Category: Equitablog

The Long-Run Economic Trend Is Our Friend: No Longer so Fresh at Project Syndicate

Posted on by Brad DeLong

Over at Project Syndicate: The Long-Run Economic Trend is Our Friend

These are days of grave disappointment at the state of the world. Sinister forces of fanatic religion-linked murder that we thought had been largely scotched by 1750 are back. They have been joined by and are reinforcing forces of nationalism, bigotry, and racism that we thought had been largely scotched in the ruins of Berlin in 1945. (There is a bright spot: the other principal fanaticism of the twentieth century, that of ideology, is comatose if not dead.) In addition, the state of economic growth since 2008 has been profoundly disappointing. There is no reasoned case for optimistically expecting a turn for the better in the next five years or so. And the failure of the globe’s institutions to deliver ever-increasing prosperity has undermined the trust and confidence which in better times would be strong factors suppressing the murderous demons of our age. Read MOAR Over at Project Syndicate

In these days of pronounced pessimism, it is past time to engage in enthusiastic and positive contrarianism with respect to the state of global economic growth not over the next five but over the next 30 years, and beyond at least to the next 60.

The reason that the 25 to 50-year economic growth future looks very bright is that the biggest of the macro trends that have been operating since the end of World War II are still, under the surface, at work. Technology continues to diffuse. World trade continues to grow. The population explosion continues to ebb. The innovative heart of the world economy in the global north continues to beat–albeit perhaps more sluggishly than it has since the 1880s (maybe). War and terror continue to destroy, terrorize, shock, and horrify, but on a scale much less than the holocausts and megadeaths of 1914-1978.

And these trends are likely to continue.

Our best source of summary information on global economic growth remains the Penn World Table research project started two generations ago by Alan Heston and Robert Summers. Take the geometric mean of individual country estimates of real GDP per capita as our first summary statistic of the state of the global economy. The Penn World Table then tells us that the world in 1980 was some 80% better off than it had been in 1950, and the world in 2010 was another 80% better off in measured material-well being terms that it had been in 1980. That places us today more than three times as well off as our predecessors in the 1950s were.

Moreover, this more than tripling of world material well-being is an underestimate. First, our real GDP measure was designed to be something Simon Kuznets could estimate quickly from data that was easily available. It does not not take proper account of use-value surplus accruing to users but only of market-value revenue captured by sellers. Over time the commodities we are producing are shifting in a direction that makes user surplus a greater and market value realized a smaller proportion of their total contribution to societal well being. And I find attempts to claim either that it has always been thus profoundly unconvincing given how much of our leisure and even our work time is spent interacting with information systems where the revenue flow is not of the essence but is only a small dribble tied to ancillary advertising.

Second, there is the case of China–and, more recently, of India. According to the PWT, China’s real GDP per capita in 1980 was more than 60% below of that of the country at the then-geometric mean of the world distribution. Today China is 25% above that moving benchmark. India in 1980 was more than 70% that benchmark, but since 1980 it has closed half the gap vis-a-vis the contemporaneous geometric mean. In the scatter of country experiences, India and China are only two counties. But they are 30% of humanity.

Now do not push optimism too far. There has been no sign of the world’s countries drawing together in their levels of prosperity. In 1950 two-thirds of countries had GDP per capita levels between 45% and 225% of the geometric mean of the world’s nations. By 1980 you had to widen that spread to 33% to 300%. And today it is 28% to 360%. That on the level of individuals the world economy is a more equal place than it was in 1980 is due to rulership that has been on the whole much better than average in China and India since the accessions of Deng Xiaoping and Rajiv Gandhi. But there are no more countries of the size of China or India to stand up. And few observers have anything like the confidence in and hopes for Xi Jinping and Narendra Modi that they had in their predecessors. It may be harder to find an export niche in the world economy to accelerate technology transfer in the future than it has been since the end of World War II. It may well be that the engine of innovation at the world’s leading technological edge will beat more slowly. But it will continue to beat. And technology will continue to diffuse. And the world will continue to grow.

Expect–terror that somehow triggers global nuclear armageddon aside–my successors in 2075 or so to be writing about how their world is, once again, three times as well off in material terms as we are today.

And beyond that? It is harder to project. We are already letting global warming, a potentially very large demon for the post-2080 world, out of the Pandora’s Box we hold. Our children’s children’s children will not thank us for that.

Must-Read: Anna Valero and John van Reenen: The Economic Impact of Universities: Evidence from Across the Globe

Posted on by Brad DeLong

Must-Read: Anna Valero and John van Reenen: The Economic Impact of Universities: Evidence from Across the Globe:

15,000 universities in about 1,500 regions across 78 countries, some dating back to the 11th Century….

