Category: Equitablog

Must-Read: Cosma Shalizi: Ernest Gellner, 1925-1995

Posted on by Brad DeLong

Must-Read: Cosma Shalizi: Ernest Gellner, 1925-1995: “Most of these themes themselves revolve around the ‘great hump’ or ‘great ditch’, which divides the modern world from pre-modern civilizations…

…On the far side… from us lies Agraria, a realm of “agro-literate polities” subject to “the tyranny of kings or cousins (or both)”, consisting mostly of highly isolated, custom-bound, illiterate rural producers with magical, ritualistic, socially-oriented religions, dominated and exploited by “the red and the black,” expert coercers and literate classes practicing various technically ineffective, self-confirming, meaningful or enchanted forms of cognition, which tended more towards universalism, rule-boundedness and scripturalism than did the folk-cults. Those of us on this side of the ditch have “escaped from the idiocy of rural life”… through a lucky accident, a “miracle”… in an otherwise none-too-promising penninsula of Asia, circumstances conspired to bring forth a kind of cognition which was cumulative, technically effective, and of no value as either a social cement or an emotional comfort–science, and the epistemologies descended from Descartes (in Gellner’s view, much better as charters for science, and prescriptive accounts of how to go about it, than as descriptions of how the world works or how messy human beings actually think)….

Combined with classes of people… more interested in producing wealth than in either theological or political disputes, and polities…. in exchange for tax[es that] were willing to let them alone… production became dominant… eventually buying off the population at large…. Socially, these societies are (at least relative to their predecessors) liberal, permissive, rich, powerful, secularized, engaged in “single-stranded” activities (e.g., in buying food we worry about taste and cost, not marriage alliances or the need not to alienate our grocer lest he not stand with us in the next feud), peaceful, atomized, economically unstable and culturally homogenous. The last two, economic change and cultural homogeneity, are, Gellner claims, connected, and together give rise to nationalism: his theory of how this happens is brilliant, innovative and convincing….

There’s more, of course… thoughts on how to get beliefs to spread without their passing proper tests of cognitive legitimacy… the effects of crossing the ditch on the former “artisans of cognition”… the “Rubber Cage” of advanced industrialism, where rationality in science and production co-exists with exuberant nonsense in the rest of life… Ibn Khaldun… society; why contemporary Islamic societies are not secularizing; the problems with… Popper, Quine…. I’d recommend starting with… Plough, Sword, and Book, and Nations and Nationalism.

Should-Read: Simon Johnson: The Politics of Job Polarization

Posted on by Brad DeLong

Should-Read: Simon Johnson: The Politics of Job Polarization: “Highly educated people at the top of the income distribution are doing better than ever…

…people with only a high school education face declining incomes, living standards, and prospects for themselves and their children. The middle class is being torn apart…. Many middle-skill, middle-income, middle-class jobs have disappeared. The new jobs that have emerged are well paid for highly educated people and poorly paid for people who have only a high school education. A leading symptom–but only a symptom–is the disappearance of well-paid factory jobs…. This technology-driven trend has been compounded by the effects of decreased transportation and communication costs, making it cheaper to move goods over long distances… easier to move manufacturing activity overseas to lower-wage locations….

The Republicans[‘]… policies… lowering personal and corporate taxes…. Repeal of… health-care reform… financial deregulation… confrontational trade measures…. Given the role of technology in displacing workers, protectionism–tearing up trade agreements and imposing tariffs on Chinese and Mexican goods–won’t bring back high-paying manufacturing jobs, and Trump has no plan B…

Missing the Economic Big Picture

Posted on by Brad DeLong

Project Syndicate: Missing the Economic Big Picture: BERKELEY – I recently heard former World Trade Organization Director-General Pascal Lamy paraphrasing a classic Buddhist proverb, wherein China’s Sixth Buddhist Patriarch Huineng tells the nun Wu Jincang: “When the philosopher points at the moon, the fool looks at the finger.” Lamy added that, “Market capitalism is the moon. Globalization is the finger.” With anti-globalization sentiment now on the rise throughout the West, this has been quite a year for finger-watching… **Read MOAR at Project Syndicate

Should-Read: Abhijit Bannerjee: E-governance, Accountability, and Leakage in Public Programs: Experimental Evidence from a Financial Management Reform in India

Posted on by Brad DeLong

Should-Read: Abhijit Bannerjee: E-governance, Accountability, and Leakage in Public Programs: Experimental Evidence from a Financial Management Reform in India: “Sometimes you hear people say ‘RCTs are so small: how can you generalize?’ There are so many people in this RCT that we could populate two small European countries with them.”

Should-Read: Brad Setser: China’s Dual Equilibria

Posted on by Brad DeLong

Should-Read: Brad Setser: China’s Dual Equilibria: “Not just multiple possible exchange rate equilibria… at least two different possible macroeconomic equilibria…

…In the “strong” yuan equilibrium, outflows are kept at a level that China can support out of its current goods trade surplus…. A larger “on-budget” central government fiscal deficit—together with an expansion of social insurance—keep demand up, even as investment falls. In the “weak” yuan equilibrium, China lets the market drive its currency lower—and a weaker currency increases the trade and current account surplus. Such surpluses would finance sustained capital outflows in excess of half a trillion dollars a year without the need to dip further into China’s reserves. The resulting surpluses would be shockingly large…. A larger trade surplus would also provide support for the economy. As investment slows, China would in effect pivot back to exports–and it wouldn’t need to use the central government’s fiscal space to support demand. Both are plausible…

The modern way to maintain an undervalued currency isn’t to intervene to weaken your currency. It is to step back and allow the market to drive your currency down–-And then intervene to resist subsequent pressure to appreciate (and rebuild reserves) when the market turns…

Must-Reads: November 29, 2016

Posted on by Brad DeLong

Interesting Reads:

Is the cost of childcare driving women out of the U.S. workforce?

Posted on by Bridget Ansel
In this May 6, 2015, file photo Saryah Mitchell, sits with her mother, Teisa, Gay, left, a rally calling for increased child care subsidies at the Capitol in Sacramento, Calif. In much of the U.S., families spend more on child care for two kids than on housing. And if you’re a woman, it’s likely you earn less than your male colleagues even though one in four households with kids relies on mom as the sole or primary breadwinner.

The U.S. unemployment rate now stands at 4.9 percent, a seemingly healthy level last experienced prior to the Great Recession of 2007-2009. Yet what is not reflected in this statistic is the growing number of Americans who have dropped out of the labor force altogether. Economists are still puzzled by this decline in the so called “labor force participation rate”—meaning the percentage of Americans that either have a job or are actively looking—especially among Americans between the ages of 25 to 54, who are supposed to be at the peak of their working life.

Scholars and policymakers interested in this trend mostly focus on the U.S. labor force’s “guy problem,” but the number of women in the labor force is amid a two-decade-long decline that began just as the cost of childcare began to rise. Are the two trends related? And if so, how big an effect does higher childcare costs have on women’s employment?

A recently released job market paper by So Kubota, a Ph.D. candidate in economics at Princeton University, attempts to tackle these questions. Kubota looks at women’s employment from 1985 to 2011. At the beginning of this period, women were entering the workforce in droves, and by the early 1990s the United States had one of the highest female labor force participation rates in the world. Today, however, many of our peer countries, economically speaking, have far surpassed the United States in this realm. (See Figure 1.)

Figure 1

What happened? Research by economists Francine Blau and Lawrence Kahn at Cornell University finds that the United States’ lack of family friendly policies to support women in their prime childbearing and career years explains one-third of the decrease in women’s labor force participation. The U.S. political landscape contrasts with many European countries, which have enacted and expanded policies such as paid parental leave, childcare subsidies, and part-time work entitlements to encourage women’s employment.

Kubota’s work complements Blau and Kahn’s work, and finds that large increases in the costs of childcare in the United States also play a role. Between 1990 and 2010—a period in which wages stagnated for many workers—the hourly cost of childcare rose 32 percent. (Childcare workers did not experience a corresponding rise in wages and today make about 40 percent less than the national median wage.) There are many theories about why costs rose as much as they did, but Kubota suggests that it was largely driven by a series of state and federal policy changes over the same period.

Kubota finds that rising childcare expenditures by families resulted in an estimated five percent decline in total employment of women and a 13 percent decline in the employment of working mothers with children under the age of five. In many ways, these results are unsurprising. Childcare is the single biggest monthly expense for some families (it exceeds the average cost of in-state college tuition in more than half of the states) while one third of parents who use childcare say that it has caused a financial problem for their household.

As prices rose, many parents began to rely less on fee-based childcare, instead seeking out other informal arrangements such as grandparents or other family member. But these kinds of arrangements are less reliable. And when they fall through, women are more likely than men to be the one to pick up the slack.

Kubota points out that his paper examines the effects of rising childcare costs on female labor supply, but adds that “it also has a significant factor on total labor supply.” Among today’s families, work-family conflict is no longer just a “women’s issue.” Women are breadwinners in 40 percent of families, and men are taking on more housework and childcare than ever before (although still significantly less than women). In fact, 60 percent of fathers in dual-earner couples reported work-family conflict.

The drop in the U.S. labor force participation rate among men and women should concern policymakers for several reasons. First of all, it has a considerable impact on U.S. economic performance and growth. And, considering most families now rely on two incomes to stay afloat, more women leaving the workforce threatens family economic security. Women’s long-term earnings and financial well-being also are at risk, reducing their accumulation of long-term savings and the ability to be financially viable in the case of divorce or a partner’s death.

Addressing the growing childcare crisis in the United States as well as helping parents by enacting other work-family supports are critical to helping more women stay in the labor force, bolstering family economic security and ensuring more robust and sustained economic growth.

How Schizo Is Ms. Market These Days?

Posted on by Brad DeLong
BofA Merrill Lynch US High Yield Effective Yield© FRED St Louis Fed

I’m confused because it does not seem to me that there is a single Ms. Market out there…

I used to strongly believe that bond and equity markets were tightly coupled by well-defined assessments of risk and a well-specified risk tolerance: take the risk-free rate, and to that the riskiness of a security times the premium per unit of risk, and you got the rate for that security. And as the risk-free rate moved up and down the whole configuration would move up and down, with some widening of spreads as the risk-free rate moved up and contraction as the risk-free rate moved down, but all in a predictable, stable configuration.

Thus safe bond and risky bond and stock prices would move in opposite directions in response to shocks to productivity and profits, and would move together in response to shocks to monetary policy and financial conditions.

Yet that does not seem to be true anymore. Since 2008 the ability of markets to actually make the risk transformation in sufficient volume that is needed for it to make sense to say “the market has a well-specified risk tolerance” seems to have broken down.

Safe bonds to their thing.

Risky bonds do their thing.

Short bonds do their thing.

Long bonds do their thing.

Equities do their thing.

And the spreads between them look like residuals more than relationships. Rather than trade ironing out the market into a single aggregate view, there seem to be three often inconsistent views here…

Should-Read: Ian Dunt: Brexit: What the Hell Happens Now?: Everything You Need to Know about Britain’s Divorce from Europe

Posted on by Brad DeLong

Should-Read: Ian Dunt: Brexit: What the Hell Happens Now?: Everything You Need to Know about Britain’s Divorce from Europe: “Britain’s departure from the European Union is filled with propaganda, myth, and half- truth–but the risks are very real…

…Mishandling Brexit could lower our global status, diminish our quality of life, and throw our legal system into turmoil…. Ian Dunt… explains • why leaving the EU is set to make us permanently poorer • how cutting immigration will affect wages and taxes • why leading industries like farming, pharmaceuticals and finance will struggle to function • whether the biggest constitutional change in post-war history will break up the UK
This is the first full public exploration of Brexit, shorn of the wishful thinking of its supporters in Parliament and the media… a portrait of a country about to undergo a period of self-inflicted isolation.

Must-Read: Nancy Folbre: Does the One Percent Deserve What It Gets?

Posted on by Brad DeLong

Must-Read: If people’s utility is proportional to the log of their lifetime incomes, then a perfectly competitive market without increasing returns, non-rival or non-excludible goods, or externalities “solves” the social welfare problem of maximizing a weighted sum of individual utility levels in which each individual’s utility is weighted by the value of his or her comprehensive lifetime endowment. What determines your lifetime endowment? The environment in which you are raised and your genetic inheritance that determines your skills, the property you inherit, luck; plus whether your particular environment-genetic-property-luck combination is scarce by nature, the luck of the draw, or by rent-seeking policy; and whether rich people have a strong jones for the things that your comprehensive lifetime endowment gives you a comparative advantage in making.

And if people are more risk averse than log utility–and it really looks like they are–the social welfare problem the market “solves” weights the ex post rich even more highly.

And we haven’t even gotten to the point that virtually nobody well-off is paid their marginal product–subtract them from society and let the market reach a new equilibrium, and in all but the most exceptional cases the drop in output would be only a small fraction of their “compensation”. (The poor, by contrast, are paid their marginal product–or less.)

The answer to the question, “is it sensible for society to maximize a social welfare function in which everybody’s utility is weighted by the ex post value of their comprehensive lifetime endowment?” is “no”.

Where does the idea that it is sensible come from. I think it comes from the opposite of rational thought. It is, psychologically, very important for human happiness for people to convince themselves that they “deserve” what they get–people are very unhappy if they think that they are among the moochers, and very very unhappy if they think that they are among the moochers. Finding a way to believe that this is true–that what is is one’s just karma–is important to many people. Thus it is a form of theology, not social science…

Nancy Folbre: Does the One Percent Deserve What It Gets?: “Years of schooling in neoclassical economic theories predispose [economists] to the view that perfectly competitive markets yield equitable as well as efficient outcomes…

…As a result, they often assess “rent seeking,” or efforts to get rich at someone else’s expense, by comparison with hypothetical market outcomes. Rent seeking becomes just another name for interference with the magic meritocracy of the marketplace. From this perspective, efforts to increase the minimum wage can be considered just as unfair as efforts to challenge compensation practices for corporate chief executives and other well-heeled top managers…