Category: Equitablog

Must-Read: Economist: A Hire Power

Posted on by Brad DeLong

Must-Read: Economist: A Hire Power:

Mike Konczal and Marshall Steinbaum…examine the worrying decline of business dynamism in America…

The trend seems to be linked to a change in the habits of American workers, especially the young adults for whom early-career job changes are an important contributor to long-run success. They have become less likely to switch jobs and move to new cities.It is possible that regulations keep Americans from jumping to new jobs or places, thereby jamming the process of economic reinvention. Some research has indicated that the growth of occupational licensing, which makes it harder to enter many service-sector industries, constrains labour mobility. Other work points to high housing costs—a consequence of overly strict land-use rules—as a force repelling workers from productive places….

Messrs Konczal and Steinbaum reckon these explanations cannot fully account for America’s doldrums. If red tape were the main constraint on the economy, then workers who do successfully move from one job to another are likely to be moving to one that pays them a lot more. And places with lower levels of economic turnover ought to enjoy higher wage growth, as firms struggle to attract scarce workers. But job changes seem not to provide much of a wage fillip, the authors find, suggesting that people are staying put because other firms are uninterested in hiring new workers and feel little pressure to offer high wages. Similarly, places in America where dynamism is very low tend to suffer unusually weak growth in pay….

Konczal and Steinbaum argue that firms do not need to compete for workers because, increasingly, they do not need to compete at all…. Profit as a proportion of GDP has lingered near the highest level in half a century. In a more competitive market, upstart firms would hire labour and pressure big firms to use their cash for job-creating investments…. Bigger gains might come from creating an economy in which firms found themselves needing to compete to attract workers…

What Was Herbert Hoover’s Fiscal Policy?: Hoisted from Five Years Ago

Posted on by Brad DeLong
Herbert hoover as president Google Search

What Was Herbert Hoover’s Fiscal Policy?: In his Budget Message setting out his plans for taxes and spending for fiscal year 1932, Herbert Hoover begged Congress not to embark on any ‘new or large ventures of government’. He admonished congress that even though ‘the plea of unemployment will be advanced as reasons for many new ventures… no reasonable view of the outlook warrants such pleas’. And he boasted that he was proposing a balanced budget–even though revenues were mightily depressed by the Great Depression:

This is not a time when we can afford to embark upon any new or enlarged ventures of Government. It will tax our every resource to expand in directions providing employment during the next few months upon already authorized projects. I realize that, naturally, there will be before the Congress this session many legislative matters involving additions to our estimated expenditures for 1932, and the plea of unemployment will be advanced as reasons for many new ventures, but no reasonable view of the outlook warrants such pleas as apply to expenditures in the 1932 Budget.

I have full faith that in acting upon these matters the Congress will give due consideration to our financial outlook. I am satisfied that in the absence of further legislation imposing any considerable burden upon our 1932 finances we can close that year with a balanced Budget. When we stop to consider that we are progressively amortizing our public debt, and that a balanced Budget is being presented for 1932, even after drastic writing down of expected revenue, I believe it will be agreed that our Government finances are in a sound condition…

Over at the Atlantic Monthly, Megan McArcle claimed that ‘Hoover was no budget-cutter’:

Hoover Was No Budget-Cutter: Hoover did not tighten up on spending.  According to the historical tables of the Office of Management and Budget, spending in 1929 was $3.1 billion, up from $2.9 billion the year before. In 1930 it was $3.3 billion. In 1931, Hoover raised spending to $3.6 billion.  And in 1932, he opened the taps to $4.7 billion, where it basically stayed into 1933 (most of which was a Hoover budget)…

In his Budget Message for fiscal year 1933, Hoover wrote:

In framing this Budget, I have proceeded on the basis that the estimates for 1933 should ask for only the minimum amounts which are absolutely essential for the operation of the Government under existing law, after making due allowance for continuing appropriations. The appropriation estimates for 1933 reflect a drastic curtailment of the expenses of Federal activities in all directions where a consideration of the public welfare would permit it….

The welfare of the country demands that the financial integrity of the Federal Government be maintained…. [W]e are now in a period where Federal finances will not permit of the assumption of any obligations which will enlarge the expenditures to be met from the ordinary receipts of the Government….

To those individuals or groups who normally would importune the Congress to enact measures in which they are interested, I wish to say that the most patriotic duty which they can perform at this time is to themselves refrain and to discourage others from seeking any increase in the drain upon public finances…

That is not a man who wants to open up the taps. That is not a man who thinks that he is opening up the taps.

