Category: Equitablog

Must-Read: Edward Filene (1931): Successful Living in This Machine Ag

Posted on by Brad DeLong

Edward Filene (1931): Successful Living in This Machine Age: “Mass Production is not simply large-scale production…

…It is large-scale production based upon a clear understanding that increased production demands increased buying, and that the greatest total profits can be obtained only if the masses can and do enjoy a higher and ever higher standard of living. For selfish business reasons, therefore, genuine mass production industries must make prices lower and lower and wages higher and higher, while constantly shortening the workday and bringing to the masses not only more money but more time in which to use and enjoy the ever-increasing volume of industrial products.

Mass Production, therefore, is production for the masses. It changes the whole social order. It necessitates the abandonment of all class thinking, and the substitution of fact-finding for tradition, not only by business men but by all who wish to live successfully in the Machine Age. But it is not standardizing human life. It is liberating the masses, rather, from the struggle for mere existence and enabling them, for the first time in human history, to give their attention to more distinctly human problems.

Recessions happen. But how often?

Posted on by Bridget Ansel
A man demonstrates outside the Lehman Brothers headquarters following the firm’s 2008 collapse.

Recessions, unfortunately, are inevitable. Even more unfortunately, economists have not been very good at figuring out when or how they will happen. But with the recovery from the Great Recession now in its eight year, some scholars and policymakers are wondering if a recession in the United States is due to hit sometime soon—basically because the current recovery is about to die of old age.

Not surprisingly, there is very little consensus on the timing. Neil Irwin at the New York Times points to research that finds the probability of a recession happening in a given year isn’t affected by how long the current expansion has been going on. And according to a paper from Glenn Rudebusch at the Federal Reserve Bank of San Francisco published earlier this year, the probability the current U.S. expansion will end is 23 percent. So in a given year it would seem that there’s a little under a one-in-four chance that the U.S. economy will slip into a recession.

Does that mean that any concerns about a recession happening anytime soon are overblown? Not exactly. As Josh Zumbrun at the Wall Street Journal shows, if the probability of a recession happening in a given year is independent of the age of an expansion, then the probability of a recession in the next few years will be fairly high. Using the San Francisco Fed’s estimates, Zumbrun shows that the probability of not having a recession in at least one year over a four-year period is 35 percent.

But recessions don’t just die of old age; something has to kill them. The last two recessions happened due to the bursting of two asset bubbles: first the dot-com stockmarket bubble in the early 2000s and then the housing bubble starting in 2006. But a look at the data doesn’t seem to show the building of any sort of major speculative asset bubble that could do significant damage to the U.S. economy. Of course, few economists, financial analysts or policymakers predicted the recessions that were caused by the bursting of the past two bubbles.

Still, the causes of the last two recessions were the exceptions to the rule since the end of the Second World War. In every other postwar expansion, the Federal Reserve has been the culprit behind the end of the expansion. Ryan Avent points this out at The Economist and notes that with interest rates near zero, central banks that are more concerned with keeping inflation quite low are likely to accidently end a recession.

Whether the next recession happens due to the bursting of a bubble that no one currently can discern or a premature interest rate hike or perhaps something else entirely, policymakers need to be ready to counteract its effects. On November 15th, Equitable Growth will be hosting an event focused on thinking through policy choices for combating the next recession when it inevitably hits. Recessions are an unfortunate eventuality, but that doesn’t mean policymakers can’t be ready for them.

Must-Read: Economist: Hands off

Posted on by Brad DeLong

Must-Read: News magazines that have spent all of the current millennium so far making excuses for Britain’s Conservative and Unionist Party have been playing with fire. Now there is some sign they are aware of just how badly they and Britain are getting burned. Let us hope that it is not too late, and that they do not backslide:

Economist: Hands off the Bank of England: “Politicians who casually attack the central bank’s integrity are playing with fire…”

Buttonwood: Central banking and the press: Anatomy of a stupid rumour: “MARK Carney, the governor of the Bank of England, has upset many people in the Conservative party because of his warnings about the economic impact of Brexit…

…This political pressure on an independent central bank governor is a great mistake. On the day after the referendum vote, the prime minister resigned and Brexit campaign leaders were nowhere to be seen; it was Mark Carney who stepped forward to calm the markets. He was the only grown-up in the room. Now the stories are circulating that Mr Carney might resign, with some even suggesting that it could happen as soon as this week. But… the British press starts to chase its own tail…. This whole affair just shows how careful one must be in a world of 24-hour news and social media. A throwaway remark in one piece becomes a source in another story and then an authoritative looking statement in a national newspaper; Chinese whispers in the internet age. 

It’s not 24-hour news and social media that’s the problem: it’s Buttonwood having in interest in pretending that the tackiest of hacky hacks write for “a national newspaper” that makes things that are for no substantive reason classified by Buttonwood as “authoritative looking statement[s]…”

Must-Read: Anton Howes: Is Innovation in Human Nature?

Posted on by Brad DeLong

Anton Howes: Is Innovation in Human Nature?: “Most theories… assume that innovation is in human nature…

…I disagree. The more I study the lives of British innovators, the more convinced I am that innovation is not in human nature, but is instead received. People innovate because they are inspired to do so — it is an idea that is transmitted. And when people do not innovate, it is often simply because it never occurs to them to do so. Incentives matter too, of course. But a person needs to at least have the idea of innovation — an improving mentality — before they can choose to innovate, before they can even take the costs and benefits of innovation into account….

My favourite example is John Kay’s flying shuttle. It was an improvement to the loom, which radically increased the productivity of weaving, and which finds a place in every textbook…. Kay’s innovation was to use two wooden boxes on either side to catch the shuttle. And he attached a string, with a little handle called a picker, so that the shuttle could be jerked across the loom, at great speed…. Kay’s innovation was extraordinary in its simplicity. As the inventor Bennet Woodcroft put it, weaving with an ordinary shuttle had been “performed for upwards of five thousand years, by millions of skilled workmen, without any improvement being made to expedite the operation, until the year 1733”. All Kay added was some wood and some string. And he applied it to weaving wool, which had been England’s main industry since the middle ages….

It is illustrative of many more innovations that were low-hanging fruit, ripe for the plucking for centuries. So the usual, natural state is the state of those millions of weavers who preceded Kay, who never knew another innovator and so never even received the idea of innovating. As the agricultural innovator Arthur Young put it, the natural state is not innovation, but “that dronish, sleepy, and stupid indifference, that lazy negligence, which enchains men in the exact paths of their forefathers, without enquiry, without thought”.

Must-Read: Paul Krugman (2011): The Ricardian Equivalence Argument Against Stimulus

Posted on by Brad DeLong

Must-Read: Paul Krugman (2011): The Ricardian Equivalence Argument Against Stimulus: “There have been a lot of shockingly bad performances among macroeconomists in this crisis…

…most startling… is the way freshwater economists… demonstrated… they don’t understand… their own… Ricardian equivalence… that what determines consumption is the lifetime present value of after-tax income, and hence that, say, a temporary tax cut won’t stimulate spending…. It is… dubious… even done right…. But… it does NOT imply that government spending on… infrastructure will be met by offsetting declines in private spending….

Robert Lucas was betraying a complete misunderstanding… when he said this:

If the government builds a bridge, and then the Fed prints up some money to pay the bridge builders, that’s just a monetary policy. We don’t need the bridge to do that. We can print up the same amount of money and buy anything with it. So, the only part of the stimulus package that’s stimulating is the monetary part.…

But, if we do build the bridge by taking tax money away from somebody else, and using that to pay the bridge builder — the guys who work on the bridge — then it’s just a wash. It has no first-starter effect. There’s no reason to expect any stimulation. And, in some sense, there’s nothing to apply a multiplier to. (Laughs.) You apply a multiplier to the bridge builders, then you’ve got to apply the same multiplier with a minus sign to the people you taxed to build the bridge. And then taxing them later isn’t going to help, we know that.

This remark was followed, by the way, by a smear against Christy Romer:

Christina Romer — here’s what I think happened. It’s her first day on the job and somebody says, you’ve got to come up with a solution to this — in defense of this fiscal stimulus, which no one told her what it was going to be, and have it by Monday morning.

So she scrambled and came up with these multipliers and now they’re kind of — I don’t know. So I don’t think anyone really believes. These models have never been discussed or debated in a way that that say — Ellen McGrattan was talking about the way economists use models this morning. These are kind of schlock economics.

Maybe there is some multiplier out there that we could measure well but that’s not what that paper does. I think it’s a very naked rationalization for policies that were already, you know, decided on for other reasons.

I’ve tried to explain why Lucas and those with similar views are all wrong…. There may be an even more intuitive way…. Think about… a family buys a house with a 30-year mortgage… takes out a $100,000 home loan…. If the house is newly built, that’s $100,000 of spending…. But the family has also taken on debt, and will presumably spend less because it knows that it has to pay off that debt. But… there’s no reason to expect the family to cut its spending right now by $100,000. Its annual mortgage payment will be something like $6,000, so maybe you would expect a fall in spending by $6000; that offsets only a small fraction of the debt-financed purchase….

How could anyone who thought about this for even a minute — let alone someone with an economics training — get this wrong?… Yet… almost everyone on the freshwater side of this divide did get it wrong, and has yet to acknowledge the error.

Must-Read: Bradley A. Hansen: The Rise and Fall of American Economic Growth

Posted on by Brad DeLong

Must-Read: Bradley A. Hansen: The Rise and Fall of American Economic Growth: “Robert Gordon’s Rise and Fall of American Economic Growth… is an excellent… expansion of Lebergott’s Pursuing Happiness…

…It describes the many ways in which the material conditions of life (what they consumed, how they worked, and their health) were transformed from 1870 to 1970. Gordon argues that economic growth this period essentially created modern economic life: comfortable homes with electricity and clean water, cars parked out front, and all of this purchased with less labor hours and less onerous labor….

Gordon’s argument that current innovations in information and communication are not transforming life the way the earlier changes did and that the rate of growth is unlikely to return to the rapid pace experienced for most of the twentieth century… actually occupies a relatively small part of the book…. I do tend to disagree with Gordon and others who underplay the transformation brought about by information technology…. I agree with Gordon that attempts to make predictions about future innovations are speculative, but I tend to be somewhat more optimistic than he is. In part, my optimism stems from the dismal performance of dire predictions about the future. Read Jevon’s on the Coal Question, or Alvin Hansen on secular stagnation….

The chief weakness…. It tells the story strictly from an American standpoint…. Increased economic freedom and access to education in Asia have the potential to dramatically increase the pool of innovators…

Must-Read: Simon Wren-Lewis: Being Honest about Ideology in Economics

Posted on by Brad DeLong

Simon Wren-Lewis: Being Honest about Ideology in Economics: “Noah Smith… says the fundamental problem with macroeconomics is lack of data….

…That is not in my view the whole story…. Real Business Cycle (RBC) research… was only made possible because economists chose to ignore evidence about the nature of unemployment in recessions…. In the RBC model there is no problem with recessions, and no role for policy to attempt to prevent them or bring them to an end. The business cycle fluctuations in employment they generate are entirely voluntary. RBC researchers wanted to build models of business cycles that had nothing to do with sticky prices. Yet here again the evidence was quite clear…. Why would researchers try to build models of business cycles where these cycles required no policy intervention, and ignore key evidence in doing so? The obvious explanation is ideological….

I do not think this is just a problem in macroeconomics. David Card is a very well respected labour economist…. His research involved no advocacy, but was simply about examining empirical evidence. So the friends that he lost objected not to the policy position he was taking, but to him uncovering and publishing evidence. Suppressing or distorting evidence because it does not give the answer you want is almost a definition of an illegitimate science….

I suspect there is a reluctance among the majority of economists to admit that some among them may not be following the scientific method but may instead be making choices on ideological grounds. This is the essence of Romer’s critique, first in his own area of growth economics and then for business cycle analysis. Denying or marginalising the problem simply invites critics to apply to the whole profession a criticism that only applies to a minority.

Must-Reads: October 28, 2016

Posted on by Brad DeLong

Should Reads:

Weekend reading: “Flexing market power” 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

One of the economic selling points for mergers and acquisitions is that the new companies will be more productive. But as new research shows for the manufacturing industry, the result more often is not greater productivity, but higher prices.

Most models of the macroeconomy assume that individuals and businesses are perfectly rational. A new paper looks at how our understanding of macroeconomic policy would change in a world where people aren’t perfectly rational.

Monopsony is not a word that rolls off the tongue, but it’s increasingly a term that anyone paying attention to the U.S. labor market should understand. A new Council of Economic Advisers brief takes a look at the role of monopsony.

Links from around the web

Columnist Martin Sandbu riffs off a recent speech by Federal Reserve Chair Janet Yellen to note the return of Keynesian thinking that calls for more active management of aggregate demand through fiscal and monetary means. [ft]

The White House recently called on state governments to rein in non-compete agreements. Evan Starr of the University of Maryland who’s done research on the effects of non-competes writes on why they’ve become such a policy concern. [vox]

Inflation seems to be picking up in the United States and in other advanced economies. Should this increase be a concern? The only thing to fear, The Economist’s Ryan Avent argues, is that the Federal Reserve and other central banks won’t let inflation run stronger. [free exchange]

Advance data for gross domestic product for the third quarter of this year came out this morning. While they showed an uptick in growth, the pace of growth in recent years has been quite lackluster. Why? Alana Semuels runs through some of the theories. [the atlantic]

Before the Great Recession, some economists, led by former Federal Reserve chairman Ben Bernanke, were concerned about a global savings glut emanating from East Asia. The savings rate of East Asian economies contributing to the glut back then was about 35 percent of collective GDP. Now it’s 40 percent. The Council of Foreign Relation’s Brad Setser lays out the data on Asia’s persistent savings glut. [follow the money]

Friday figure

Figure from “Equitable Growth’s Jobs Day Graphs: September 2016 Report Edition”

Must-Reads: Robert Waldmann: Benchmark II

Posted on by Brad DeLong

Robert Waldmann: [Benchmark II][]: “Benchmark[s] which I think are dangerous…

…Macroeconomists have agreed to treat technology as exogenous. I think this particular choice helps explain Paul Romer’s extreme irritation…. Macroeconomists have agreed that long run forecasts are best made using a neoclassical model without frictions. This means that the macroeconomic discussion is about the optimal model of convergence to a given long run which is given by assumption and not analysis or evidence. This provoked Roger Farmer to be almost as harsh as Paul Romer (by the way reading that Farmer post is a much better use of your time than reading this post)…

Benchmark II]: http://rjwaldmann.blogspot.com/2016/10/benchmark-ii.html