Category: Equitablog

Weekend reading: “the indispensable U.S. corporate income tax” edition

Posted on by Nick Bunker

This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth published this week and the second is the work we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.

Equitable Growth round-up

The whole U.S. federal tax code could use a number of reforms, but the corporate income tax is particularly in need of a reboot. Reed College economist Kim Clausing lays out a defense of the tax and some suggestions for changes.

Job search is a two-way street: workers look for a job and employers try to find new employees. Yet the employer portion tends to get overlooked—and it shouldn’t because the intensity of employer job search impacts employment and wage growth.

Does the estate tax violate our sense of equity? A concern for equity might suggest that policymakers change the form of certain wealth taxes, but not their wholesale elimination.

Workers in the retail and service sectors are increasingly subject to erratic and unpredictable work schedules. New research looks at how these schedules may have an impact on the health of these workers.

We’ve all become more skeptical of mortgage debt after the bursting of the housing bubble. In light of calls to reduce the influence of debt in the housing market, how should we consider a new company offering equity investments in residential houses?

Links from around the web

Is something rotten with the state of macroeconomics? According to economist Paul Romer the answer is a resounding yes. In a new article, he claims that over the past three decades “macroeconomics has gone backwards.” [paulromer dot net]

A new report questions the interpretation and overall validity of the now famous “elephant chart” of global income growth. But the Financial Times’ Martin Sandbu shows that the criticism raises questions the original paper preempted and that the new analysis leads to similar conclusions as the original. [free lunch]

Derek Thompson notes a surprising trend in the U.S. labor market: the working poor are the workers with the most leisure time and the rich have the least. That’s the opposite of many, including famously John Maynard Keynes, would have expected. What’s behind these trends? [the atlantic]

Central bankers and many economists have been very interested in the natural rate of interest, or “equilibrium real rate of interest.” But what if this rate doesn’t exist at all? Eric Lonergan makes the case against r*. [philosophy of money]

Economists are studying inequality more and more these days and Alana Semuels noticed an interesting trend about some of the economists leading the way: they’re Europeans. [the atlantic]

Friday figure

Figure from “How intensely are U.S. employers looking for workers?” by Nick Bunker

Must-Reads: September 16, 2016

Posted on by Brad DeLong

Should Reads:

Must-Read: Fatih Guvenen et al.: The Nature of Countercyclical Income Risk

Posted on by Brad DeLong

Must-Read: Fatih Guvenen et al.: The Nature of Countercyclical Income Risk:

The base sample is a nationally representative panel containing 10 percent of all U.S. males from 1978 to 2010…

We… decompose individual income growth during recessions into ‘between-group’ and ‘within-group’ components…. Contrary to past research, we do not find the variance of idiosyncratic income shocks to be countercyclical. Instead, it is the left-skewness of shocks that is strongly countercyclical. That is, during recessions, the upper end of the shock distribution collapses–large upward income movements become less likely–whereas the bottom end expands–large drops in income become more likely. Thus, while the dispersion of shocks does not increase, shocks become more left skewed and, hence, risky during recessions….

One… [observable] characteristic–the average income of an individual at the beginning of a business cycle episode–proves to be an especially good predictor of fortunes during a recession: prime-age workers that enter a recession with high average earnings suffer substantially less compared with those who enter with low average earnings (which is not the case during expansions). Finally, we find that the cyclical nature of income risk is dramatically different for the top 1 percent compared with all other individuals–even relative to those in the top 2 to 5 percent.

Must-Read: Dan Gross: How to Bring Back Manufacturing Jobs

Posted on by Brad DeLong

Must-Read: Dan Gross: How to Bring Back Manufacturing Jobs:

America has a long-running crisis in manufacturing employment….

