeLong and Summers (2012). Attempts to reduce debt via fiscal consolidations have very likely resulted in a higher debt to GDP ratio through their long-term negative impact on output….

DeLong and Summers (2012)… assuming plausible values for g and r… [and] a multiplier of about 1.8… the hysteresis parameter [η] would have to be between 0 and 0.025 [for austerity not to be counterproductive]…. If we take our results at face value, the hysteresis effect is much larger than any of these values…. [From] Table 8… we would be calibrating the parameter η to be at or above 1…. Fiscal consolidation… was self defeating and instead of delivering the outcome of reducing debt, it led to an increase…

Www nber org papers w22374 pdf

#ASSA2017 Day 3 roundup

Posted on by Nick Bunker

The annual meeting of the Allied Social Science Associations is this weekend in Chicago. The conference features hundreds of sessions covering a wide variety of economics research. Interesting papers are all over the place, so below are some of the papers that caught the eyes of Equitable Growth staffers during the last day of the conference. Check out the highlights from the first and second days of the conference.

“How Does Unemployment Affect Consumer Spending?”

Peter Ganong, Harvard University; Pascal Noel, Harvard University

Abstract: We study the spending of unemployed individuals using anonymized data on 210,000 checking
accounts that received a direct deposit of unemployment insurance (UI) benefits. The account holders are similar to a representative sample of U.S. UI recipients in terms of income, spending, assets, and age. Unemployment causes a large but short-lived drop in income, generating a need for liquidity. At onset of unemployment, monthly spending drops by 6%, and work-related expenses explain one-quarter of the drop. Spending declines by less than 1% with each additional month of UI receipt. When UI benefits are exhausted, spending falls sharply by 11%. Unemployment is a good setting to test alternative models of consumption because the change in income is large. We find that families do little self-insurance before or during unemployment, in the sense that spending is very sensitive to monthly income. We compare the spending data to three benchmark models; the drop in spending from UI onset through exhaustion fits the buffer stock model well, but spending falls much more than predicted by the permanent income model and much less than the hand-to- mouth model. We identify two failures of the buffer stock model relative to the data – it predicts higher assets at onset, and it predicts that spending will evolve smoothly around the largely predictable income drop at benefit exhaustion.

“Management Practices, Workforce Selection and Productivity”

Stefan Bender, Deutsche Bundesbank; Nicholas Bloom, Stanford University; David Card, University of California-Berkeley; John Van Reenen, Massachusetts Institute of Technology; Stefanie Wolter, Institute for Employment Research (IAB)

Abstract: Recent research suggests that much of the cross-firm variation in measured productivity is due to differences in use of advanced management practices. Many of these practices – including monitoring, goal setting, and the use of incentives – are mediated through employee decision-making and effort. To the extent that these practices are complementary with workers’ skills, better-managed firms will tend to recruit higher-ability workers and adopt pay practices to retain these employees. We use a unique data set that combines detailed survey data on the management practices of German manufacturing firms with longitudinal earnings records for their employees to study the relationship between productivity, management, worker ability, and pay. As documented by Bloom and Van Reenen (2007) there is a strong partial correlation between management practice scores and firm-level productivity in Germany. In our preferred TFP estimates only a small fraction of this correlation is explained by the higher human capital of the average employee at better-managed firms. A larger share (about 13%) is attributable to the human capital of the highest-paid workers, a group we interpret as representing the managers of the firm. And a similar amount is mediated through the pay premiums offered by better-managed firms. Looking at employee inflows and outflows, we confirm that better-managed firms systematically recruit and retain workers with higher average human capital. Overall, we conclude that workforce Selection and positive pay premiums explain just under 30% of the measured impact of management practices on productivity in German manufacturing.

“Licensing and Service Quality: Evidence Using Yelp Consumer Reviews”

Darwyyn Deyo , George Mason University;Thomas Stratmann , George Mason University

Abstract: A common justification for licensing is consumer protection, that is, quality and safety. We employ a unique dataset of individual Yelp business ratings to estimate the relationship between licensing and quality for four occupations. We test whether licensing impacts competition for these occupations using a negative binominal model and find a negative relationship between more licensing and the number of firms. We design a difference-in-differences model with state fixed effects, using business location near state borders as a treatment group and state requirements for licensing as the treatment. Yelp ratings are used as the measure of service quality. We find that having any licensing for an occupation or requiring any licensing exams significantly lowers quality within a state. We also find evidence for diminishing returns from licensing for education and training, licensing exams, and minimum school grade requirements. The results are robust to several specification tests.

“Moved to Opportunity: The Long-Run Effect of Public Housing Demolition on Labor Market Outcomes of Children”

Eric Chyn, University of Virginia

Abstract: This paper provides new evidence on the effects of moving out of disadvantaged neighborhoods on the long-run economic outcomes of children. My empirical strategy is based on public housing demolitions in Chicago which forced households to relocate to private market housing using vouchers. Specifically, I compare adult outcomes of children displaced by demolition to their peers who lived in nearby public housing that was not demolished. Displaced children are 9 percent more likely to be employed and earn 16 percent more as adults. These results contrast with the Moving to Opportunity (MTO) relocation study, which detected effects only for children who were young when their families moved. To explore this discrepancy, this paper also examines a housing voucher lottery program (similar to MTO) conducted in Chicago. I find no measurable impact on labor market outcomes for children in households that won vouchers. The contrast between the lottery and demolition estimates remains even after re-weighting the demolition sample to adjust for differences in observed characteristics. Overall, this evidence suggests lottery volunteers are negatively selected on the magnitude of their children’s gains from relocation. This implies that moving from disadvantaged neighborhoods may have substantially larger impact on children than what is suggested by results from voucher experiments where parents elect to participate.

“Capturing the Productivity Impact of the ‘Free’ Apps and Other Ad-Supported Media”

Leonard Nakamura, Federal Reserve Bank of Philadelphia; Jon Samuels, U.S. Bureau of Economic Analysis; Rachel Soloveichik, U.S. Bureau of Economic Analysis

“Free” consumer entertainment and information from the Internet, largely supported by advertising revenues, has had a major impact on consumer behavior. Some economists believe that measured GDP growth is badly underestimated because GDP excludes online entertainment (Brynjolfsson and Oh 2012; Ito 2013; Aeppel 2015). This paper introduces an experimental GDP methodology which includes advertising-supported media in both final output and business inputs. For example, Google Maps would be counted as final output when it is used by a consumer to plan vacation driving routes. On the other hand, the same website would be counted as a business input when it is used by a pizza restaurant to plan delivery routes. Contrary to BEA’s critics, including ‘free’ media in the input-output accounts has little impact on either GDP or TFP. Between 1998 and 2012, measured nominal GDP growth falls 0.005% per year, real GDP growth rises 0.009% per year and TFP growth rises 0.016% per year. The changes to nominal GDP, real GDP and TFP are even smaller before 1998. Our method for accounting for ‘free media’ is production oriented in the sense that it is a measure of the resource input into the entertainment (or other content) of the medium, rather than a measure of the consumer surplus arising from the content. BEA uses a similar production oriented approach when measured GDP. In contrast, other researchers used broader approaches to measure value (Brynjolfsson and Oh 2012), (Varian 2009) and (Bughin et. al 2011). We’ve also explored a more expansive accounting methodology which incorporates some of the network effects from online media. With this expansive accounting, the productivity boom from 1995 to 2000 becomes even stronger and the weak productivity growth of the past decade may be ameliorated somewhat

Should-Read: Laura Tyson and Lenny Mendonca: Federalism and Progressive Resistance

Posted on by Brad DeLong

Should-Read: The Left Coast can neutralize a great deal of what Trump will do, and can do a great deal of good stuff that Trump would never think of doing. And it should:

Laura Tyson and Lenny Mendonca: Federalism and Progressive Resistance: “With the world’s sixth-largest economy, a population of nearly 40 million that looks like the future of America…

…and a united and responsible Democratic government, California is a model of what progressive federalism can accomplish. It has led the way in expanding rights for women, farmworkers, immigrants, and sexual minorities, among others. Similarly, it has been at the vanguard of environmental protection and efforts to combat climate change – from setting tough standards for energy consumption and auto emissions (adopted as federal law in 2016), to pioneering a carbon-pricing system. Governor Jerry Brown recently promised that if the Trump administration cuts federal funding for satellites needed to collect climate data, California would “launch its own damn satellite.