Category: Equitablog

Weekend reading: “Rich spatial controls” 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 U.S. economy might need an injection of more inflation. But many economists point to models that show higher inflation would have significant costs. A new paper comes to a different conclusion, examining how those costs might not change much with the rate of inflation.

Cutting the U.S. corporate income tax to help boost wages sounds like a counterintuitive idea. But if we think the incidence of the tax falls mostly on labor, it makes sense. Yet it seems unlikely that labor bears most, if any, of the tax burden, which mainly falls on capital.

Does raising the minimum wage in the United States reduce teen employment? A new paper in this debate argues that studies finding a negative impact do not account for pre-existing labor market trends in states before minimum wage hikes. Ben Zipperer, a co-author of the paper, provides a nontechnical explanation of the paper.

The last few years have seen significant increases in subprime auto lending across the country. For anyone who remembers the last big uptick in subprime lending, this might cause some concern about sparking a new recession. Those concerns are overblown.

Despite trends toward increasing gender equity in the workplace, occupational segregation by gender is still pervasive in the U.S. labor market. Will McGrew shows how this segregation is a problem for the wages and economic growth.

Links from around the web

Earlier this week, John Williams, the president of the Federal Reserve Bank of San Francisco, released a new paper on rethinking monetary policy in an era of low interest rates. Larry Summers reacts to the paper and suggests some more policy reforms. [wonkblog]

Part of the Federal Reserve’s mandate is to promote “maximum employment” with its conduct of monetary policy. But there are clear differences in how changes in unemployment affect different racial groups in the United States, particularly African Americans. Narayana Kocherlakota points out that positive trend of Fed policymakers starting to acknowledge this fact. [bloomberg view]

Is there any connection between the decline in the labor share of income and measured productivity growth? Dietz Vollrath explains (with a baking analogy) how a change in the distribution of income can impact productivity growth. [growth econ]

The causes of rising “inter-firm inequality” is a big open question in economics. Looking into this question, Claudia Sahm digs into a big paper on the role of firms in the rise of income inequality. [macromom]

Due to the recent exit of certain insurers from the new U.S. insurance exchange markets, concerns about competition are becoming more prominent. With those concerns in mind, Yale University’s Jacob Hacker brings back his proposal for a public option—an insurance plan rule by the federal government – for the exchanges. [vox]

Friday figure

Figure from “Credible research designs for minimum wage studies” by Ben Zipperer.

Must-Read: Michael D. Carr and Emily E. Wiemers: The decline in lifetime earnings mobility in the U.S.: Evidence from survey-linked administrative data

Posted on by Brad DeLong

Must-Read: What is driving this? Fewer progressive “careers” by which one rises from account-management drone to senior manager as one’s company grows and thrives? Much more seems to be riding on initial education and one’s choice of industry, perhaps… It’s complicated!

Michael D. Carr and Emily E. Wiemers: The decline in lifetime earnings mobility in the U.S.: Evidence from survey-linked administrative data:

Abstract: There is a sizable literature that examines whether intergenerational mobility has declined as inequality has increased….

This literature is motivated by a desire to understand whether increasing inequality has made it more difficult to rise from humble origins. An equally important component of economic mobility is the ability to move across the earnings distribution during one’s own working years.

We use survey-linked administrative data from the Survey of Income and Program Participation to examine trends in lifetime earnings mobility since 1981. These unique data allow us to produce the first estimates of lifetime earnings mobility from administrative earnings across gender and education subgroups. In contrast to much of the existing literature, we find that lifetime earnings mobility has declined since the early 1980s as inequality has increased. Declines in lifetime earnings mobility are largest for college-educated workers though mobility has declined for men and women and across the distribution of educational attainment.

One striking feature is the decline in upward mobility among middle-class workers, even those with a college degree. Across the distribution of educational attainment, the likelihood of moving to the top deciles of the earnings distribution for workers who start their career in the middle of the earnings distribution has declined by approximately 20% since the early 1980s.

Must-Read: Michael Spence: Growth in a Time of Disruption

Posted on by Brad DeLong

Must-Read: But what does “developing countries must accept the inevitability of changes to their growth models caused by digital technologies. Instead of viewing these changes as a threat, and trying to resist them, developing economies should be getting ahead of them…” mean, concretely, on the ground? Take advantage of digital technologies and platforms (eBay, cellphones, Amazon, FedEx) that provide channels of information capture and dissemination on the one hand and distribution on the other: those are clear complements to what developing economies can do. But how is one to find a niche for one’s workers’ brains-as-cybernetic-controllers that will make the diamonds-water paradox their friend in the enormously productive digital global economy of the future?

Michael Spence: Growth in a Time of Disruption:

Developing countries are facing major obstacles…

…headwinds generated by slow advanced-economy growth and abnormal post-crisis monetary and financial conditions… disruptive impacts of digital technology… set to erode developing economies’ comparative advantage in labor-intensive manufacturing activities…. Adaptation is the only option. Robotics has already made significant inroads in electronics assembly… sewing trades, traditionally many countries’ first entry point to the global trading system, likely to come next…. Supply chains based on the location of relatively immobile and cost-effective labor will wane, with production moving closer to the final market….

Developing countries need to act now to adapt their growth strategies…. The problems in advanced countries–from slow economic growth to political uncertainty–are likely to persist…. Investment, both public and private, remains a powerful growth engine…. It is critical to manage the capital account in a way that protects and enhances the real economy’s growth potential…. A realistic approach to the digital revolution is needed…. Developing countries must accept the inevitability of changes to their growth models caused by digital technologies. Instead of viewing these changes as a threat, and trying to resist them, developing economies should be getting ahead of them….

The distribution of gains from economic growth cannot be ignored…. It is important to establish sustainable growth patterns early on…. Entrepreneurial activity is vital to translate economic potential into reality. Policies that support such activity, such as by removing obstacles to new business creation and enhancing financing opportunities, cannot be left out…

Must-Reads: August 19, 2016

Posted on by Brad DeLong

Should Reads:

The “Confidence Fairy” and the Ideology of Economic Theory and Policy: Alas! Still Preliminary Little More than Notes…

Posted on by Brad DeLong

I promised more on this in August.

Last August.

August 20125.

I am, clearly, very late:

Paul Krugman: Fairy Tales:

Mike Konczal, channeling Kalecki, pointed out…

…arguments rejecting Keynes and declaring that only business confidence can achieve full employment serve [the] very useful political purpose… [of] empower[ing] plutocrats and big business…. And this speaks to the wider point of the politicization of macroeconomics. Why did freshwater macroeconomists refuse to learn from the lessons of the Volcker recession and recovery, which clearly refuted their approach and supported some kind of Keynesian view on monetary policy? Why has the overwhelming recent evidence for a Keynesian view of fiscal policy been ignored? You might think that business, at least, would welcome policies that boost sales; but the ideology of confidence must be defended.

At the level of academic economics it is a huge puzzle–after all, Ed Prescott and Bob Lucas decide that downturns are driven not by monetary but by real factors just at the very moment when Paul Volcker hits the economy with a brick, and demonstrates not just that contractionary policy has contractionary effects on the real economy, but that doing everything he could to make his contractionary policy anticipated and credible did not materially lessen those real effects. A bigger example of “who are you going to believe, me and Ed or your lying eyes?” would be hard to imagine.

The best excuse I have found takes off from Marion Fourcade et al.‘s analysis of the American economics profession, especially their observations on the rise of business schools and business economics in shaping what economists think about and how they think it. That they are predisposed by their social location into believing that bankers (and the businessmen) are key value-adders in the economy creates an elective affinity with the macroeconomic doctrine that the bankers and businessmen have got us by the plums, and so the only durable way to create a strong and healthy economy is to keep them confident and enthusiastic about investing in new capital equipment now–which means keeping them very confident and very secure in their expectations of future profits.

My current (very imperfect) thoughts about this are contained right now in: The Confidence Fairy in Historical Perspective.

I was going to revise it into a proper paper before letting it out of the gate into the public. But that has not yet happened. So let me at least put the slides below the “fold”, if “fold” has any meaning anymore. Or, rather, below the next “fold”:

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Must-Read: Barry Ritholtz: How Fast is CEO Compensation Rising?

Posted on by Brad DeLong

Must-Read: The floodgates opened in the late 1990s, with Clinton’s second term and the stock market boom. Why did the floodgates open, and open then, and open so much? The timing suggests the flood of insurance and commercial banking money into investment banking, and the ability of investment bankers to collect rents off of it, spilled over to CEOs who, by virtue of their ability to take their companies private and so join the Private Equity world, had effectively become investment bankers and paid like investment bankers in the late 1980s. But that is just a WAG (a Wild-A—–Guess)…

Barry Ritholtz: How Fast is CEO Compensation Rising?: “CEO compensation is growing faster than the wages of the top 0.1 percent…

…and the stock market. This is a rather amazing chart:

Banners and Alerts and How Fast is CEO Compensation Rising The Big Picture

Must-Read: Fred Bateman et al.: Did New Deal and World War II Public Capital Investments Facilitate a “Big Push” in the American South?

Posted on by Brad DeLong

Must-Read: I am really glad that Fred and company have done this–helps explain why Big Defense is the only part of Big Government that America’s southern and western conservatives will admit to liking…

Fred Bateman et al.: Did New Deal and World War II Public Capital Investments Facilitate a “Big Push” in the American South?:

Abstract: The “big push” theory claims that publicly coordinated investment can break the cycle of poverty…

…by helping developing economies overcome deficiencies in private incentives that prevent firms from adopting modern production techniques and achieving scale economies. Despite a flurry of research, however, scholars have offered scarce few real-world episodes that seem to fit the theoretical model.We argue that the postwar performance of the American South, which followed large public capital investments during the Great Depression and World War II, is such an application. Both econometric analysis and a contemporary survey of firms strongly support the notion that big-push dynamics were at work.

Communism and Really Existing Socialism: A Reading List for Post-Millennials

Posted on by Brad DeLong
Manchester 1844 Google Search

What should someone coming of age in 2020 or so–someone post-millennial, who has no memories of all of any part of the twentieth century–learn about communism, and really existing socialism?

It is, I think, very clear by now to everyone except the most demented of the herbal teabaggers, and should be clear to all, that communism was not one of the brightest lights on humanity’s tree of ideas. Nobody convinced by the writings of Marx and his peers that a “communist” society was in some sense an ideal who then achieved enough political power to try to make that vision a reality has built a society that turned out well. All, measured by the yardsticks of their time and geographical situation, were either moderately bad, worse, disastrous, or candidates for the worst-régime-every prize. None attained the status of:

a prayse and glory that men shall say of succeeding plantations, “the Lord make it like that of New England.” For wee must consider that wee shall be as a citty upon a hill…

Moreover, those who took Marx most seriously and fell under his intellectual spell either did first-class work only after they had liberated themselves and attached themselves to some other’s perspective (as Perry Anderson did to Weber via “modes of domination” and as Joan Robinson did to Keynes). Too close and uncritical a study of Marx is a mode of self-programming that introduces disastrous bugs into your wetware. The thinkers useful for the twenty-first century are much more likely to be along the lines of Tocqueville, Keynes, Polanyi, de Beauvoir, Lincoln, and (albeit in his intellectual rather than his political or personal practice) Jefferson than Marx. (And Foucault? Maybe Foucault–nah, that is too likely to introduce a different set of dangerous bugs to your wetware…)

Yet the ideas and the arguments for “communism” were (and are?) powerful. And they were very convincing to millions if not billions of people for fully a century and a half. How should post-millennials understand this? How much about this ought they to learn? And how best to present the subject so that they gain the fullest and most accurate understanding, in the short time that is all that they can afford to spend on it?

Here’s my first second take on readings, in the order in which I would put them a course:

More Scattered Things I Have Written: on and About the Subject:

Subprime auto loans are not the second coming of the U.S. mortgage crisis

Posted on by Ed Paisley

This past week on his show Last Week Tonight, the comedian John Oliver highlighted the rise of subprime automobile lending in the United States over the past couple of years. The lending practices that Oliver’s segment highlights—many of them deceptive—are clearly something policymakers should investigate. This subprime lending trend has been going on for several years now, with implications for how we think about the U.S. financial system. Oliver, though, carried his observations to an unfortunately familiar place—the subprime mortgage boom of 2002-2006—an analogy that’s seems telling at first glance but which is not really apt given the smaller effects of subprime auto lending on the overall economy.

First, the sheer size of home mortgages compared to auto loans should give us pause. According to data from the Federal Reserve Bank of New York, there were $1.1 trillion worth of auto loans in the second quarter of 2016, an almost 50 percent increase since the end of the Great Recession in the second quarter of 2009. The amount of mortgage debt is much larger ($8.84 trillion in the second quarter of 2016), and its growth during the housing bubble was much faster (almost doubling from 2001 to 2007).  Oliver recognizes this size discrepancy in his segment but not the speed discrepancy.

Oliver’s analogy has other problems as well. The reason why the collapse of the housing bubble was so vicious was because the inflation of the bubble increased consumer spending quite a bit. Many households used appreciating homes as a way to finance more consumption. But it’s well known that cars are a depreciating asset. They lose value over time. It’s highly unlikely that anyone is using their car as an ATM to finance spending. More households with auto debt will reduce consumption as money is funneled to service the debt on their cars.

The role of auto loans in the financial sector is also quite different than mortgages. Oliver notes that subprime auto loans are being securitized and sold to institutional investors just as subprime mortgages were before the housing crash and the onset of the Great Recession. Yet mortgage-backed securities weren’t just incredibly popular securities bought and sold by banks. They also became an integral part of the financial system, with banks using triple-A rated securities as risk-free collateral in inter-bank lending. These bonds were, in effect, privately created money used in the shadow banking system. There is no evidence that the securities based on auto loans are serving such a function right now.

But let’s not miss the broader point. The subprime auto-loan practices highlighted by Oliver seem to be very predatory. What’s more, loans made by auto dealers, known as dealer-originated loans, are not under the jurisdiction of the U.S. Consumer Financial Protection Bureau, the federal agency that would naturally look into these issues. Policymakers concerned by these trends may want to look into this exemption. More broadly, the continuing ability of some actors in the U.S. financial system to target low-income and low-credit workers with financial products is something policymakers need to keep in mind as they consider the role of the financial sector in creating strong and sustained economic growth.

Must-Read: Alisdair McKay and Ricardo Reis: Designing effective automatic stabilisers of the business cycle

Posted on by Brad DeLong

Must_Read: Alisdair McKay and Ricardo Reis: Designing effective automatic stabilisers of the business cycle:

Brexit has raised the possibility of a recession on both sides of the Atlantic….

Unable to use traditional remedies like monetary or fiscal policy stimulus, policymakers may consider automatic fiscal stabilisers…. The social insurance system stands at the centre of automatic stabilisers, yet we still know too little about how it affects the macroeconomy (Blanchard et al. 2010)…. We focus on two key programmes: a progressive tax system, and unemployment insurance.  We find that unemployment insurance has a substantial stabilising effect on the business cycle, and as a result the optimal policy is to have a more generous unemployment benefit than would be optimal in a world without macroeconomic fluctuations.  On the other hand, the progressivity of the tax appears to have little effect on the business cycle….

[The] redistribution channel based on marginal propensities to consume is the classic explanation of how unemployment benefits function as an automatic stabiliser, we find that benefits have an even more important effect on the economy. Households face considerable uncertainty over employment and over the wages they earn when employed. The fear of losing their income because of an unemployment spell in the future leads workers to want to save, and so reduce their consumption.  That is, unemployment reduces aggregate consumption demand not just by reducing the current income of unemployed workers but also by inducing precautionary savings by all workers who fear the possibility of unemployment.  By making unemployment less painful, unemployment benefits reduce these concerns and give workers confidence to spend….

When we quantify our model, we find that business cycle stabilisation considerations increase the optimal unemployment benefit replacement quite substantially.  We find that in the optimal unemployment insurance replacement rate is 49%, while it would be 36% in the absence of business cycles…. The unemployment insurance system is very effective at stabilising the business cycle by dampening the cyclical swings in household precautionary savings motives…. Recessions have large welfare costs due to the increase in uninsurable risks that households face.

While similar arguments can be put forward for the benefit of more progressive income taxes, both in terms of redistributing resources in a recession and by lowering precautionary savings, progressive income taxes have a stronger negative effect on average economic activity and a more limited effect on volatility, because of the comparatively small variation in income of those continuously employed during the business cycle. Therefore, we find that considering automatic stabilisation has a negligible effect on the desired level of progressivity.