Category: Equitablog

Must-Read: Doug Jones: The world at 1000 BCE

Posted on by Brad DeLong

Must-Read:** My view: this map has the Middle East having much less of the 50 million and the Ganges and China coast much more than they likely had in reality:

Https ourworldindata org wp content uploads 2013 05 world maps of population density over the last 5000 years goldewijk beusen and janssen 2010 png

Doug Jones: The world at 1000 BCE: “The world population is about 50 million…

…The Bantu expansion is just beginning, from a homeland on the present Nigeria/Cameroon border. It will eventually cover most of Africa south of the equator. The expansion is sometimes told as a story of first farmers replacing hunter-gatherers. But, as with the Indo-European expansion, this now looks to be too simple…. The Bantu had something extra – social organization? malaria resistance? – going for them.

Seafarers with roots in the Lapita culture have already reached Western Polynesian – Samoa and Tonga, previously uninhabited. The Olmec are flourishing in Meso-America. A controversial find (the Cascajal block) suggests they are just taking up writing. In China, the Mandate of Heaven has passed from the Shang Dynasty to the Zhou.

In the Near East and Eastern Mediterranean, the Late Bronze Age collapse has opened up space for smaller states. Tyre and other Phoenician city-states are sailing the Mediterranean. Phoenicians using an alphabet that Greeks will eventually adapt. Further south, Philistines and Israelites have been duking it out, with Israelites gaining the upper hand under David (king from 1010 to 970 BCE). The Iron Age conventionally begins now, with the widespread use of iron – more abundant and cheaper than bronze.

On the steppe, horses have long been domesticated, but people are now learning to make effective use of cavalry – fighting in formation and firing volleys from horseback. This is the beginning of 2500 years in which the division between Steppe and Sown will be central to Eurasian history…

The Roots of Growth: Review of Joel Mokyr: “A Culture of Growth”

Posted on by Brad DeLong
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The roots of growth: Brad DeLong examines a study that places the origins of the Industrial Revolution in fifteenth-century Europe.

A Culture of Growth: The Origins of the Modern Economy
Joel Mokyr Princeton University Press: 2016.
ISBN: 9780691168883

What is modern economic growth? Going by the best available measure (it might be more honest to say ‘guess’), today’s average material living standards and economic productivity levels are some 20 times what they were in the agricultural era (about 6000 BC to AD 1500). And the efficiency with which humanity uses technology and organization to transform resources into useful commodities is currently growing at 2% per year — perhaps 100 times the rate common before the Industrial Revolution… Read MOAR at Nature

Is monopsony important for understanding the U.S. labor market?

Posted on by Bridget Ansel
In a monopsonic labor market, employers have the power to set wages below what would normally prevail in a perfectly competitive labor market

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. Monopsony refers to a market where there is only one buyer, in contrast to the more familiar term monopoly, which refers to a situation where there is only one producer in a market. While it’s very uncommon to see a situation of only one buyer, monopsony is a useful way to understand important trends in the U.S. labor market, such as inequality, declining worker mobility, and the gender wage gap. A new report from the President’s Council of Economic Advisers details the influence of monopsony.

But first, some quick background on the theory of monopsony. In a perfectively competitive labor market, something like monopsony does not happen. Employers and employees are both “price takers,” meaning that their individual actions have no control over the wages employers will pay employees. That wage setting happens through the impersonal collective workings of the labor market. In contrast, in a monopsonic labor market, employers do have the power to set wages and can use this wage-setting power to reduce the wages of workers below what would normally prevail in a perfectly competitive labor market. Of course, an actual monopsonic market where there is only one employer rarely happens, yet monopsony can be a useful basis for understanding how employers in industries where there are few competitors for workers can have wage-setting power over their employees.

How does monopsony happen? The new Council of Economic Advisers report runs through a number of ways that firms could have wage-setting power in the U.S. labor market. The first is that firms in the U.S. economy are becoming more concentrated, giving them more power not only in the markets for the goods and services they provide but also in the markets for the labor they hire. The council’s report also notes that direct collusion by employers and the use of restrictive non-compete agreements can give employers wage-setting power. The CEA authors also note that “job lock”—induced by employer-provided health insurance—can make workers more reticent to leave a job and therefore give more bargaining power to employers.

