Category: Equitablog

Must-Read: Mark Thoma: Diverting Attention From the Real Issues

Posted on by Brad DeLong

Must-Read: The estimable Mark Thoma tries, once again, to raise the level of the debate back toward reality. Everything he says is true:

Mark Thoma: Diverting Attention From the Real Issues:

Immigration is not the problem…. Immigrants do not lower the employment prospects for natives…

Short-run… adjustment costs [do] fall mainly on people with less than a high school education. But in the long-run, the employment prospects for Americans are enhanced by… immigrants…. Immigrants [do] lower wages for… previous immigrants, the people that newcomers are most likely to compete with for jobs. For everyone else the impact… is positive…. Low and high-paying jobs are complements….

Immigrants [do not] create an undue burden for social programs…. Both documented and undocumented workers… pay income, Social Security, sales, Medicare taxes, and so on. Undocumented immigrants are not allowed to participate in Medicaid, food stamps, welfare, CHIP, or SSI programs, and legal permanent residents must contribute to Social Security and Medicare for at least 10 years before they are eligible for benefits (the wait is five years on many other programs)…. “Communities with high concentrations of immigrants do not suffer from outsized levels of violence…. Violent crime tended to decrease when the population of foreign-born residents rose.” Study after study debunks the claim that immigrants commit crimes at a higher rate than natives….

If immigration isn’t the problem, then what is?… Globalization, technological change, and lack of bargaining power in wage negotiations…. We have two choices. We can close our doors to international trade… blame immigrants… ignore the impact that technological change has had on worker’s economic security, and do nothing to enhance worker’s ability to claim a fair share of the output they produce. Alternatively, we can move toward Bernie Sanders’s type of social insurance and redistribution to ensure that the gains from immigration, trade, and technological change are widely shared…

Must-Reads: September 9, 2016

Posted on by Brad DeLong

Should Reads:

Must-Read: Kaila Colbin: The Real Reason This Elephant Chart Is Terrifying

Posted on by Brad DeLong

Must-Read: Kaila Colbin: The Real Reason This Elephant Chart Is Terrifying:

The real reason this elephant chart is terrifying NewCo Shift

A shock-and-awe wake-up call about the nature of exponentially accelerating technology…

…I show the crowd a recent headline: Apple’s Foxconn factory in China just fired 60,000 people and replaced them with robots…. We’ve heard it for more than a century: “Factory workers replaced by automation.” Not so much the next headline: “Artificially intelligent lawyer, Ross, hired by law firm.” Or the following one: “Artificially intelligent chatbot successfully contests 160,000 parking tickets in London and New York.” Or the following: “Artificially intelligent teaching assistant helps students online for an entire semester and nobody noticed.”…

Let’s start with the tip of the trunk. This is the global 1%, and they’re doing pretty well…. The top of the elephant’s head, around the 50–60th percentiles, is also a happy story. Those are the jobs created by the industrialization of China and India…. These folks are[n’t] getting rich. As Milanovic points out:

Chinese and Indian GDP per capita has increased by 5.6 and 2.3 times, respectively, over the period… [but the] people around the global median are, however, still relatively poor by Western standards. This emerging ‘global middle class’ is composed of individuals with household per capita incomes of between 5 and 15 international dollars per day….

Where the trunk dips. The 75–90th percentiles. Those are basically poor people in rich countries…. The fact that GDP in the US, for example, went up over the 20-year period in the elephant graph doesn’t mean that wages went up, or that workers are better off. They did not, and they are not. This is the hollowing out of the American middle class….

The thing that is increasing exponentially is the price-performance of technology…. Machine learning has now gotten so good a robot can do your job, Ms. Knowledge Worker. But the Foxconn headline? The 60,000 workers replaced by robots? That’s the price side of the price-performance equation, and it’s a lot scarier. Technology has gotten so cheap that it is now more economically viable to buy robots than it is to pay people $5 a day. And technology only gets cheaper over time….

Yes, we have 200 years of headlines saying the robots were going to take our jobs. Yes, historically new technologies have created more jobs than they’ve done away with. Yes, we have no idea what kind of creativity will be unleashed when 3 billion new minds come online in the next five years. But we have a rocky road ahead. It is not a simple transition to go from assembling iPhones to starting your own micro-enterprise…

Must-Read: Claudia Sahm: Telling Macro Stories with Micro

Posted on by Brad DeLong

Must-Read: Claudia Sahm: Telling Macro Stories with Micro:

Economists are avid storytellers…

A good story paper in economics, according to David Romer, has three characteristics: a viewpoint, a lever, and a result…. Blog or media coverage… focuses on the result…. Economists… spend more time on the lever, the how-did-they-get-the-result part…. The viewpoint matters… but it usually holds across many papers.

Best to focus the new stuff. Except when the viewpoint comes under scrutiny, then the stories can really change…. One long-standing viewpoint in economics is that changes in the macro-economy can largely be understood by studying changes in macro aggregates. Ironically, this viewpoint even survived macro’s push to micro foundations with a “representative agent” stepping in as the missing link between aggregate data and micro theory…. An ever-growing body of research and commentary is helping to identify times when differences at the micro level are relevant for macro outcomes….

In the past nine years, have seen models that condition on aggregate measures of income, wealth, interest rates, sentiment, and credit conditions do a pretty good job explaining the changes in aggregate consumer spending…. Adding micro heterogeneity to macro models is one in a long list of possible improvements. Adding a more realistic financial sector, exploring non-linearities, relaxing rational expectations, and extracting a better signal from noisy aggregate data are all in the queue too…. I suspect the Representative Agent is not getting voted off macro island any time soon….

Economics is not supposed to be about economists, but sometimes our stories can feel that way, especially to non economists. And to be fair, the viewpoints that economists bring to their work do have an impact on the results, if nothing else by what we choose to study…

Must-Read: Brad Setser: What To Do When Countries With Fiscal Space Won’t Use It?

Posted on by Brad DeLong

Must-Read: Brad Setser: What To Do When Countries With Fiscal Space Won’t Use It?:

Fiscal policy alone doesn’t determine the current account….

And, well, a significant share of many countries’ current account is now coming from investment income earned abroad, and that can fluctuate in strange ways. But there is a potential adding-up issue if all the large surplus economies in East Asia deliver on their planned fiscal consolidations. The first order impact of fiscal consolidation in all three should be a bigger external surplus in all three. By forecasting that away, the IMF runs the risk of understating the drag fiscal consolidation in East Asia might pose to global demand.

Must-Read: Heidi Shierholz: The Myth of Job Polarization

Posted on by Brad DeLong

Must-Read: Heidi Shierholz: The Myth of Job Polarization:

In the first few years of the recovery, growth was very strong in very low-wage jobs that pay $10 per hour or less. This is typical…

…in the early phase of a recovery, when jobs are being added but the labor market still has a lot of slack, there tends to be disproportionate growth in low-wage jobs. The strong growth in low-wage jobs was offset by weak growth in middle-wage jobs…. Since 2013 the pattern has shifted. There has been a notable decline in the number of workers in very low-wage jobs…. The last few years saw disproportionate gains in middle- and high-wage jobs. In particular, there has been extremely strong growth in jobs with wages between $12 and $18 per hour. Jobs in the $19-$35 range saw growth that was roughly in line with what would have been expected given the overall level of job growth. And there was strong growth in jobs that paid more than $35 per hour…. As the labor market has strengthened, the pattern of very strong growth in low-wage jobs and weak growth in middle-wage jobs in the first few years of the recovery has shifted…

Weekend reading: “Read this in 3D” 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

Many workers in the United States who are paid by the hour are increasingly subject to unpredictable schedules. A new report from Heather Boushey and Bridget Ansel argues that these schedules have economic consequences for individuals, firms, and the broader U.S. economy. The coauthors break down the report in a blog post here.

On Tuesday, Equitable Growth released its latest round of working papers with the research covering trends in inequality, the creation of a data set of historical state and local minimum wages, and the impact of the Great Recession in Detroit.

Kavya Vaghul writes on the new research on the impact of the latest recession on the financial well-being of low and moderate income households in the Detroit area. These households were struggling before and the recession only made things worse.

Researchers and policymakers examining inequality often focus solely on income even though wealth and consumption inequality occasionally have their time in the spotlight. But how about looking at how the three trends interact? Two of our new working papers do just that.

In recent years, corporate profits have increased relative to the gross domestic product of the U.S. economy. But U.S. corporate tax revenue as a share of GDP hasn’t increased. Is the corporate income tax so flawed we should scrap it? Or does it need a big overhaul?

Links from around the web

Larry Summers continues his series outlining his disappointment with the proceedings at the Jackson Hole conference last month. “On balance, I think the Fed’s complacency about its current toolbox is unwarranted.” [larrysummers.com]

Speaking of the Federal Reserve, Tim Duy writes on the possibility of the central bank continuing to push the unemployment rate lower. “The Fed seems to place almost zero weight on the probability that the natural rate of unemployment is significantly below their estimates.” [fed watch]

One potential future prospect for the labor markets of high-income countries is that the majority of workers will end up in “make-work” jobs that have very low productivity. But is that already happening? Matt Klein looks at the data and finds that since 1990, 96 percent of net job growth has happened in industries where productivity growth is low or hard to measure. [ft alphaville]

Some jobs are likely to vanish and employment in these occupations is not evenly distributed across the United States. Emily Badger looks at a new report that tries to understand which parts of the country are most likely to see jobs disappear in the long run. [wonkblog]

In economic circles, a now famous graph of global income growth since 1988 shows strong growth for the middle and the top of the income distribution. But how would that graph look for smaller locations such as, say, the 50 states?  Quoctrung Bui makes those graphs and writes them up. [the upshot]

Friday figure

Smeeding income/wealth mobility
Whether it's wealth or income, those at the top and the bottom are very likely to stay there
Chance an individual starting in a quintile ends up in each quintile later in life.

Figure from “Inequality of income, wealth, or consumption? How about all three?” by Nick Bunker

The U.S. corporate income tax in a time of high profits

Posted on by Nick Bunker

Apple Inc. made news yesterday when it announced the newest model of the iPhone and a number of other updates to its other products. The company was also in the news late last month, but the subject was instead about its profits. The European Commission ruled that a tax arrangement between Apple and Ireland violated European Union rules and that the Cupertino, CA-based technology company owed Ireland €13 billion, about $14.5 billion, in back taxes.

The Apple incident is just an extreme example of how far some countries will go to get corporate profits booked within their borders. Apple may eventually have to pay more taxes to Ireland—legal challenges could drag on for years. Yet the company still has more than $215 billion in cash sitting overseas as a means of reducing their tax liability —even if the company’s CEO seems ready to move the cash to the United States.

Apple is far from alone in shifting its profits overseas, as Reed College economist Kimberly Clausing pointed out in a report for Equitable Growth earlier this year. As corporate profits have risen over the past 30 years, corporate tax revenue as fallen as a share of GDP and offshoring is a major contributor to this trend.. (See Figure 1.)

Figure 1

Looking at this graph, it seems as if policymakers might be better off scrapping the U.S. corporate income tax and trying to tax profits some other way. Some analysts have called for shifting the tax burden off of corporations and onto the shareholders of those firms. But more and more U.S. stocks are not taxable due to the rise of tax-advantaged retirement plans and more foreign ownership of U.S. stocks.

These trends and many other reasons are why policymakers interested in taxing corporate profits should focus on reforming the corporate income tax, not scrapping it. On Monday, Equitable Growth will publish a new report by Clausing that makes the argument for the “indispensable corporate tax.” Check back next week to see what reforms could help.

Must-Read: Tim Duy: Is Pushing Unemployment Lower A Risky Strategy?

Posted on by Brad DeLong

Must-Read: Tim Duy thinks, I believe correctly, that the Fed is confusing its own past policy errors with economic laws:

Tim Duy: Is Pushing Unemployment Lower A Risky Strategy?:

Fed hawks are pushing for a rate hike sooner than later in an effort to prevent the economy from “overhearing”…

…argued to set the stage for the next recession…. John Williams:

History teaches us that an economy that runs too hot for too long can generate imbalances, potentially leading to excessive inflation, asset market bubbles, and ultimately economic correction and recession. A gradual process of raising rates reduces the risks of such an outcome…. If we wait too long to remove monetary accommodation, we hazard allowing imbalances to grow, requiring us to play catch-up, and not leaving much room to maneuver. Not to mention, a sudden reversal of policy could be disruptive and slow the economy in unintended ways….

William Dudley….

A particular risk of late and fast is that the unemployment rate could significantly undershoot the level consistent with price stability. If this occurred, then inflation would likely rise above our objective. At that point, history shows it is very difficult to push the unemployment rate back up just a little bit in order to contain inflation pressures. Looking at the post-war period, whenever the unemployment rate has increased by more than 0.3 to 0.4 percentage points, the economy has always ended up in a full-blown recession…. This is an outcome to avoid….

I don’t know that there is a law of economics where the unemployment can never be nudged up a few fractions of a percentage point. But I do think there is a policy mechanism…. Rhe Fed tends to overemphasize the importance of lagging data such as inflation and wages and discount the lags in their own policy process. Essentially, the Fed ignores the warning signs of recession, ultimately over tightening…. For instance, an inverted yield curve traditionally indicates substantially tight monetary conditions. Yet even after the yield curve inverted at the end of January 2000, the Fed continued tightening through May of that year, adding an additional 100bp to the fed funds rate. The yield curve began to invert in January of 2006; the Fed added another 100bp of tightening in the first half of that year. This isn’t an economic mechanism…. This is a policy error….

Bottom Line: The Fed thinks the costs of undershooting their estimate of the natural rate of unemployment outweigh the benefits. I am skeptical they are doing the calculus right on this one. I would be more convinced they had it right if I sensed that placed greater weight on the possibility that they are too pessimistic about the natural rate. I would be more convinced if they were already at their inflation target. And I would be more convinced if their analysis of why tightening cycles end in recessions was a bit more introspective. Was it destiny or repeated policy error? But none of these things seem to be true.