Increases in the number of universities are positively associated with future growth of GDP per capita (and this relationship is robust to controlling for a host of observables, as well as unobserved regional trends). Our estimates imply that doubling the number of universities per capita is associated with 4% higher future GDP per capita. Furthermore, there appear to be positive spillover effects from universities to geographically close neighboring regions…. Part of the effect of universities on growth is mediated through an increased supply of human capital and greater innovation (although the magnitudes are not large). We find that within countries, higher historical university presence is associated with stronger pro-democratic attitudes.

Must-Read: Duncan Black: The Ad Cycle

Posted on by Brad DeLong

Must-Read: Duncan Black: The Ad Cycle:

I thought it would’ve reset by now, but the internet just keeps getting worse and worse…

Trying to read a website is like playing a game of whack-a-mole with the ads, and that’s before we start complaining about the auto-on video and audio ads. Usually these things do follow a cycle, with the ad arms race heating up until everybody realizes it isn’t sustainable and it resets a bit, but it seems like endless cover-the-text popover ads are here to stay this time. A mystery to everyone who has ever used the internet is why anybody (meaning the people who pay lots of money for these ads) think that they’ll sell anything by rendering their potential customers’ browsers temporarily unusable, but for some reason they do….

Must-Read: Paul De Grauwe and Yuemei Ji: Animal spirits and the optimal level of the inflation target

Posted on by Brad DeLong

Must-Read: Paul De Grauwe and Yuemei Ji: Animal spirits and the optimal level of the inflation target:

Low inflation targets can cause economies to hit the zero lower bound during deflationary periods caused by even mild shocks…

In such circumstances, central banks lose their ability to stimulate the economy. This column assesses the risk of this happening using a model that endogenises self-perpetuating optimism and pessimism in the economy. Given agents’ intrinsic chronic pessimism during times of recession, central banks should raise their inflation targets to 3 or 4% to preserve their ability to stimulate the economy when needed.

Declining U.S. labor mobility is about more than geography

Posted on by Bridget Ansel

The U.S. labor market often gets praise for being a dynamic place with lots of hiring, job-switching and moving around the country. But the land of the frontier settlers and Horace Greeley is starting to lose some of its luster in this regard. Research over the past several years shows how U.S. workers are far less likely to move across state lines. This trend has correctly led to some concern about its consequences for the U.S. labor market. But are concerns about geographic mobility for the sake of geographic mobility well placed?

A new piece in Democracy by Yale Law School professor David Schleicher looks at how labor mobility, or more specifically geographic labor mobility, is on the decline in the United States as well as at policies that might be able to help workers move more often. Schleicher’s diagnosis of the labor mobility problem is that it is fundamentally a matter of workers being hindered from moving to or leaving certain regions of the United States. In Schleicher’s telling, policies that reduce the “entry limits,” such as reducing the supply of housing in dynamic regions, or that increase “exit limits,” such as public benefits that aren’t portable across state lines, prevent some less economically dynamic regions from “shrinking.” Policies such as these are the culprits behind the decline in geographic mobility, according to Schleicher.

But some research on the topic of labor mobility is skeptical of this diagnosis of increased moving costs. Why? Because geographic mobility on the decline alongside all other kinds of labor market mobility. Research by economists Raven Molloy and Christopher Smith—both of the Federal Reserve Board—and Abigail Wozniak of the University of Notre Dame points to the importance of the labor market in driving geographic mobility down. Their research shows that the gains from making a job switch, regardless of a geographic move, has been declining since the 1980s. In other words, the costs of moving aren’t the main factor. Rather, it’s the decline in the gain. Further research by these three economists and Riccardo Trezzi of the Federal Reserve Board rules finds very little evidence that increased regulation or restriction of housing has played a role in declining labor market fluidity.

This isn’t to say that some of the policies that Schleicher proposes wouldn’t be helpful at the margins when it comes to increasing labor market fluidity or addressing other problems in U.S. economy. But given the root cause of declining geographic mobility, we should be more focused on causes and solutions that focus on the labor market itself. For example, there’s good evidence, for example, that declining labor mobility is a sign of declining labor demand in the U.S. economy, as Mike Konzcal and Marshall Steinbaum at the Roosevelt Institute lay out. Clearly this diagnosis leads to a different understanding of how to boost labor market fluidity. And given the potential consequences of inaction on this issue, it’s important to get the diagnosis right.