What these sources of monopsony power (and others mentioned by the report) have in common is that workers are denied or hindered in the ability to use another job as a bargaining option. That appears to be a major source of the power imbalance—that employers are restricted in finding other jobs. The policy options proffered by the CEA report include policies that would directly increase the bargaining power of workers, such as increasing unionization and a higher minimum wage.

The new report also suggests policies that would help increase the mobility of workers between jobs, such as curbing the use of non-compete agreements so workers can more easily move to new jobs, paid family and medical leave to help workers deal with family responsibilities that often hinder job switching, and reforming land-use regulations to allow for more housing in areas where workers are more in demand. Empowering workers in this way may be an effective way to counteract the creeping influence of monopsony in the U.S. economy.

Must-Read: Simon Wren-Lewis: Paul Romer on Macroeconomics

Posted on by Brad DeLong

Must-Read: As I understand it, Paul Romer’s critique of RBC and DSGE models is wide of the mark only insofar as people no longer take the conclusions of RBC and DSGE models seriously. Paul quotes Smets and Wouters from 2007 about the U.S. since the 1970s:

Monetary policy shocks contribute only a small fraction of the forecast variance of output at all horizons… account for only a small fraction of the inflation volatility…. “Demand” shocks such as the risk premium, exogenous spending, and investment-specific technology shocks explain a significant fraction of the short-run forecast variance in output, both the wage mark-up (or labor supply) and, to a lesser extent, output-specific technology shocks explain most of its variation in the medium to long run…. Third, inflation developments are mostly driven by price mark-up shocks in the short run and wage mark-up shocks in the long run…

And points out that there is something very wrong. Volcker said he was going to hit the economy on the head with a monetary policy shock brick to reduce inflation. He did so. Inflation fell from 10% to 4%. Unemployment spiked to 11%. And yet Smets-Wouters cannot see it. Instead, they see a great many driving shocks that are nothing but equation residuals.

If anybody believed this, it would be a YUGE problem. That (most) people do not believe this and yet still feel that they must talk this way is a big problem:

Simon Wren-Lewis: Paul Romer on Macroeconomics: “The microfoundations project, which was meant to make macro just another application of microeconomics, has left macroeconomics with very few friends among other economists….

The latest broadside comes from Paul Romer. Yes it is unfair, and yes it is wide of the mark in places, but it will not be ignored… because he discusses issues on which modern macro is extremely vulnerable. The first is its treatment of data…. The only models deemed acceptable in top journals… are… selective about the data…. Both micro and macro evidence is either ignored because it is inconvenient, or put on a to do list for further research… an inevitable result of making internal consistency an admissibility criteria for publishable work. The second vulnerability is a conservatism which also arises from this methodology… [that] makes it intractable to model some processes: for example modelling sticky prices where actual menu costs are a deep parameter. Instead DSGE modelling uses tricks, like Calvo contracts. But who decides whether these tricks amount to acceptable microfoundations or are instead ad hoc or implausible? The answer depends a lot on conventions….

Paul’s discussion of real effects from monetary policy, and the insistence on productivity shocks as business cycle drivers, is pretty dated…. Yet it took a long time for RBC models to be replaced by New Keynesian models, and you will still see RBC models around. Elements of the New Classical counter revolution of the 1980s still persist in some places. It was only a few years ago that I listened to a seminar paper where the financial crisis was modelled as a large negative productivity shock….

In no other discipline could you have a debate about whether it was better to model what you can microfound rather than model what you can see. Other economists understand this, but many macroeconomists still think this is all quite normal…   

Must-Read: Bruce A. Blonigen and Justin R. Pierce>: Evidence for the Effects of Mergers on Market Power and Efficiency

Posted on by Brad DeLong

Bruce A. Blonigen and Justin R. Pierce: Evidence for the Effects of Mergers on Market Power and Efficiency: “Study of the impact of mergers and acquisitions (M&As) on productivity and market power has been complicated…

…by the difficulty of separating these two effects. We use newly-developed techniques to separately estimate productivity and markups across a wide range of industries using detailed plant-level data. Employing a difference-in-differences framework, we find that M&As are associated with increases in average markups, but find little evidence for effects on plant-level productivity. We also examine whether M&As increase efficiency through reallocation of production to more efficient plants or through reductions in administrative operations, but again find little evidence for these channels, on average. The results are robust to a range of approaches to address the endogeneity of firms’ merger decisions.