Year after year, the number of people employed in making things declines…. Across the board–on both sides of the aisle, in every part of the country–there is an overwhelming desire to have more manufacturing jobs. This is partly due to nostalgia and symbolism. But… also… the manufacturing jobs that have been lost (and that remain) offer better pay, benefits, and job security than the service jobs that have replaced them. What’s more, manufacturing has a big multiplier effect…. If they were being honest, politicians would note that the vast majority of the millions of manufacturing jobs lost can’t return… globalization and competition… rendered obsolete by technology… the value and volume of stuff factories produce tends to rise each year, even if employment falls, because software, machines, and computers are doing more of the work….

The level of skills and competencies manufacturing employers are seeking in their employees may be significantly higher than the level they were seeking 10, or 20, or 30 years ago. In most instances, especially in service industries such as retail and food service, labor shortages can be solved by the simple application of higher wages. But when it comes to manufacturing, higher wages may be only part of the solution. Sure, you can entice a skilled operator of machine tooling to walk across the street by doubling her salary. But if the market–i.e., other companies, the educational system, and training programs–hasn’t been endowing sufficient numbers of workers with those skills, higher pay will only get you so far. The most direct way to bring back manufacturing jobs, then, may be for companies to decide that they are prepared to invest in programs or direct efforts that will produce workers with the skills they need. The solution to outsourcing production elsewhere may be to insource training…

Brookings Productivity Festival: DeLong Edited Transcript (September 9, 2016)

Posted on by Brad DeLong

The Productivity Puzzle: How Can We Speed Up the Growth of the Economy?

First, I need to stop flashing to the dystopian future which Bronwyn here has made me imagine. It is one in which drones overfly my house with chemical sensors constantly sniffing to see if I am cooking Kung Pao Pastrami–without having bought the required intellectual property license from Mission Chinese…

Deep breath…

Three big things have been going on with respect to productivity growth here in the United States over the past half century.

First came the productivity growth slowdown proper: If you had, forty-five years ago, asked a then appallingly young Martin Baily how prosperous the U.S. would be in 2025, he would then have bet that GDP per capita in 2025 would $125,000 in 2009-value dollars. The productivity slowdown that began after 1973 pushed that estimate down to $80,000 2009-value dollars of per capita GDP as of 2025. That is the forecast that Martin would have made–did make–throughout the 1980s and well into the 1990s.

Second came the information age growth spurt of 1995-2004: It looked like a return to the pre-1973 old normal in productivity growth driven by the technological revolution in information and communication technology. We hoped that it was a permanent shift. It turned out to be a one-time blip: first up, then down.

Third came 2008. After 2008, we are no longer expecting $80,000 of 2009-value dollars of per capita GDP in 2025. We are expecting only $63,000. This is a second big jump down, one very closely tied to what happened in 2008, and one of remarkably large magnitude given that come 2025 it will have had less than two decades to cumulate and compound.

These are three–four if you want to distinguish the bounce-up in 1995 from the bounce-down in 2004–different phenomena. They need to be analyzed separately and distinctly.

Consider 2008: We ought to have had a substantial recovery back to the pre-2008 trend after the 2008-2009 crisis. We did not. (Bob Barro will talk a bunch about that anomalous surprise later on.) I merely want to stress now that our failure to see a true and proper recovery back toward if not to the pre-financial crisis trend is not because our economy has become sclerotic. It is not because the economy has lost its ability to reallocate resources to more productive uses as a result of market price signals. Consider the period 2005-2008. The economy reallocated resources fine from 2005-2008 away from housing and into exports, investment, and other categories. It did so financial markets changed their views of the housing sector. As their views of the housing sector changed, they sent different price signals to the real economy. And businesses responded to incentives on a truly remarkable and massive level in an astonishingly smooth way. Housing construction sat down. Business investment and exports stood up. And it all happened without a recession.

Then with what happened in 2008 came the big problem. The financial crisis created a low-pressure high-unemployment economy. After 2008 we hit the zero lower bound on interest rates. Optimism about how effective Federal Reserve quantitative easing and forward guidance polices could be turned out to be wrong.

Then we hit the economy on the head with the fiscal-austerity brick—mostly at the state and local level, but at the federal level as well. We hit it on the head over and over again. With interest rates at zero, the Federal Reserve finds no way to signal exports and business investment that they really should be doing more, and should be taking up the slack from fiscal austerity that was caused by hitting the economy on the head with the fiscal-austerity brick over and over again.

Moreover, we did nothing to restructure housing finance to assist peoples cared and panicked after the housing crash and living in their sisters’ basements from forming households of their own, and moving out.

And productivity growth collapsed and has stayed collapsed.

Why? I find myself very impressed with analyses like those of Steve Davis and Till von Wächter, of Gabe Chodorow-Reich and Johannes Weiland, and of many others. They say that it really matters for the process of creative destruction and reallocation whether it takes places in a high- or a low-pressure economy. Caught up in a mass layoff–something that is clearly in no way a signal of your skill level, productivity, or work ethic–when unemployment is low? You lose maybe 5% of your income over the next 20 years. Caught up in a mass layoff when unemployment is high? Your loss is more like 20% of your income over the next 20 years. “Employment flexibility” has very different consequences for long-run productivity growth depending on whether that flexibility leads you to move to a higher-productivity job or to unemployment or out of the labor force altogether. These macro-micro linkages are very clear in the labor literature. They seem barely noticed in the productivity literature.

Can we still recover from this post-2008 disaster?

First, I think we need to stop calling it the “Great Recession”. It will soon be the “Longer Depression”–longer than the Great Depression. It already is in Europe. Can we recover?:

  • Back in 2009 I would have said: yes, we will recover easily
  • Right here in 2012 Larry Summers and I said we could recover straightforwardly–but only with the right policies.
  • Now? There are still people like Gerry Friedman who are very optimistic, who say that we could, and that it would be if not easy at least straightforward. I am not arguing with Gerry Friedman until November 15th. I will argue with him then.

Aside from striving for a high-pressure economy and hoping that Gerry Friedman is right–which Martin did recommend–what can we do?

There is no reason why reversing the poorly-understood factors that generated the first 1973 slowdown and that turned 1995-2004 into a temporary blip rather than a permanent shift should be the highest priority when we seek for policies to boost productivity. We should, instead, look for low-hanging fruit. What is the low-hanging fruit here?

I would focus on our value-subtracting industries:

  • In finance we now pay some 8% of GDP—2% of asset value per year on an asset base equal to 4 times annual GDP. We used to 3% of GDP —1% and change of asset value a year for assets equal to 2.5 annual GDP. It does not seem to me that our corporate control or our allocation of investment is any better now than it was then. Certainly people now are trading against themselves more, and thus exerting a lot more price pressure against themselves. They are making the princes of Wall Street rich. Is there any increase in properly-measured real useful financial services that we are buying for this extra 5% of GDP? Paul Volcker does not think so. And I agree.

  • In health care administration we now pay another excess 5% of GDP. Our doctors, nurses, and pharmacists do wonderful things. But as Princeton’s Uwe Reinhart likes to say, you do the accounting and our health care administrators are about one-eighth as productive as German administrators. Why? Because they’re all working against each other. Half are trying to get insurance companies to pay bills. The other half are trying to find reasons why this particular set of bills should not be paid by the insurance company. Do any of you understand your health insurance EOB—Explanations of Benefits? If so, I congratulate you! Or, rather, I do not congratulate you: I there’s something psychologically wrong with you if you do understand them.

  • Mass incarceration—add up the effects on human capital and find another 2% of GDP that other countries do not pay that we are spending for, as best as I can see, no net value whatsoever.

  • The bet that we have made over and over again over the past 35 years that what the economy really needs is lower taxes on the rich. Elite conspicuous consumption is, by definition, not a source of social welfare–it is utility for the rich extracted by spite from the rest. It shows up in GDP as a plus. It does not show up as a plus in any even half-plausible societal well-being calculation.

  • NIMBYism. At this conference we have talked a little bit about occupational NIMBYism. It may be a big factor—I am not convinced, but I also am not unconvinced. But there is more. As Bronwyn said yesterday, anyone who lives in San Francisco or D.C. or Boston has got to be very impressed with residential and land-use NIMBYism as a major factor. But our judgment that land-use NIMBYism is an important factor may just be the myopia of where we Route 128 and Silicon Valley people have to live.

In my remaining time, I wish to echo what Bronwyn was saying: We need to more attention to the government’s regulation and management of research and development. We have a world that is increasingly non-Smithian, in terms of what we make and where value comes from. Yet our government seems increasingly confined to four roles: a military, a social insurance company, a protector of property rights—especially of stringent and quite probably counterproductive at the margin intellectual property rights—and an enforcer of contracts. It seems, increasingly, on autopilot with respect to other things. That cannot be healthy at all.

INTERRUPTION: “You didn’t use the words ‘public investment’ once.”

I thought you would. (Laughter)

I did include an allusion to Larry Summers’s and my paper that we gave in this space back in 2012. I hereby incorporate that entire paper by reference in my revised and extended remarks.

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The private sector offers up new U.S. home mortgage options

Posted on by Bridget Ansel
Photo of newly built townhouses for sale in Miami.

After the collapse of the debt-fueled housing bubble in the United States nearly a decade ago, economists, policymakers, and homebuyers are all a bit more skeptical of debt-financed housing investments. Policymakers continue to discuss a number of proposals to reconsider how mortgage markets work and potentially shift the system away from debt and toward more equity-like ways to purchase homes, but it’s the private sector where change seems to be on the move.

Andreesen Horowitz, the venture capital firm, recently announced a new round of investments in Point, a firm that will lend homebuyers money for a share of ownership in their houses. Simply put, the firm gives households a certain amount of money toward a down payment in return for some share of gains in the value of the houses. In their description of Point, Andreessen Horowitz describes the firm’s product as “the elimination of primary debt.” Is this product something that could mitigate the problems with mortgage debt that led to so many foreclosures in the wake of the recent housing bust?

Matt Levine at Bloomberg View has looked into the details of the product Point is selling (or the details that are discernable from the outside) and sorted through them. The quick version is that the product acts like a form of insurance against declines in housing prices. The extra equity investment from the company gives borrowers more protection against the equity in homes being entirely wiped out because the size of the mortgages they need to take out are smaller. The borrowers are paying for this insurance by giving up some of the gains if their home’s value goes up significantly. As Levine puts it: “If you get money from Point and your house price goes up a lot, you wish you had just gotten a bigger mortgage instead. If your house price stays flat, Point is a better deal for you.”

But is this product an “elimination” of primary debt? By increasing the size of the overall equity investment in the house, Point’s investment product would reduce the amount of debt that’s financing the purchase. But there’s still a mortgage with the rigidity that always accompanies mortgage debt financing. If housing prices decline significantly and wipe out all the equity, then homeowners are still on the hook for their mortgage payments.

Compare that scenario to ideas such as the shared responsibility mortgage proposed by economists Atif Mian of Princeton University and Amir Sufi of the University of Chicago. This kind of financial instrument would ratchet down the monthly payments that homeowners make automatically if the price of the homes decline below the value of the mortgage. PartnerOwn, a firm based in Chicago, is offering a mortgage much like the shared responsibility mortgage.

Comparing the two mortgages, Point’s product would reduce the amount of debt used, whereas a shared responsibility mortgage would change the structure of the debt altogether. In neighborhoods or communities where prices dropped significantly, the shared responsibility mortgage would enable homeowners to weather the shocks and help housing prices recover more quickly. The Point mortgage offering would only delay an (most likely) inevitable wave of debt defaults and foreclosure.

Of course, the likelihood that either of these products will dominate the mortgage market anytime soon is unlikely. But in our conversations about future reforms, it’s worth remembering that not all changes will have the same effects and there may be room for a variety of equity-linked mortgage products.

Must-Read: Noah Smith: The New Heavyweight Macro Critics

Posted on by Brad DeLong

Must-Read: Noah Smith: The New Heavyweight Macro Critics:

[Paul] Romer’s harshest zinger… is this:

In response to the observation that the shocks [in DSGE models] are imaginary, a standard defense invokes Milton Friedman’s (1953) methodological assertion from unnamed authority that “the more significant the theory, the more unrealistic the assumptions (p.14).” More recently, “all models are false” seems to have become the universal hand-wave for dismissing any fact that does not conform to the model that is the current favorite. The noncommittal relationship with the truth revealed by these methodological evasions…goes so far beyond post-modern irony that it deserves its own label. I suggest “post-real.”

Ouch…. Meanwhile, a few weeks earlier, Narayana Kocherlakota wrote a post called “On the Puzzling Prevalence of Puzzles”. The basic point was that since macro data is fairly sparse, macroeconomists should have lots of competing models that all do an equally good job of matching the data. But instead, macroeconomists pick a single model they like, and if data fails to fit the model they call it a “puzzle”. He writes:

To an outsider or newcomer, macroeconomics would seem like a field that is haunted by its lack of data…. In the absence of that data, it would seem like we would be hard put to distinguish among a host of theories…. [I]t would seem like macroeconomists should be plagued by underidentification…. But, in fact, expert macroeconomists know that the field is actually plagued by failures to fit the data–that is, by overidentification. Why is the novice so wrong? The answer is the role of a priori restrictions…. The expert knows how to build up theory from a priori restrictions that are accepted by a large number of scholars…. [I]t’s a little disturbing how little empirical work underlies some of those agreed-upon theory-driven restrictions–see p. 711 of Lucas (JMCB, 1980) for a highly influential example of what I mean.

In fact, Kocherlakota and Romer are complaining about much the same thing: the overuse of unrealistic assumptions… the habit of assuming stuff that just isn’t true…. What… Canova and Sala paper says too, in a much more technical and polite way…. What seems to unite the new heavyweight macro critics, besides a lingering annoyance with Bob Lucas and his associates, is an emphasis on realism….. They’re not saying that economists need 100% perfect realism…. But if Romer, Kocherlakota, etc. are to be believed, macroeconomists aren’t currently close to that optimal interior solution.

Very Brief Musings on Democracy

Posted on by Brad DeLong

Cf.: Christopher H. Achen and Larry M. Bartels: Democracy for Realists: Why Elections Do Not Produce Responsive Government

And:

Cf: Martin Wolf: Capitalism and Democracy: The Strain Is Showing:

Confidence in an enduring marriage between liberal democracy and global capitalism seems unwarranted….

So what might take its place? One possibility[:]… a global plutocracy and so in effect the end of national democracies. As in the Roman empire, the forms of republics might endure but the reality would be gone.

An opposite alternative would be the rise of illiberal democracies or outright plebiscitary dictatorships… [like] Russia and Turkey…. Something rather like that happened in the 1930s. It is not hard to identify western politicians who would love to go in exactly this direction. Meanwhile, those of us who wish to preserve both liberal democracy and global capitalism must confront serious questions. One is whether it makes sense to promote further international agreements that tightly constrain national regulatory discretion in the interests of existing corporations…. Above all… economic policy must be orientated towards promoting the interests of the many not the few; in the first place would be the citizenry, to whom the politicians are accountable. If we fail to do this, the basis of our political order seems likely to founder. That would be good for no one. The marriage of liberal democracy with capitalism needs some nurturing. It must not be taken for granted…

As I see it:

  1. Democracy has never been an especially good way of choosing smart, technocratic leaders. Democracy has different excellences…

  2. Democracy’s primary excellence is that it rules out the mirage of violent revolution as a chiliastic solution to current disappointments: the problem is not that the people are oppressed but rather that the people chose to be governed by the current group of clowns–and that is the problem that needs to be fixed…

  3. Democracy’s secondary excellence is that it provides a powerful degree of insulation against rent-seeking by the currently rich, who are always in favor of wealth extraction from the rest and generally opposed to the creative destruction that economic growth brings–for they are the ones creatively destroyed…

  4. We have the wrong kind of democracy in Europe: the electorate that matters is the German electorate, and from the perspective of the holders of political power in Germany, depression elsewhere in Europe is not a problem but rather a source of support from an electorate feeling the schadenfreude–as long as Germany continues to be an export powerhouse…

  5. We have the wrong kind of democracy in the United States: the gerrymandered Republican legislators of Capitol Hill see a sluggish economy not as a threat to their position to be solved but rather as a demonstration that they are right in their contempt for the Democratic president…

  6. We have the wrong kind of democracy in Britain–Cameron and Osborne’s economic policy failure has indeed gotten that set of bastards thrown out, but their successors have no better ideas about how to generate economic prosperity than they did…

  7. The result has been the rise of a movement opposed to the norms of representative compromise government that has more than faint echoes of the fascist moments of early twentieth century Europe–but this time not just in Europe and on the fringe in the United States…

  8. Nevertheless, if we can get back to a non-wrong kind of democracy–on the European continent, in Britain, and in the U.S.–its primary and secondary excellences will still be of enormous value…

Are unpredictable schedules harming U.S. workers’ health?

Posted on by Bridget Ansel
A retail employee wheels out a rack of girls’ clothing in Phoenix.

Working too few hours to make ends meet. Scrambling to arrange childcare around a schedule that is constantly shifting. Commuting to work only to be sent home without pay. These are some of the big hurdles confronting millions of workers in the U.S. retail and service sectors as they seek to build stable livelihoods. Increasingly, more and more employers are using scheduling systems that match the number of workers on the job with predicted consumer demand, which often wreak havoc on workers who have little control over a schedule that changes at a moment’s notice.

The consequences of unpredictable schedules have been well-documented by the media and researchers alike, and many accounts have suggested that these kind of worker schedules may have consequences for health as well. Now, a new working paper from Equitable Growth by sociologists Daniel Schneider of the University of California-Berkeley and Kristen Harknett at the University of Pennsylvania looks specifically at the health and well-being of workers who work unpredictable and variable hours. The results are overwhelmingly negative, with the variability of work hours being strongly associated with a host of physical and mental health issues as well as financial instability.

The researchers use data collected from a national sample of hourly retail workers at eight brick-and-morter companies, all of which are among the largest 15 retail employers in the United States. The two sociologists zero in on the correlation between the health and well-being of workers and three scheduling practices that many of these workers experience— volatility in work hours from week to week, variation in the times of workers’ shifts, and little advance notice for upcoming work schedules.

Somewhat unsurprisingly, the authors find that those workers with greater variation in their weekly work hours were significantly more likely to prefer more work hours compared to those who had set shifts. Schneider and Harknett also find that unstable and unpredictable work schedules are negatively associated with household financial insecurity, even when controlling for hourly wage and overall household income. That’s because workers’ pay fluctuates from week to week depending on how many hours they are given, which affects everything from the ability to put food on the table to engaging in any long-term financial planning.

The stress of these schedules takes a toll. Schneider and Harknett found that those who work a variable schedule are much less likely to have good quality sleep and are more likely to report “serious psychological distress.” Those with volatile schedules also spend less time with their children and are more stressed out. If sustained, research shows that parental stress can harm kids’ mental and physical health, which has lasting effects into adulthood.

The authors point out that, importantly, it is the variability of hours rather than nonstandard timing of work that has the most significant association with harmful outcomes (excluding those who work a regular night shift). But they do find that having at least two-weeks notice of their next work schedules makes a significant difference in terms of a workers’ well-being. As the authors say, this advance notice seems likely “to improve workers’ ability to plan their child care, to combine work with schooling or a second job, and in turn may reduce stress and improve mental health.”

Many state and local governments (including Washington, D.C. and Seattle) are currently debating legislation that would require two-weeks advance notice of schedules and access to more work hours. This research adds to the growing body of work documenting the harm these scheduling practices inflict onto workers.