So what is going on here?

I think that Megan McArdle’s major problem is that she is looking at one table–Table 1.1 in OMB’s Historical Tables. She is not reading Hoover’s Budget Messages or any other documents from the Hoover administration, not reading histories of the Hoover administration, not identifying how what congress finally enacted and what Hoover signed differed from what Hoover had originally proposed–or indeed, at how as the Great Depression deepened Hoover decided at the very start of calendar year 1932–halfway through fiscal year 1932–to push for measures (Reconstruction Finance Corporation, Home Loan Bank, direct loans to fund state Depression relief programs) that increased spending–but did so alongside the Revenue Act of 1932 that increased taxes.

After he decided that he was President and that the Treasury Secretary Andrew Mellon whom he had inherited from Coolidge worked for him and that Mellon should go off to be Ambassador to the Court of St. James, Hoover did decide to do something to fight the Great Depression. Tax increases to try to balance the budget in order to call down the confidence fairy made up the biggest part of his plan. But Hoover also sought to fund state relief. And he sought to set up GSE’s (RTC, HLB) to restart broken capital markets.

But to say that ‘Hoover was no budget-cutter’ misses most of the story. Hoover would have been a budget-cutter in normal times. Hoover was a budget-balancer. Hoover held the line against powerful political forces that sought to increase government spending in the Great Depression for fully 2 1/2 years before endorsing what seem to us to be half-measures.

Must-Read: Nuno Palma: Sailing Away from Malthus: Intercontinental Trade and European Economic Growth, 1500-1800

Posted on by Brad DeLong

Must-Read: Nuno Palma: Sailing Away from Malthus: Intercontinental Trade and European Economic Growth, 1500-1800:

What was the contribution of intercontinental trade to the development of the European early modern economies?…

Previous attempts to answer this question have focused on static measures of the weight of trade in the aggregate economy at a given point in time, or on the comparison of the income of specific imperial nations just before and after the loss of their overseas empire. These static accounting approaches are inappropriate if dynamic and spillover effects are at work, as seems likely. In this paper I use a panel dataset of ten countries in a dynamic model which allows for spillover effects, multiple channels of causality, persistence and country-specific fixed effects. Using this dynamic model, simulations suggest that in the counterfactual absence of intercontinental trade, rates of early modern economic growth and urbanization would have been moderately to substantially lower. For the four main long-distance traders, by 1800 the real wage was, depending on the country, 6.1 to 22.7% higher, and urbanization was 4.0 to 11.7 percentage points higher, than they would have otherwise been. For some countries, the effect was quite pronounced: in the Netherlands between 1600 and 1750, for instance, intercontinental trade was responsible for most of the observed increase in real wages and for a large share of the observed increase in urbanization. At the same time, countries which did not engage in long-distance trade would have had real wage increases in the order of 5.4 to 17.8% and urbanization increases of 2.2 to 3.2 percentage points, should they have done so at the same level as the four main traders. Intercontinental trade appears to have played an important role for all nations which engaged in it, with the exception of France. These conclusions stand in contrast with the earlier literature which uses a partial equilibrium and static accounting approach.

Persistent economic disadvantage and education inequality in the United States

Posted on by Bridget Ansel

The intersection of income inequality and education is one of the more troubling features of the U.S. economy. Research by Stanford University economist Sean Reardon shows a rising educational achievement gap between students from high-income backgrounds and those whose parents are lower-income earners. There’s plenty of evidence that policymakers should be paying attention to educational differences by income, but most of the data that researchers use to evaluate educational programs don’t directly measure income. Instead, they employ proxies, most often eligibility for subsidized school lunches, to determine the economic disadvantages faced by some schoolchildren compared to others.

Simply using current eligibility or non-eligibility for subsidized lunches, however, might not be the best way to look at the effects of income inequality on educational achievement. A new paper by economists Katherine Michelmore of Syracuse University and Susan Dynarski of the University of Michigan shows why. The two researchers use administrative data from the state of Michigan to look at how economic disadvantages affect standardized test scores. Many studies on this question will look at the achievement gap during a single year and use a measure of disadvantage such as being eligible for subsidized school lunches. But the administrative data Michelmore and Dynarski use lets them track students over time to discern how often students were eligible for school lunches mapped to their test scores.

What they find is that there’s a difference—a significant one—in test scores in the 8th grade between students who are occasionally eligible for subsidized lunches and those who have been  eligible every single year since kindergarten. The two economists consider students who have been eligible every year (14 percent of Michigan students) to be persistently disadvantaged. And they find that these students score a full standard deviation below kids who have never been on subsidized lunches (40 percent of students) and just under a quarter below students who are occasionally eligible for subsidized lunches (roughly 45 percent of students). (A standard deviation being further away from something than a quarter standard deviation.)

Why is there such a difference between students who are occasionally eligible for subsidized lunches and those who are persistently eligible? One possibility is that exposure year after year to low-income living adds up over time, pushing down test scores in the process. But Michelmore and Dynarski find that the vast majority of the gap between persistently eligible students is present early on in their schooling—3rd grade, to be precise—so the differences in exposure alone can’t explain the gap. Instead, the two researchers argue that the difference between persistently-eligible students and occasionally-eligible students is a sign that the former are from much lower-income backgrounds. It’s a story of income inequality, not income volatility.

These results, as the authors note, have important implications for the design and evaluation of education programs. Eligibility for subsidized lunches is an important metric in many datasets used by researchers and policymakers to compare students across income levels. The difference between students who are occasionally eligible for school lunches and those who persistently may have significant effects. Many federal, state and local education programs use the percent of students in a school eligible for subsidized lunches as a way of targeting school spending. Yet there’s a significant amount of variation among schools with the same amount of eligibility when it comes to persistently and occasionally eligible students. A more targeted program would want to consider this variation as well.

A similar dynamic potentially holds for so-called value-added models for evaluating teachers. Often these measures will use the share of subsided lunch eligible students in a classroom as a control for the economic disadvantage of students in classrooms in order to not give lower scores to teachers who have low-income students. But if persistently eligible students are concentrated in some classrooms but not in others, then it could bias these measures of teacher performance.

The extent of that bias hasn’t been investigated yet. But what is clear from this paper is the need to use more fine-grained data when thinking about the impact of differences in income on educational outcomes. Other administrative data, for example tax data (if properly used), could be quite helpful. If policymakers are going to implement programs and evaluate them, we might as well use the best tools possible.

Must-Read: Matthew Shapiro: How Economic Shocks Affect Spending

Posted on by Brad DeLong

W Must-Read: Matthew Shapiro: How Economic Shocks Affect Spending:

Many consumers do not follow the standard advice by having a substantial cash buffer. Nonetheless, they are able to smooth consumption in the face of a temporary drop in income by changing their timing of payments….

The tax rebates of 2001 and 2008, the 2009–10 tax credit, and both the onset and expiration of the 2011–12 payroll tax holiday… have some strong common features…. the implied marginal propensity to consume (MPC) is between one-quarter and one-third… a non-negligible effect on aggregate spending…. The most common response to receiving extra income is to pay off debt. From the standpoint of aggregate demand, saving a rebate or using it to pay off debt…. To the extent that a fiscal stimulus results from an economic downturn where consumers are cutting back spending because of a debt overhang—as was certainly the case in 2008 and its aftermath—it is not surprising that consumers use a tax rebate for balance sheet repair…. There is no evidence that the MPC from tax rebates or temporary tax cuts varies with income…

Must-Read: Paul Romer: Professionalism and the Academic Division of Labor

Posted on by Brad DeLong

Must-Read: Paul Romer: Professionalism and the Academic Division of Labor:

Ed Prescott has a new NBER paper (with a co-author I do not know) on monetary policy with negative nominal interest rates…

Other economists have written on this topic. None of the work I know in this area is mentioned in Ed’s paper…. Suppose that 100 readers of the Prescott paper pursue questions about negative nominal interest rates and that links to the literature could have saved each of them 10 minutes. Then 100 minutes invested could have saved 1000 minutes. How many other chances does any of us have to make an investment with a 10x payoff? So Ed, please. Demonstrate what it means to be a professional

Must-Reads: August 2, 2016

Posted on by Brad DeLong

Should Reads:

Must-Read: David Lipton: The Key to Raising Business Investment: Keep Pushing the Accelerator

Posted on by Brad DeLong

Must-Read: Yes, 130% of the shortfall in business investment in the Global North is due to slack demand and the accelerator. We can puzzle why exceptionally loose interest rate policy has not helped more to boost private investment. We can lament the shortage of risk-bearing capacity that has kept spreads elevated.

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We can even demand reform of housing market finance in order to make people feel secure enough to be willing to move out of their sisters’ basements: homeownership rates continue to drop like a stone:

FRED Graph FRED St Louis Fed

But none of these should distract our attention from the fact that weak economies, slack private investment, low capital formation, and retarded productivity growth are a self-reinforcing vicious circle:

David Lipton : The Key to Raising Business Investment: Keep Pushing the Accelerator:

Why have businesses in advanced economies not been investing more in machinery, equipment and plants?…

Some believe that the key to more business investment is less uncertainty about fiscal policy, regulation, and structural reforms. Some believe that it is providing better financing…. The facts suggest a much simpler answer: Business investment has been weak because economic activity has been weak. Ensuring a recovery in sales and sales prospects is the key.

A study we published in the April 2015 World Economic Outlook suggests that virtually all of the weakness in business investment in advanced economies since the crisis can be explained by the weakness in the economic environment… in line with the ‘accelerator effect,’ where investment responds to changes in output and sales….

Now, as we leave the crisis behind, with faster growth in advanced economies, longer-term forces related to aging and lower productivity growth continue to cloud the horizon…. Long-term growth in advanced economies is now about ½ percentage point lower than it was before the crisis…. There is a risk that these longer-term forces come together and further reduce incentives to invest. So, even as we see faster growth, policymakers need to remain focused on ensuring a sustained rise in private investment. Here, while policy advice must be country specific, some general principles apply…. The case for more infrastructure investment remains…

Must-Read: Nick Rowe: Anti Urban Economics

Posted on by Brad DeLong

Must-Read: Smart theoretical point about agglomeration. Situations in which we have strategic complementarity and negative externality are prisoners’ dilemmas. But is there reason to think that such situations are in any sense typical in the case of human agglomeration? Isn’t the natural presumption otherwise?

Nick Rowe: Anti Urban Economics:

I’m just throwing this out there. Read at your own risk…

I don’t know what I’m talking about (even more than usual). I’m just thinking out loud, and being ornery. I will explain where I’m coming from after I’ve made my point. There’s a difference between “strategic complementarity” and “positive externalities”. Strategic complementarity is what creates cities. But cities don’t necessarily create positive externalities. “Network externalities” is a bit of a BS term that conflates two conceptually distinct things…

Must-Read: Andy Taylor: Failure To Expand Medicaid Adds To Stresses In Southeast Kansas County

Posted on by Brad DeLong

 

Andy Taylor: Failure To Expand Medicaid Adds To Stresses In Southeast Kansas County:

Dr. Julie Stewart doesn’t want political candidates and elected officials to show up at her nonprofit medical clinic in Coffeyville for photo opportunities, grant announcements or organized tours.

Instead, the Coffeyville physician would like those officials to take a personal interest in the patients who have chosen Stewart’s Community Health Clinic of Southeast Kansas because they have no health insurance options.

“I want you to come help me take off their socks so you can see the sores of a diabetic patient who has no health insurance,” Stewart said. “And then I want you to get on the ground in front of them and wash their feet.”

Such medical procedures are more than commonplace for Stewart. In Coffeyville, medical providers and clinics have seen an increase in traffic since the October 2015 closure of Mercy Hospital in nearby Independence, Kansas…. After Mercy Hospital’s closure, Independence and the surrounding area have become ground zero for the debate over Medicaid expansion and what it means for rural health care…. 31 states and the District of Columbia have expanded Medicaid eligibility to adults earning up to 138 percent of the federal poverty level…. Kansas is one of 19 states that have not expanded eligibility for Medicaid…. In Kansas, only adults with dependent children are eligible for KanCare, the state’s privatized Medicaid program, and then only if their annual incomes are below 28 percent of the poverty level, which for a family of four is $9,216….

Sheldon Weisgrau, of the Kansas Association for the Medically Underserved in Topeka, said…. “At $4,229 per person per year… Medicaid expansion would have brought $5.9 million to Montgomery County”… 38 medical jobs…. Mark Woodring, CEO of Coffeyville Regional Medical Center, said the hospital continues to be challenged by the growing tide of uninsured persons who use its emergency room for medical care. It is the only hospital in Montgomery County. Additionally, the hospital only receives about 20 cents on every $1…. “Tell me any other business that is guaranteed a loss of 80 cents on the dollar while dealing with more patients and surrounded by more needs,” Woodring said…. Weisgrau encouraged Kansas residents to take their concerns to elected officials…