Must-Read: Dennis K. Berman and Jamie Heller: Wall Street’s “Do-Nothing” Investing Revolution

Posted on by Brad DeLong

Must-Read: Dennis K. Berman and Jamie Heller: Wall Street’s “Do-Nothing” Investing Revolution: “Picking stocks is at heart an arrogant act…

…It requires in the stock picker a confidence that most others are dunces, and that riches await those with better information and sharper instincts. Entire cities—notably New York and London—have been erected in service of this belief. And the image of the clever, dauntless stock maestro is embedded in the American ideal.

Yet there is a simple, destructive idea taking over Wall Street: that stock pickers can’t pick stocks well—or at least well enough for the fees they charge. And even those who do can’t sustain it year after year. In short, the idea of the “active manager” is rapidly losing its intellectual legitimacy to the primacy of the “passive investor” who merely buys an index of shares. That has certainly been true for the last 10 years, when between 71% and 93% of U.S. stock mutual funds either closed or failed to beat their closest index funds…

Must-Read: Carmen Reinhart: The Return of Dollar Shortages

Posted on by Brad DeLong

Must-Read: The IMF is, for moral hazard reasons, not a redistributionist but a system stability-preserving agency. In a better world, either a WTO or private sector insurers would provide developing country social insurance to cushion the impact of commodity price fluctuations. That is not the world we live in:

Carmen Reinhart: The Return of Dollar Shortages: “Seven decades later, despite the broad global trend toward more flexibility in exchange-rate policy and freer movement of capital across national borders, a “dollar shortage” has reemerged…

..The source of the dollar shortage is not the need for post-conflict reconstruction (though in some cases that is also a contributing factor). Rather, countries… have been hit very hard by plunging oil and commodity prices since 2012…. For countries that had embraced more flexible exchange rates… the initial reversal of oil and primary commodity prices ushered in a wave of currency crashes, while those that maintained more rigid exchange-rate arrangements experienced rapid reserve losses. Because the price slump has persisted, by 2015 capital controls were being tightened and currency pegs were being adjusted or abandoned. Fining, threatening, or even jailing informal currency traders have not been particularly successful….

Of far greater urgency is that dollar shortages have become food shortages in countries such as Egypt and Venezuela, as well as much of Sub-Saharan Africa…. The most vulnerable segments of the population have been left at real risk. The Marshall Plan, through its generous provision of grants, was designed to relieve the dollar shortage in post-war Europe. No modern-day equivalent is visible on the horizon…. It is more plausible to expect a variant of the 1980s, with more emerging and developing countries seeking IMF programs. This, perhaps, may be an opportunity for China to fill a void at the top.

What does macroeconomic policy look like when people aren’t perfectly rational?

Posted on by Bridget Ansel

One of the leading criticisms of economics is the field’s reliance on perfectly rational agents in many of its models. Read the assumptions behind a macroeconomic model and the rules under which households and businesses are presumed to make decisions. Chances are high that they will seem fanciful if not outright ridiculous. Of course, simplifying assumptions are always going to be needed to make models workable, but “perfect rationality” seems like a jump too far—not least because behavioral economics research shows how individuals very often fail to act in rational ways.

Is there a way to integrate the insights of behavioral economics into the assumptions that inform a macroeconomics model? Well, there is! A new paper does just that.

The paper, updated this month, by economist Xavier Gabaix of Harvard University, integrates behavioral economics findings into what’s known as a New Keynesian macroeconomic model—one that includes microeconomic decisionmaking and markets that aren’t perfectly competitive and that is the kind of model often used by central banks. The specific insight that Gabaix adds to the model is “bounded rationality,” where a person’s ability to make a decision is bounded by cognitive limits. One way to think of this is an individual who isn’t trying to make the best decisions but rather find the decision that is satisfactory. Part of these cognitive limits is that individuals or businesses will be myopic, or care a lot more about the present than the future. This is in contrast to perfectly rational agents who knows exactly how events in the future will impact them.

What does the inclusion of bounded rationality mean for a macroeconomic model? Gabaix’s model leads to a lot of interesting results, including fiscal policy that is much stronger and a resolution of a debate about the effects of interest rates on inflation. (See Bloomberg View columnist Noah Smith’s piece on an earlier iteration of the paper for a fuller explanation of this second debate.) Two other findings, however, are of particular interest to monetary policymakers.

Consider how central banks have recently made a turn toward emphasizing their future plans for monetary policy, reflecting a similar movement in academic macroeconomics. These ideas about communication include forward guidance, or “communication about the likely future course of monetary policy,” as well as policy tools that create commitments for the central bank, such as targeting nominal gross domestic product. But in a world where businesses or individuals aren’t that concerned about the future because they are myopic, these policies won’t have as much power as they would in a world of perfectly rational agents. Gabaix’s model explains a puzzle other economists have noted—that forward guidance isn’t as effective as other models would have us believe, and that nominal GDP targeting isn’t the optimal commitment policy for monetary policy.

Gabaix’s model is a powerful sign of how changing the assumptions behind models can change our understanding of what’s the best possible route forward. Even if these two monetary policy tools —targeting nominal gross domestic product and communicating the likely future course of policy —aren’t optimal or as powerful as other models indicate, they still could be quite effective. Further research that brings the insights of behavioral economics into macroeconomic modeling would be very valuable to policymakers.

New research on market power and productivity

Posted on by Bridget Ansel
People walk by an AT&T retail store, Monday, Oct. 24, 2016, in New York. AT&T plans to buy Time Warner for $85.4 billion.

Concerns about business consolidation and increasing market power have entered the center of the U.S. policy conversation. Consider the reaction to the proposed merger of AT&T Inc. and Time Warner Inc. where both presidential campaigns have raised concerns about the consolidation of the two large companies. The traditional argument for mergers and acquisitions is that the joining of two companies will lead to efficiency gains that will help customers and the economy overall. But some researchers and policymakers are increasingly skeptical that increasing consolidation will lead to such efficiency gains. A newly released research paper will give them reason to retain their skepticism.

The new research by economists Bruce A. Blonigen of the University of Oregon and Justin R. Pierce of the Federal Reserve Board was released yesterday as a National Bureau of Economic Research working paper. The two economists look at how mergers and acquisitions affected productivity and market power in the manufacturing sector from 1998 to 2006. The authors specifically look at how productivity (both labor productivity and total factor productivity) and markups (the difference between the price charged by a business and the marginal cost of producing a good) change in individual factories that are part of companies that merge or are acquired. They compare the changes to a number of other groups of plants to tease out the effects. As Noah Smith, writing about the paper at Bloomberg View puts it, they “compare factories that get acquired in a merger to similar factories, and to factories for which a merger has been announced but not yet completed.”

What the two economists find is that the efficiency gains that were supposed to appear didn’t in fact happen. This study found that increased consolidation doesn’t have any significant effect on plant-level productivity. What it does have an effect on is prices (and profits): markups increased due to the consolidation of manufacturing firms. The increase in markups appears quite significant: 15 percent to 50 percent of the average markup in the data. In other words, the price of manufactured goods increased while there were no productivity gains. The increasing amount of rents in the manufacturing sector could very well have contributed to higher income inequality, either intrafirm or interfirm, depending on how the gains were shared within the company.

Interesting, Blonigen and Pierce are able to look at the effects of different kinds of mergers and acquisitions. They looked at how these effects on productivity and markups might change if the merger is horizontal—between two companies in the same industry—or if they were consolidation across industries. They find the productivity effects are negative when mergers are horizontal, but there appear to be some productivity gains when the mergers are non-horizontal.

This new research gives policymakers reason to be wary of mergers. Of course this paper looks only at the manufacturing sector and researchers would be well served to try to extend its approach to other parts of the economy. Interest in the effects of market power isn’t going away anytime soon.

Must-Reads: October 25, 2016

Posted on by Brad DeLong

Should Reads: