Category: Equitablog

Must-Read: Robert Waldmann: Benchmark, Model, and Hypothesis

Posted on by Brad DeLong

Must-Read: Robert Waldmann: Benchmark, Model, and Hypothesis:

I imagine hopes followed by disappointments in the following order…

P might be true…. P isn’t true, but P might still be a useful approximation…. All the attempts to use P to approximate reality have failed, because each implication is far from the truth…. Work starting with P shares the fault of totally undisciplined empiricism which can describe but not forecast. However, P is a useful benchmark….

Macroeconomics is reaching the 4th stage [with respect to] the DSGE models which have dominated academic work for decades…. My view is that… the claim that a something is a useful benchmark… is similar to the claim that a model is a useful approximation…. The choice of a benchmark is important because one modification is considered at a time. If implications were… linear… it wouldn’t matter…. But they aren’t. The way in which an unrealistic DSGE model differs from the same model with a financial friction can be completely different from the way in which the real world would be different if a financial friction were eliminated….

A more important problem…. The vast majority of models in the literature share many of the implications of the benchmark…. So, for example, if the benchmark model has Ricardian equivalence, so do most of the modified models…. [When] temporary lump sum tax cuts… were proposed in the USA in 2009… many economists argued that policy makers were ignoring the results of decades of academic research. In fact, they were ignoring the implication of the standard benchmark model….

The more diplomatic critics of mainstream academic macroeconomics insist that the models, which they find unsatisfactory, are useful benchmarks…. [But] a simple example illustrat[es] the danger…. [Consider] the original Lucas supply function… [leads to] the policy ineffectiveness proposition which lead Sargent and Wallace to note that, in their model, the optimal policy was to set the inflation rate to some desired target and ignore everything else. Notably this is the policy mandate of the European Central Bank….

The repeated use of the word “hypothesis” in the 50s, 60s, and 70s strongly suggests that the equations in question were not originally considered parts of models which were false by definition. Thomas Sargent’s phrase “take a model seriously” sure seems to imply “treat a model as a null hypothesis.”… Lucas and Prescott were enthusiastic about hypothesis testing until it falsified too many of their hypotheses, and both independently said exactly that:

My recollection is that Bob Lucas and Ed Prescott were initially very enthusiastic about rational expetations econometrics. After all, it simply involved imposing on ourselves the same high standards we had criticized the Keynesians for failing to live up to. But after about five years of doing likelihood ratio tests on rational expectations models, I recall Bob Lucas and Ed Prescott both telling me that those tests were rejecting too many good models. The idea of calibration is to ignore some of the probabilistic implications of your model but to retain others…

Why do long-term unemployed Americans face difficulties finding jobs?

Posted on by Bridget Ansel
Tanya Scott searches job sites for employment possibilities at the Mississippi Department of Employment Security WIN Job Center in Jackson, Miss.

Why do Americans who’ve been out of work for a long time have such a hard time finding jobs? The answer is very important because long-term unemployment (longer than 26 weeks) as a share of the labor force and as a share of total unemployment has been on an upward trend over the past decade or so. Levels spiked during the Great Recession and are now on the decline, but they are still quite elevated. Why care about long-term unemployment? The rate at which these workers get hired is much lower than the rates for workers who’ve been unemployed for shorter periods of time. Do long-term unemployed Americans face more difficulties getting hired because they aren’t very productive or because of some other potential flaw? Or is it because of the experience of being unemployed itself?

A new National Bureau of Economic Research working paper by economists Katharine Abraham and John Haltiwanger of the University of Maryland and Kristin Sandusky and James Spletzer of the U.S. Census Bureau seeks to determine what’s behind the struggles of long-term unemployed workers. This is not as easy as it might seem at first glance. The reason: Researchers can look at the rate at which workers get hired from data sets such as the Current Population Survey, but it’s impossible to tell whether the thing holding back these workers is something that was present before unemployment or due to unemployment itself.

The coauthors match two datasets together to help get at this question. They take data from the Current Population Survey and match it with data from the Longitudinal Employer-Household Dynamics program, an administrative dataset that has information on workers’ employment histories. The information from the LEHD lets the four economists see the trajectory of workers’ careers before they lose their jobs. Such knowledge is important when evaluating the causes of the hiring struggles for the long-term unemployed. An analysis can look at the difference between two workers with very similar work histories but with different amounts of time in unemployment.

What the authors find is that after accounting for differences in education, age, and job experience, there is still a significant difference in hiring for long-term unemployed workers compared to those out of work for shorter periods of time. This points toward explanations that have to do with a long spell of unemployment itself causing harm rather than something being wrong with the workers that is hindering hiring.

The four economists note there are a number of potential explanations that center on unemployment itself being the problem for long-term unemployed Americans. Maybe a long period of unemployment harms workers’ skills and makes them less employable. Perhaps after a long time of having no luck of finding jobs, these workers might not search as hard. Or employers simply could be discriminating against them. Figuring out which among these explanations (or maybe others) are responsible for the hiring difficulties facing the long-term unemployed is an important next step for research as the current business cycle enters its seventh year since the end of the Great Recession.

Must-Reads: October 5, 2016

Posted on by Brad DeLong

Should Reads:

Thinking about U.S. antitrust enforcement in the 21st century

Posted on by Bridget Ansel
Photo of President Theodore Roosevelt, the original “trust-buster.”

After decades of being out of the policy spotlight, U.S. antitrust policy and concerns about firms’ increasingly concentrated market power have moved toward center stage. Recent research highlights the increasing concentration of control over the U.S. economy among a decreasing number of big firms. Such research and the events of the day—think of the wave of mergers and acquisitions among technology and healthcare companies—have moved policymakers toward increasing their attention to the enforcement of antitrust laws and other means of reducing market power.

But why should policymakers care about market concentration? There’s the well-known answer that increased market power hurts consumers, but there are other reasons to be concerned with increased market power in the U.S. economy.

First, it’s very possible that increased market concentration has contributed to the rise in income inequality. Jason Furman, Chairman of the President’s Council of Economic Advisers, and Peter Orszag, former Director of the Office of Management and Budget and currently at investment bank Lazard, make such an argument. The two economists connect the rise of inter-firm inequality and the increasing amount of “rents”(abnormal profits) in the economy due to market concentration. Their research suggests that these rents are captured by a select number of firms and then shared with workers at those “superfirms.” The result is major gains for a select number of workers at the expense of everyone else and an increase in income inequality.

Increasing market concentration also could have an effect on the function of the labor market. When economists talk about the use of market power, it’s often in reference to the markets for goods and services. Increasingly, however, some firms also leverage their power in the labor market. Instead of flexing their monopoly power, these firms would be using their monopsony power. And since firms with monopsony power will employ fewer workers than is optimal for the whole economy, increasing concentration could result in a decline in overall demand for workers.

These are just two examples of how the increasing concentration of firms in the U.S. economy may be a very worrying trend. There are many questions, however, related to these two examples—and many others related to the overall question of economic concentration. That’s why Equitable Growth is interested in accelerating investigations into these questions and why we are hosting an event tomorrow focused directly on the role of antitrust enforcement.

Must-Read: Joseph Cotterill: A BREXIT Joke

Posted on by Brad DeLong

Must-Read: Joseph Cotterill: A BREXIT Joke:

Compare: Bloomberg story on “three senior figures in May’s administration” promising “no special favours” for the City in Brexit negotiations, October 2nd:

Business leaders are failing to recognize that the new prime minister has a different view of the City of London from Cameron, the people said. May does not simply accept what the City says in the way that Cameron and his former chancellor, George Osborne, tended to do, according to one person. That realization will be a shock to some in the City, the person said.

Financial-services firms risk damaging their relationship with lawmakers by repeatedly complaining about the impact of Brexit on their businesses and threatening to move their offices out of the U.K., one senior figure said, dismissing as a joke the idea that London-based financial-service companies would all move to Frankfurt, Paris or Dublin.

Contrast: Speech by Director of Policy and Risk Gerry Cross, Central Bank of Ireland, October 3rd:

Following the UK referendum, there is the potential for a material increase in the number of applications for authorisation by the Central Bank due to the possible loss of passporting rights of UK-authorised entities.

We will in general want to see that the Board and the management of the entity are located here such that that the business is run from here. We will want to be satisfied that the mind and will of the entity are located here; that the decision-making happens here.

I think one thing that we will want to be very clearly satisfied about is that the risks that are associated with the business of the entity are governed, remunerated, managed and mitigated in and by that entity. That obviously flows through to the staffing that we would expect to see.

Who sounds more like they’ve actually got a plan?

Who seems to be hoping senior managers won’t follow the money?

Having a child comes with significant financial consequences

Posted on by Bridget Ansel

Any parent can tell you that children are expensive. Childcare, the endless diaper supply, and cute onesies add up to a startling $12,500 in the first year alone, according to the most recent figure from the U.S. Department of Agriculture. And while every parent makes financial sacrifices for their offspring, many parents today are facing these costs with less money coming in, compounding the financial burden of having a child. A new working paper by Alexandra Stanczyk, currently a postdoctoral scholar at the University of California-Berkeley, looks at household economic well-being in the year before and after birth among a sample of U.S. households. She finds that, on average, households experience a significant decline in economic well-being in the time around a birth.

Having a baby is, to grossly understate it, enormously taxing both physically and emotionally, which is why almost all mothers in the United States take some time off work after the birth of a child. Yet many families today depend on women’s income, which means that time out of the workforce can exact a huge financial toll considering that the United States has no paid leave policy. Many mothers (and an increasing number of fathers) must forgo pay to care for their children.

Once they return to work, many women face a “motherhood wage penalty,” especially at the bottom of the income spectrum. In contrast, men see a boost in their earnings after the birth of a child. While this can help somewhat offset the decline in a new mother’s earnings within two parent households, women’s lower earnings potential means less income overall for families.

The drop in parents’ income around childbirth can have major consequences for kids as well. Money matters for children’s development, even before children are born. Babies born into poverty are at a heightened risk for preterm birth (which is associated with long-term intellectual and developmental disabilities) and other negative outcomes. Inadequate family income is harmful for children—particularly young children—affecting their long-term social-emotional, cognitive, and academic outcomes even when controlling for other parental characteristics.

Childbirth affects families’ financial well-being across the income spectrum, but this financial hit is particularly harmful for single mothers. Lacking the support of a partner or family member’s income, many of these women rely heavily on public benefits such as the Supplemental Nutrition Assistance Program, the Earned Income Tax Credit, and the Child Tax Credit, among others. Stancyzk finds that these benefits do help, but they do not go far enough because the financial burden of not working is so high that many low-educated parents and single mothers tend to return to work much quicker than their married and better-educated counterparts. This has major consequences for mother and child alike, including higher rates of maternal depression and lower rates of immunization and health visits for their children.

These U.S. trends stand in stark contrast to European households, where household income tends to go up when a new member of the family arrives. The difference, Stanczyk points out, is due to European countries’ policies that support families with young children by providing paid leave and childcare subsidies. And the research points out that the benefits of such policies go beyond individual families: Paid leave, for example, raises the likelihood that a new mother will remain in the labor market and continue to contribute to national productivity overall.

Having the time to care for one’s baby in those early months has a lasting impact on the long-term health and development of a child. And states that do have paid leave policies in place (California, Rhode Island, and New Jersey) find that overall the paid benefits reduce the burden on government assistance programs.

Only 12 percent of private-sector workers have access to paid leave from their employers, according to the U.S. Bureau of Labor Statistics. Among low-income workers, that number drops to 4 percent—meaning that overall, private-sector benefits exclude the low-income workers that would benefit the most from such policies. By describing the financial hardship that many families face during a crucial time in their lives, Stancyzk highlights the wide-reaching consequences of federal policymakers’ inaction around helping families navigate work-family conflict.

Must-Read: Hal Varian: No Hope of a Quiet Life in the Age of Disruption

Posted on by Brad DeLong

Must-Read: Hal Varian: No Hope of a Quiet Life in the Age of Disruption:

Robust competition in tech brings benefits for consumers…

The 20th century was a great time for innovation…. Then, as now, we saw the typical dynamic that accompanies technological innovation: a flood of entrants followed by intense competition and exits, with a handful of large companies remaining. The same script is playing out online… [but] today tech groups are competing across industries rather than within them, and competing globally rather than nationally…. Google, Amazon, Facebook, Microsoft and Apple… are not stuck in silos or hemmed in by a single business model… compete intensely… products and services are better, faster and cheaper than ever before….

Why do they not just sit back, stick to what they do best and let the money roll in? Because sitting back is a sure recipe for obsolescence. Entering a new market in the online world is far easier than in the offline world…. Companies such as Amazon, Google, Microsoft and IBM offer services to small operators that range from advertising and app stores to cloud services and open-source software…. Competition in tech is robust for both large and small companies, resulting in low prices, high-quality products and innovation that benefits consumers worldwide…

Does the one percent deserve what it gets?

Posted on by Bridget Ansel
Photo of the late Apple Inc. CEO, Steve Jobs, on Jan. 10, 2006.

The rich are not like you and me. They contribute far more to society than everybody else, so argues Harvard University economist Gregory Mankiw in his essay “Defending the One Percent.” Mankiw’s praise for talented superstars such as Steven Jobs, J.K. Rowling, and Steven Spielberg quickly blooms into a more general argument that competitive labor markets pay workers what they deserve. This is music to the ears of high earners, and it sings to a very human desire to believe that the world is fair.

But this argument is based on neoclassical economic theories that define the domain of human choice in narrow terms, minimizing the effects of bad luck, bad markets, and bad inequalities that often predetermine market outcomes. Mankiw’s argument leaves room for corporate bad behavior defined in narrow terms as “gaming the system.” But what he most deplores is government meddling with the system.

Most economists do not explicitly endorse such views. But years of schooling in neoclassical economic theories predispose them 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.

Like neoclassical economic theory in general, this approach is too narrow. Competitive markets comprise a relatively small part of an economy dominated by large multinational corporations—marketplaces and firms that are embedded in a global environment of unpriced goods and services.

Efforts to get rich at someone else’s expense, which fall under the academic rubric of distributional conflict, are multidimensional. Forms of collective bargaining power based on citizenship, class, race and ethnicity, and gender, as well as other aspects of group identity, influence the resources that individuals bring to the labor market. They also influence the power that individuals possess to modify labor market outcomes.

Some of us contribute more than members of the top one percent to the economy, and some of us contribute less. None of us gets exactly what we deserve. One difference between the rich and us is that they have more money. They also enjoy—both as cause and effect—a lot more power.

—Nancy Folbre directs the Program on Gender and Care Work at the Political Economy Research Institute at the University of Massachusetts Amherst. Her working paper on this subject is in our working paper series.

Must-Read: Stephen J. Redding and David E. Weinstein>: What Big Data Tells Us About Real Income Growth

Posted on by Brad DeLong

Must-Read: I think this by Stephen J. Redding and David E. Weinstein looks likely to be brilliant!

What big data tells us about real income growth VOX CEPR s Policy Portal

The difference between the cluster of standard price indices and the CG-UPI is the wedge produced by what Redding and Weinstein call “consumer valuation bias”–the fact that standard price indices miss the fact that when a commodity’s price rises because of a demand shift the fact of that demand shift means that the commodity is delivering more utility. The difference between the CG-UPI and the Unified Price Index itself is, if I understand what is going on, the effects of Feenstra (1994) variety-adjustment terms.

2%/year of consumer valuation bias and 4%/year of Feenstra variety-adjustment terms are not too shabby…

Of course, the foundations of this are built on sand. The assumption is that a taste change does not diminish your true utility, but rather opens up opportunities to increase your utility above its previous level by shifting consumption toward the commodities you know like more. Thus if today you decide you like cheeseburgers more than lapin au vin and shift consumption toward cheeseburgers your utility goes up, and then if tomorrow you decide you like lapin au vin more than cheeseburgers and shift consumption toward lapin au vin your utility goes up again, leaving you the day after tomorrow with the same consumption bundle you had yesterday, but with higher utility.

Taste shifts that bring your preferences into better accord with ευδαιμοια might bear such an interpretation. Taste shifts that random-walk or mean-revert, I believe, cannot.

Stephen J. Redding and David E. Weinstein: What Big Data Tells Us About Real Income Growth:

The problem is not that we don’t know how to convert nominal expenditures into welfare; it is that we know too many ways of doing it…

Macroeconomists typically assume… taste parameters never shift, so the utility function is constant… in order to derive a ‘money-metric’ utility function…. Applied microeconomists… assum[ed] that there are time-varying demand and supply curves…. The existence of these time-varying demand curves is inconsistent with the macroeconomist’s idea that taste parameters are fixed…. Actual price and real output data is constructed by statistical agencies using formulas that differ from either approach…. The same assumptions that form the foundation of demand-system estimation can be used to prove that standard price indexes are incorrect, and the assumptions underlying standard price indexes invalidate demand-system estimation….

Our index enables us to identify a novel form of bias that arises from the assumption of time-invariant demand…. ‘Consumer valuation bias’ arises whenever expenditure shares respond to demand shifts…. If higher consumer demand causes prices to rise, a conventional index will overstate cost-of-living changes because it will not adjust for the fact that some of the price increase is offset by the higher utility per unit associated with the demand shift…. The consumer valuation biases in existing indexes appear to be quite substantial, suggesting that allowing for demand shifts is an economically important force in understanding price and real income changes. We can see these differences at the aggregate level in Figure 2….

The Fisher, Törnqvist and Sato-Vartia result in almost identical changes in the cost of living that are bounded by the Paasche and Laspeyres indexes…. All assume no demand shifts for any good. The distance between the Sato-Vartia index and the Common-Goods Unified Price Index tells us the importance of the consumer valuation bias…. The distance between the Sato-Vartia and the Feenstra-CPI indicates the value of the adjustment for changes in variety…

The dynamics of household economic circumstances around a birth

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Author:

Alexandra B. Stanczyk, School of Social Welfare Postdoctoral Scholar, University of California, Berkeley

Abstract:

With the arrival of an infant, many households face increased demands on resources, changes in the composition of income, and a potentially heightened risk of economic insecurity. Changing household economic circumstances around a birth have implications for child and family wellbeing, women’s economic security, and public program design, yet have received little research attention in the U.S. Using data from the Survey of Income and Program Participation, this study provides new descriptive evidence of month-to-month changes in household economic wellbeing and the composition of household income in the year before and after a birth. Results show evidence of significant declines in household economic wellbeing in the months around a birth, particularly for single mothers who live without other adults. Income from public benefit programs buffers but does not eliminate declines in economic wellbeing. More generous and timely income supports, as well as policies facilitating mothers’ employment could boost economic wellbeing during this critical period.