Must-Read: William Buiter (2009): The Unfortunate Uselessness of Most ‘State of the Art’ Academic Monetary Economics

Posted on by Brad DeLong

Must-Read: William Buiter (2009): The Unfortunate Uselessness of Most ‘State of the Art’ Academic Monetary Economics:

If one were to hold one’s nose and agree to play with the New Classical or New Keynesian complete markets toolkit, it would soon become clear that any potentially policy-relevant model would be highly non-linear….

The interaction of these non-linearities and uncertainty makes for deep conceptual and technical problems. Macroeconomists… took these non-linear stochastic dynamic general equilibrium models into the basement and beat them with a rubber hose until they behaved.  This was achieved by completely stripping the model of its non-linearities and by achieving the transsubstantiation of complex convolutions of random variables and non-linear mappings into well-behaved additive stochastic disturbances. Those of us who have marvelled at the non-linear feedback loops between asset prices in illiquid markets and the funding illiquidity of financial institutions exposed to these asset prices through mark-to-market accounting, margin requirements, calls for additional collateral etc.  will appreciate what is lost by this castration…. Threshold effects, critical mass, tipping points, non-linear accelerators–they are all out of the window.  Those of us who worry about endogenous uncertainty arising from the interactions of boundedly rational market participants cannot but scratch our heads….

When you linearize a model, and shock it with additive random disturbances, an unfortunate by-product is that the resulting linearised model behaves either in a very strongly stabilising fashion or in a relentlessly explosive manner.  There is no ‘bounded instability’ in such models.  The dynamic stochastic general equilibrium (DSGE) crowd saw that the economy had not exploded without bound in the past, and concluded from this that it made sense to rule out, in the linearized model, the explosive solution trajectories.  What they were left with was something that, following an exogenous random disturbance, would return to the deterministic steady state pretty smartly. No L-shaped recessions.  No processes of cumulative causation and bounded but persistent decline or expansion.  Just nice V-shaped recessions….

The practice of removing all non-linearities and most of the interesting aspects of uncertainty from the models that were then let loose on actual numerical policy analysis, was a major step backwards.  I trust it has been relegated to the dustbin of history by now in those central banks that matter…. Charles Goodhart… once said of the Dynamic Stochastic General Equilibrium approach which for a while was the staple of central banks’ internal modelling: “It excludes everything I am interested in”. He was right…. The Bank of England in 2007 faced the onset of the credit crunch with too much Robert Lucas, Michael Woodford and Robert Merton in its intellectual cupboard.  A drastic but chaotic re-education took place and is continuing…

Must-Read: Robert Novy-Marx: Is Momentum Really Momentum?

Posted on by Brad DeLong

Must-Read: Robert Novy-Marx: Is Momentum Really Momentum?:

Momentum is primarily driven by firms’ performance 12 to seven months prior to portfolio formation…

…not by a tendency of rising and falling stocks to keep rising and falling. Strategies based on recent past performance generate positive returns but are less profitable than those based on intermediate horizon past performance, especially among the largest, most liquid stocks. These facts are not particular to the momentum observed in the cross section of US equities. Similar results hold for momentum strategies trading international equity indices, commodities, and currencies…

Must-Read: Marc Dordal i Carreras, Olivier Coibion, Yuriy Gorodnichenko, and Johannes Wieland: Rethinking Inflation Targets for Long ZLB Episodes

Posted on by Brad DeLong

Must-Read: Marc Dordal i Carreras, Olivier Coibion, Yuriy Gorodnichenko, and Johannes Wieland: Rethinking Inflation Targets for Long ZLB Episodes:

The estimated frequencies and durations are quite sensitive to individual country experiences…

For example, excluding Japan reduces the frequency and duration to 6% and just under three years respectively, lowering the optimal rate of inflation to 2% per year. Excluding the period 1968-1984 when inflation and nominal interest rates were too high for the ZLB to be practically reached, on the other hand, raises the estimated frequency and duration of ZLB episodes to 10% and four and half years respectively, thereby raising the optimal inflation rate to almost 4% per year, the level advocated by economists like Olivier Blanchard and Paul Krugman.

In summary, the specific optimal rate of inflation implied by the model remains very sensitive to one’s beliefs about the frequency and duration of ZLB episodes, values for which history provides only limited guidance. Given the uncertainty associated with measuring historical frequencies and durations of ZLB episodes, the wide range of plausible outcomes that can be reached for the optimal inflation rate implies that profound humility is called for by anyone advocating a specific inflation target.

Must-Reads: September 21, 2016

Posted on by Brad DeLong

Should Reads: