Category: Equitablog

Equitable Growth’s inaugural grantee conference

Posted on by Nick Bunker

Today Equitable Growth hosts our inaugural grantee conference, with researchers presenting work funded through our competitive grants program. The research being presented covers areas ranging from secular stagnation and debt overhangs to declining income mobility, and from unpredictable work schedules to patents and entrepreneurism.

Equitable Growth’s competitive grants program has funded three rounds of grantees so far. Some of the research projects are already completed, some are in preliminary stages, and others are still in progress. The hope is that our grantees’ research will help not only other researchers better understand the workings of the economy but policymakers as well. The great work that our grantees have and will continue to do can have a great impact within their fields of research, but that impact can be expanded by forging a link between the academy and the policymaking world. There’s already a connection there, but it can be stronger.

Of course, today’s conference is just a start, though it builds on what we’ve been focused on since our launch in 2013. It’s the first time we’ve gathered our grantees together to present research, yet all along we’ve worked to better understand the potential connections between inequality, economic growth, and stability—and convey those findings to policymakers.

Later this fall we’ll release our fourth Request for Proposals and start the process of selecting new research to fund. For anyone interested in helping to increase our knowledge in these areas, be on the lookout over the next few months for more details. We’ll be looking forward to finding our future grantees.

Must-Read: V.V. Chari, Lawrence Christiano, and Patrick J. Kehoe (2008): Facts and Myths about the Financial Crisis of 2008

Posted on by Brad DeLong

Must-Read: Is this the most totally clueless macroeconomics paper ever? If not, what is?

V.V. Chari, Lawrence Christiano, and Patrick J. Kehoe (2008): Facts and Myths about the Financial Crisis of 2008:

The United States is indisputably undergoing a financial crisis and is perhaps headed for a deep recession…. We examine three claims about the… financial crisis… and argue that all three claims are myths. We also present three underappreciated facts about how the financial system intermediates funds…. Conventional analyses of the Önancial crisis focus on interest rate spreads. We argue that such analyses may lead to mistaken inferences about the real costs of borrowing…. We argue that even if current increase in spreads indicate increases in the riskiness of the underlying projects, by itself, this increase does not necessarily indicate the need for massive government intervention. We call for policymakers to articulate the precise nature of the market failure they see, to present hard evidence that differentiates their view of the data from other views which would not require such intervention, and to share with the public the logic and evidence that burnishes the case that the particular intervention they are advocating will fix this market failure.

The Clones of Jim Tobin vs. the Gravitational Pull of Chicago: A Paul Krugman Production…

Posted on by Brad DeLong
2016 09 20 krugman geneva pdf

The highly-esteemed Mark Thoma sends us to Paul Krugman. In praise of real science: “Some people… always ask, ‘Is this the evidence talking, or my preconceptions?’ And you want to be one of those people…”.

Paul’s most aggressive claim is that our economics profession in 2007 would have done a much better job of economic analysis and policy guidance in real time had it consisted solely of clones of Samuelson, Solow, Tobin–I would add Modigliani, Okun, and Kindleberger–as they were in 1970: that the vector of net changes in macroeconomics in the 1970s were of zero value, and that the vector of net changes in macroeconomics since have been of negative value as far as understanding the world in real time is concerned.

This is, I think, too strong–and Paul does not quite make that claim. Doug Diamond and Phil Dybvig (1983)? Andrei Shleifer and Rob Vishny (1997)? And, of course, that keen-sighted genius Paul de Grauwe (2011).

Paul K. might respond that:

  • Paul de G. is very close to a clone of Jim Tobin who spent fifteen years as a member of the Belgian parliament, to which I can only say “touché”.
  • And you could say that Diamond-Dybvig and Shleifer-Vishny are simply mathing-up Kindleberger (1978), or perhaps Bagehot (1873). But there is great value in the mathing-up.
  • And I am going to have to think about why I have so much softer a spot in my heart for Uncle Milton Friedman than Paul K. does.

But in essentials, yes: Rank macroeconomists in 2007 by how much their intellectual trajectory had been influenced by the gravitational pull o fEd Prescott, Robert Lucas, and even Milton Friedman. Those whose trajectories had been affected least understood the most about the world in which we have been enmeshed since 2007:

Paul Krugman: What Have We Learned From The Crisis?:

We’ve seen a lot of vindication for old, unfashionable ideas–oldies but goodies that got deemphasized, and in some cases effectively blackballed, in the decades following the 1970s, but have turned out to be remarkably useful practical guides….

I was always a bit unsure about my own bona fides. Obviously I’d been a professional success, but why? Was it truly because I’d been making a real contribution to our understanding of how the world works, or was I simply good at playing an academic game?… Then came the crisis… and… several immediate questions in which popular intuitions and simple macroeconomic models were very much at odds. Would budget deficits cause interest rates to soar? Practical men said yes; economists, at least those of us with certain tools in our boxes, said no. Would huge increases in the monetary base cause runaway inflation? Yes, said practical men, politicians, and a few economists; no, said I and others of like mind. Would fiscal austerity depress output and employment? No, said many important people; on the contrary, it would be expansionary, because it would raise confidence. Yes, a lot, said Keynesian-minded economists. And my team won three out of three. Goooaaal!…

Economists from 1970 or so… might well have done a better job responding to the crisis than the economists we actually had on hand…. Tobin was one of the last prominent holdouts against the Friedman-Phelps natural rate hypothesis…. Friedman, Phelps, and their followers argued that any attempt to hold unemployment persistently below the natural rate would lead to ever-accelerating inflation; and their models implied, although this is rarely stressed, that an unemployment rate persistently above the natural rate would lead to ever-declining inflation and eventually accelerating deflation. Tobin was, however, skeptical…. Phillips tradeoffs that persist in the long run, at least at low inflation….

For reasons not completely persuasive to me, the standard response of macroeconomists to the failure of deflation to materialize seems to be to preserve the Friedman-Phelps type accelerationist Phillips curve, but then assert that expected inflation is “anchored”, so that it ends up being an old-fashioned Phillips curve in practice. We can debate why, exactly, we’re going this way. But… Tobin’s 1972 last stand against the natural rate turns out to be a better guide to the post-2008 landscape than just about anything written in the 35 years that followed….

The U.S. Federal funds rate hit zero in late 2008, with the economy still in a nosedive. The Fed responded with the first round of quantitative easing…. Meanwhile, the budget deficit soared…. What effect would these radically unusual policies have? The answer from quite a few public figures was to predict soaring inflation and interest rates. And I’m not just talking about the goldbugs… Allan Meltzer and Martin Feldstein warned about the coming inflation, joined by a Who’s Who of the Republican establishment. Academics like Niall Ferguson and John Cochrane warned about massive crowding out of private investment. But old-fashioned macro, with something like IS-LM at its base, offered startlingly contrary predictions at the zero lower bound…. And sure enough, inflation stayed low, as did interest rates.

IJT-style macro also made a prediction about the output effects of fiscal policy – namely, that it would have a substantial multiplier at the zero lower bound…. Chicago’s Cochrane insisted that the old-fashioned macro behind it had been “proved wrong.” Robert Lucas denounced Christina Romer’s use of multiplier analysis as “shlock economics,” basing his argument on a garbled version of Ricardian equivalence…. Jean-Claude Trichet sunnily declared that warnings about the contractionary impact of austerity were “incorrect”…. A few years on, and the old-fashioned Keynesian analysis looks pretty good… a multiplier around 1.5…. Which just happens to be the multiplier Christy Romer was assuming….

But wait, we’re not quite done. One aspect of the post-2008 story that apparently surprised many people, even smart economists like Martin Feldstein, was that huge increases in the monetary base didn’t seem to produce much rise in broader monetary aggregates, leading to claims that something strange was going on–that maybe it was all because the Fed was paying interest on excess reserves. But the same thing happened in Japan in the early 2000s, without any special interest payments….

The bottom line is that the crisis and its aftermath have actually provided a powerful vindication of macroeconomic models. Unfortunately for many economists, the models it vindicates are more or less vintage 1970. It’s far from clear that anything later added to our ability to make sense of events, and developments in macro over the course of the 80s and after may even have subtracted value….

What looks useful is a sort of looser-jointed approach: ad hoc Hicks-Tobin-type models, with simple models of financial market failure on the side…. For those seeking a definitive, integrated approach this will seem pitifully inadequate; and if I were a young academic seeking tenure I’d run away from all of this and either do empirical work or shun macro altogether. But models don’t have to rigorously dot all i’s and cross all t’s–let alone satisfy the peculiar criteria that modern macro calls “microfoundations”–to be very useful in practice…

Must-Read: Paul Krugman: What Have We Learned from the Crisis?

Posted on by Brad DeLong

Must-Read: The highly-esteemed Mark Thoma sends us to Paul Krugman. In praise of real science: “Some people… always ask, ‘Is this the evidence talking, or my preconceptions?’ And you want to be one of those people…”:

Paul Krugman: What Have We Learned From The Crisis?:

We’re talking about an… episode… longer than the famous era of stagflation in the 1970s and early 1980s….

The costs… were also much larger than those of the stagflation era…. But here’s a funny thing…. Stagflation had a huge impact on economic thinking, both at the level of academic research and on conventional wisdom among policymakers. The global financial crisis and the recession/stagnation that followed seem to have had much less impact. To a remarkable extent, economists and economic policymakers are still saying the same things in 2016 that they were saying in 2007. For some reason, there doesn’t seem to be a clear consensus about what, if any, lessons we should draw from years of terrible economic performance….

We’ve seen a lot of vindication for old, unfashionable ideas–oldies but goodies that got deemphasized, and in some cases effectively blackballed, in the decades following the 1970s, but have turned out to be remarkably useful practical guides…. There have been… revelations about… liquidity and the failure of arbitrage… that have definitely changed how I see the world, and have important policy implications…. We’ve made some important and uncomfortable discoveries about the politics and sociology of economics itself–about the resistance of both the economics profession and public officials to changing their views in the face of contrary information.

At this point you’re going to ask me for a solution…. I don’t… have one, except to urge everyone… to be… bit self-aware. Nobody is pure; everyone is tempted to read evidence as supporting what he or she wants to believe. But some people… always ask, “Is this the evidence talking, or my preconceptions?” And you want to be one of those people. If your initial reaction to the incredible and terrible events of the past 9 years is that they just show that you were right all along, consider how unlikely that is, and challenge yourself. If there’s any offsetting benefit to economic crisis, it is that it can be a learning experience. Let’s not waste that opportunity.

Unemployment and models of U.S. consumption

Posted on by Bridget Ansel
In this Thursday, March 3, 2016, photo, Georgia Department of Labor services specialist Louis Holliday, left, helps a woman with a job search at an unemployment office in Atlanta.

If you lost your job tomorrow, how much would you have to pull back on spending? The answer to that question and the answer that millions of other U.S. workers could give would help economists get a really good handle on which models of consumption actually do a good job of explaining the world around us. Not only would economists want to know how much you’d cut back on, they’d also want to know what specific kinds of consumption you’re pulling back on as well as how you might react to loosing unemployment insurance. Unfortunately, no one has access to data that can answer all those questions for everyone in the United States. But recent research can offer some answers for a subset of U.S. workers.

The research, recently highlighted in a brief from the JPMorgan Chase & Co Institute, is by economists Peter Ganong, currently of the National Bureau of Economic Research, and Pascal Noel of Harvard University. (The research was partially funded by an Equitable Growth academic grant in 2014 for Pascal.) What the two economists are looking at is how consumption changes when a worker loses a job and then goes on unemployment insurance. Using anonymized data from JPMorgan Chase, Ganong and Noel can look at the actual transactions that show up in a bank account instead of asking workers what they spent their money on. And they also can see when workers receive payments from the unemployment insurance system. Accountholders at JP Morgan might not be representative of the overall population, but they end up being fairly representative of workers who end up receiving unemployment benefits as many low-income workers are ineligible.

According to the data, once workers loses their jobs and go on unemployment insurance their consumption drops by 6 percent. Now perhaps this drop is because these workers no longer have worker-related expenditures. But looking at the data, Ganong and Noel see that only about one-fourth of the drop in spending can be explained by a decline in work-related consumption. Over time, as workers continue to rely on unemployment insurance, spending drops an extra 1 percent every month they are receiving benefits. And then, if they don’t find a job before their UI eligibility expires, the consumption decline (at an 11-percent clip) for a worker when they run out of benefits is even larger than when the workers lost their jobs.

What does this tell economists and policymakers about the consumption behavior of households? The fact that workers were so sensitive to changes in monthly incomes means the permanent income hypothesis doesn’t do well in explaining the data. But at the same time, these workers’ consumption doesn’t drop off as much as might be expected if a “hand-to-mouth” model was appropriate and households were totally at the whim of monthly changes in income. Instead, Ganong and Noel find evidence for a “buffer stock” model, in which households hold some savings—a bit less than a month of income—in reserve in case of an economic shock and then draw down on that savings if they lose their jobs. So households do boast some form of insurance by having liquid savings to draw down, but they don’t have that much.

How applicable the results from the JPMorgan Chase & Co Institute data are for the general public is up for debate, but given the checks the co-authors ran it’s seem likely that they are. Seeing more studies like this one that actually look at the balance sheets of households in the face of big economic shocks would be great way to keep digging into these important questions.

Must-Read: Bill White: Ultra-Easy Money: Digging the Hole Deeper?

Posted on by Brad DeLong

Must-Read: The problem is that ultra-easy money that creates financial imbalances is also supposed to create real-side imbalances as well. That is, in fact, how you know that there are financial imbalances: financial assets are supposedly “backed” by real-side assets that simply aren’t there. The financial imbalance of too much CDS in 2005 was matched by real houses that had been built that were occupied by “owners” who had no chance of paying their mortgages, and could only come out whole if the cycle continued another round at yet a higher level of prices. The financial imbalance of too much dollar-denominated Latin American debt in 1982 was matched by a real export sector in Latin American that simply could not export to earn enough hard currency to make up the debt amortization. In both cases, lenders made soporific by easy money did not do their due diligence as to what their debtors were doing (or, rather, not doing) to build (or, rather, not build) real assets of the value to back their financial debts.

And the result of ultra-easy money is inflation, in assets or in real currently-produced commodities, as financial and spending values outrun real production values, and accelerating inflation until the crash comes.

But where is the inflation? It’s not in any currently-produced goods and services. It’s not in any risky financial assets where buyers are ignoring disaster scenarios. Rather, the assets that are high priced are the Treasuries, which are valuable precisely because investors are conspicuously not underpricing risk and not ignoring disaster scenarios:

Bill White: Ultra-Easy Money: Digging the Hole Deeper?

Ultra Easy Monetary Policy: Why it Hasn’t Worked as Intended

  • Premised on belief that it will stimulate demand BUT
  • Smacks of panic and raises levels of uncertainty
  • Bringing spending forward only works for a while
  • Consumers restrained by many factors including debt
  • While corporate investment also faces headwinds
  • Just as Keynes himself suggested

Ultra Easy Monetary Policy: Why Unintended Consequences Matter

  • McKinsey says global debt ratios are almost 20 percentage points of GDP above pre crisis levels
  • Asset prices in AMEs raised to unsustainable levels?
  • Risk Off/Risk On investment patterns and other market “anomalies”
  • Threatened financial institutions also lower “potential” growth
  • EME corporates run many risks
  • Other “unintended consequences”?
  • More dangers now than in 2007?

Must-Read: Narayana Kocherlakota: The Fed Is About to Make a Mistake

Posted on by Brad DeLong

Must-Read: Narayana Kocherlakota: The Fed Is About to Make a Mistake:

More than seven years after the recovery began in mid-2009, inflation remains below the central bank’s 2-percent target…

…indicating that the economy is still operating below potential. As of July, consumer prices… excluding volatile food and energy goods and services… were up 1.6 percent. Worse, markets appear to be losing confidence that the Fed will ever reach its target: Yields on Treasury bonds suggest that traders expect inflation to average less than 2 percent five to 10 years from now. As the experience of the Bank of Japan indicates, restoring such confidence is not easy…. Although the unemployment rate has returned to its 2007 level of 5 percent, the fraction of Americans in their prime working years who have a job remains well below its pre-recession level.  All this argues for the Federal Open Market Committee, the central bank’s policy-making arm, to provide added stimulus by cutting interest rates….

Unfortunately, I’m confident that the Fed won’t cut rates. Doing so now might require officials to raise rates more rapidly in the future–an outcome that they are, for reasons that are unclear to me, determined to avoid. So the central bank will either raise rates by a quarter percentage point or do nothing. The latter appears more likely, given that two Fed governors have spoken out in favor of caution. The last time the Fed took an action from which two governors dissented was in 1993. In either case, it will be the wrong move.

Must-Read: Harry Brighouse: Why Have Classroom Discussions Anyway?

Posted on by Brad DeLong

Must-Read: Harry Brighouse: Why Have Classroom Discussions Anyway?:

I didn’t give any reasons why students actually should discuss….

When I first started teaching I didn’t understand why, either. Here’s why…. Students were–and still are–not like me. Hardly any of them are like me. Not that they are less smart, but they have different ways of learning than mine (most of them having not been treated to a diet of BBC Radio 4 for most of their waking hours during childhood, and not having been surrounded by books and the expectation of reading them, and many of them having had other, more appealing, things to do). I now believe that most people can’t listen, usefully, to even a more expert speaker than I am, for 75 minutes straight…. But the students were–and my current students are–like me in one way…. They need to talk in order to learn. They need to hear the words coming out of their mouths, practice making arguments, giving reasons, and hearing reasons from others to whom they do not feel an immediate inclination to defer (i.e. not just me).

And… I did all these things, and learned a lot from them, just not really in class…. I had weekly tutorials… [and,] much more significant… after just about every lecture I retired to the student refectory with friends and discussed the lecture and/or the readings and/or the essays we were writing. This, I am sure, is where I learned the most. My students don’t have tutorials. And most are not habituated to discussing their classwork outside of class…. So they need to discuss intellectual issues in class, both to do the learning of the discipline-specific content and skills that can only occur through discussion – through practical application if you like – and to get habituated to doing the same outside of class. They need, I think, to be told explicitly why classroom discussion is such an important part of the class, and that they should discuss the material with friends or classmates outside of class….

My previous post… prompted a hallway discussion, during which I revealed that… my ambition is that, on average, I should be speaking for no more than 25% of class time. My colleague looked horrified: “But don’t we want them to learn how to think in a certain way?”. Yes, we do. But how to we get them to think in that way? I am just skeptical that, for most of them, simply being in a room with us, the experts, thinking out loud in that certain way (usually without much expertise, and with no training, as speakers) is optimal for getting them to think in that way….

There’s another reason for wanting discussion…. Students vary a lot in how confident they are…. Confidence, while it correlates with social class, does not correlate tremendously well with competence…. So we have a duty to elicit, by whatever means necessary, participation and discussion from all students, regardless of their predisposition to participate: they all need to learn through discussing, and they all need to learn through hearing others participate….

I’ve also been talking about small classes of 20 or so. Things are different in the large lecture…

More women in the United States are working past retirement age

Posted on by Bridget Ansel

It’s not uncommon for working women and men to scale back their hours to part-time as they grow older. But a growing number of women are bucking this trend, working past the traditional retirement age. According to a new paper by Harvard University economists Claudia Goldin and Lawrence Katz, the growth in women’s increased labor force participation beyond their 50s and into their 60s and 70s is overwhelmingly driven by those working full-time.

So why are more women working longer? Part of the explanation has to do with women’s increased labor force participation overall. The women who today are in their 60s and 70s are much more likely to have worked throughout their life compared to those who were at those same ages 10 years or 20 years ago. Education also plays a role:  College-educated women (as well as college-educated men) are much more likely to work full time into their 60s and 70s compared to less-educated Americans. The number of older women in the workforce with a bachelor’s degree also is rising. (See Figure 1.)

Figure 1

At first glance, it may seem that anemic savings have something to do with this new labor force trend. About 60 percent of all U.S. households have no savings in an Individual Retirment Account or defined-savings retirement plan such as a 401(k) account. A recent Federal Reserve report on economic well-being finds that 26 percent of those surveyed claimed their retirement plan is to “keep working as long as possible.”

But Goldin and Katz find that financial insecurity isn’t the whole story. The increase in later-life employment is happening among women who are better educated and healthier, which tend to go hand-in-hand, and therefore are more likely to be in white-collar occupations that are relatively well-paid. What seems to matter is whether women enjoy their jobs. As Goldin and Katz say, “As jobs become more enjoyable and less onerous and as various positions become part of one’s identity, women work longer.”

What your spouse does also matters. Women are more likely to remain working if their partner is working, too, compared to other married women. Considering that a larger number of couples are delaying retirement than they were two decades ago, this also plays into this trend.

The same can be said for women’s early work history. Women who reach a certain level of career advancement early on are much more likely to still be employed past their 50s, regardless of how much they earned. In addition, while those who have children are less likely to be working full time (or at all) between the ages of 25 and 44, kids don’t seem to affect their return to the workforce later on, although it does have a major impact on women’s wages throughout their lifetime.

This finding is important considering that Goldin and Katz find that more recent cohorts of 40-year-old women are less likely to be working between the ages of 25 and 44 compared to older generations. A college-educated woman born between 1964 and 1968, for example, was less likely to be working at age 40 compared to her counterpart born between 1944 and 1948, which the authors attribute to a lack of family friendly policies such as paid leave (a sentiment other researchers have echoed). But considering the increase in education and more young women joining the labor force in recent decades, researchers suggest that older women’s employment will only grow in the coming decades, despite the dip in participation when raising children.

All of these factors play a quantifiable, predictive role in driving older women’s labor force participation. But Goldin and Katz note that the number of college-educated women in their 60s still working is higher than these factors would anticipate, meaning that there is an unknown factor keeping them in the labor force. The same can be said for younger women as well, who will “likely retire later than one would have predicted based on their educational attainment and lifecycle participation rates.”

Regardless of why, what’s clear is that this is not an isolated phenomenon: Women are likely to continue working past “traditional” retirement age for years to come. This could have important implications for the size and productivity of the U.S. workforce in the future.

Must-Read: Ben Thompson: What the Media Misses About Facebook, Facebook’s Missing Humans, Will the iPhone 7 Be a Hit?

Posted on by Brad DeLong

Must-Read: In the age of the modern internet, according to Ben Thompson, publications must either…

  • chase the mass advertising-based audience, and so succumb to spending most of their time publishing clickbait…
  • rely on a niche audience and subscriptions, and thus block (most of their) valuable content from (the long tail of most of) their potential readership (most of the time).
  • accept that they are going to be endothermic: burn more money than they take in, and survive off of sugar mommies and sugar daddies of one form or another.

If he is right, this is not a good situation from many perspectives. But is their an argument that he is wrong?

Ben Thompson: What the Media Misses About Facebook, Facebook’s Missing Humans, Will the iPhone 7 Be a Hit?:

Media executives need to take a very hard look at their businesses and decide where they can survive…

…because the implications of their choice run in two very different directions: niche means heavy investment in differentiation, presentation, depth, and a willingness to forgo easy traffic for the sake of lifetime value that is exceptionally difficult to realize. Scale means cutting costs, simplifying presentation, breadth, and the uncertainty of living on another platform which doesn’t hate you but also doesn’t give you any special favors and may occasionally wrong you without meaning to. Doing both means death…