Category: Equitablog

Should-Read: Dietz Vollrath: Labor’s Share, Profits, and the Productivity Slowdown: “There’s been a slowdown in measured productivity growth… since about 2000…

…At the same time, there has been increasing attention given to the fact that labor’s share of GDP has been trending downward over the last 30 years or so…. The flip side of this declining labor share is a less well-documented sense that this is related to greater rents being collected by firms with more market power…. What I want to do here is show how these two trends are related in some fundamental sense through how we measure productivity growth. The TL;DR version is that a falling labor share (and rising profit share of GDP) will necessarily lead to a decline in measured productivity growth, even if underlying innovation doesn’t change. The reason is that if firms have increasing market power, then they are using inputs less efficiently from an aggregate perspective, and measured productivity growth is about how efficiently we use inputs. So increased market power–captured by the decline in labor share–will put a drag on productivity growth…

Must-Read: Larry Summers: A Badly Designed US Stimulus Will Only Hurt the Working Class: “Investors have… concluded that… very expansionary fiscal policy and major reductions in regulation…

…in sectors ranging from energy to finance to drug pricing will raise demand and reflate the American economy. The result has been a rise in real interest rates and inflation expectations, along with a strong stock market and a strong dollar…. [But] initial market responses… are poor predictors…. Rüdiger Dornbusch made an extensive study of… populist economic programmes…. Over the medium- and long-term they were catastrophic for the working class in whose name they were launched. This could be the fate of the Trump programme given its design errors, implausible assumptions and reckless disregard for global economics….

Tax credits for equity investment and total private sector participation that will not cover the most important projects, not reach many of the most important investors, and involve substantial mis-targeting…. The highest return infrastructure investments–such as improving roads, repairing 60,000 structurally deficient bridges, upgrading schools or modernising the air traffic control system–do not generate a commercial return and so are excluded…. Nor can the non-taxable pension funds, endowments and sovereign wealth funds that are the most promising sources of capital for infrastructure take advantage…. [AND] the Trump tax reform proposals are too expensive. Many… only benefit the high-saving wealthy….

Trump’s global plan… rests on a misunderstanding…. The Mexican peso has depreciated about 10%… rais[ing] the cost of anything the US exports to Mexico and to lower the cost of anything Mexico exports to the US… mak[ing] Mexico and other emerging markets much cheaper relative to the US for global companies… US workers, particularly in manufacturing, will see increased pressure. The plan seems to assume we can pressure countries not to let their currencies depreciate…. [But] not even US presidents… can repeal the laws of economics.

Populist economics will play out differently in the US than in emerging markets. But the results will be no better…

Should-Read: Not supply and demand, but rent-seeking and monopoly as potential sources of our Second Gilded Age:

Matthew Rognlie (2015): Deciphering the fall and rise in the net capital share: “In the postwar era, developed economies have experienced two substantial trends in the net capital share of aggregate income…

…a rise during the last several decades, which is well-known, and a fall of comparable magnitude that continued until the 1970s, which is less well-known. Overall, the net capital share has increased since 1948, but when disaggregated this increase comes entirely from the housing sector: the contribution to net capital income from all other sectors has been zero or slightly negative, as the fall and rise have offset each other. When decomposed into a return on fixed assets and a residual share of pure profits, the fall and rise of capital income outside the housing sector in the US owes mostly to the residual: it is not paralleled by fluctuations in the measured value of non-housing capital. This observation—combined with the theory of factor substitution, and simulation results from a multisector model—casts doubt on explanations of changes in the net capital share that rely on changes in the value of capital. There is greater support in the data for narratives that emphasize cyclical and trend variation in market power.

Should-Read: Speaking of “communities of engineering practice” and Hirschman linkages:

Dan Wang: How Smartphones Made Shenzhen China’s Innovation Capital: “The technological implications of smartphone technology go far beyond the smartphone itself…

…Pry open your iPhone or Android device, you’ll see… chips… computing… take pictures… wireless communications… pinpoint… GPS…. Companies have invested millions of dollars in figuring out how to make them small, cheap, and light enough to include in smartphones. And most of these chips have proven useful well beyond the smartphone market. As a result, we’re in the midst of a hardware renaissance, in which it’s easier than ever to develop and market new gadgets. The center of this renaissance is Shenzhen….

In 2013, Chris Anderson coined the phrase “the peace dividends of the smartphone wars” to describe this flowering of innovation…. Apple decided that the first iPhone would be manufactured in Shenzhen by a Taiwanese company called Foxconn. Shenzhen is now totally dominant in mobile production, turning out not just iPhones but also Android devices for the whole world. And the spillover effects of these innovations have made it a lot easier to develop new products. Electronic components that used to cost tens of thousands of dollars (if they could be bought at all) may now only cost a few dollars, allowing more inventors to prototype and produce…. Hoverboards might provide the most colorful example of how smartphones have enabled spinoff technologies…

Must-Read: I am not sure that this is right. Rapid economic growth in the emerging-market economies–actual catch-up–is a phenomenon limited to 1980-2015, and is driven by China and India. Otherwise the rest have merely kept pace with the Global North + Pacific Rim. And the rest have fallen behind Global North + Pacific Rim + China + India. The future global between-country income distribution picture looks very cloudy to me…

Tomas Hellebrandt and Paolo Mauro: The Future of Worldwide Income Distribution: “Over the next two decades the structure of world population and income will undergo profound changes…

…Global income inequality is projected to decline further in 2035, largely owing to rapid economic growth in the emerging-market economies. The potential pool of consumers worldwide will expand significantly, with the largest net gains in the developing and emerging-market economies. The number of people earning between US$1,144 and US$3,252 per year in 2013 prices in purchasing power parity terms will increase by around 500 million, with the largest gains in Sub-Saharan Africa and India; those earning between US$3,252 and US$8,874 per year in 2013 prices will increase by almost 1 billion, with the largest gains in India and Sub-Saharan Africa; and those earning more than US$8,874 per year will increase by 1.2 billion, with the largest gains in China and the advanced economies.

Must-Read: Yes, a high-pressure economy can be very popular. Any other questions?

Nico Voigtländer and Hans-Joachim Voth: Highway to Hitler: “Can infrastructure investment win “hearts and minds”?…

…We analyze a famous case – the building of the highway network in Nazi Germany. Construction began shortly after Hitler’s takeover of the government, and was one of the regime’s most important projects. We collect new data on highway construction, and examine its role in increasing support for the Nazi regime during the period that led up to the 1934 referendum. The plebiscite merged the offices of chancellor and president, establishing Hitler’s supreme power as Führer. Our results suggest that highway construction was highly effective, building popular support and helping to entrench the Nazi dictatorship.

Must-Read: If we think that the task of expansionary fiscal policy is to allow for tighter monetary policy and so raise nominal interest rates by 300 basis points to get asset prices back to what we think of as appropriate levels, then we need a big fiscal stimulus: $400 billion a year of increased deficits, largely via higher spending, seems called for.

That is a largely independent question of what the level and direction of national investment should be. There are two big issues here:

• How do we rebalance asset prices–i.e., how do we fund private and public investment?
• What should the level of investment be?

Jared Bernstein: The Macro-Economy Doesn’t Care Which Party Signs the Stimulus Check: “I yield to no one in my concerns about the damage…

…But… let’s separate out an infrastructure plan from a big, regressive tax cut, sky-high tariffs, whacking Obamacare, and other bad ideas…. Investment in neglected public goods–roads, bridges, water systems, airports, shipping ports, broadband, public schools, mass transit (DC Metro!)–would help generated needed demand in places that are still suffering from economic slack and could help boost lagging productivity as well. That argument is not rendered invalid because Republicans pass the plan….

The plan matters. During the campaign… characteristically muddled stuff from team Trump about leveraging private investment through tax credits, which implies infrastructure usage that spins off some kind of investor payouts–ie, user fees. Also, bridges to nowhere…. So if we’re talking about either of those, I retract my endorsement…. But a smart infrastructure plan could help. And if it did lead to greater resource utilization, as I suspect it would–that’s the Keynesian point–and that in turn boosted inflation and interest rates, that’s a feature, not a bug… very low levels… have not been a signal that things are great; they’re symptoms of secular stagnation….

Finally, on numerous grounds, I’d strongly oppose the highly regressive tax cut I believe is coming…. Its impact will be wasted on tax cuts for the rich. Since they’re not income-constrained in the first place, they’re less likely to spend…. Second, trillions in “permanent” tax cuts, infrastructure spending, and bumping up the defense budget (another Trump priority) will force strong pressure to cut spending in other areas that will inevitably ding the most vulnerable. We’re going to need more revenue in the future, not less…