Must-Read: : “As the world becomes flat, talent, entrepreneurship, and VC $ become more concentrated…”: https://t.co/MN1JGPPRaR https://t.co/7dGcpzfHSU:
Category: Equitablog
Must-Reads: July 20, 2016
Meet Equitable Growth’s 2016 grantees
The Washington Center for Equitable Growth is excited to introduce our 2016 round of grantees. These grants are being awarded to researchers who are investigating the various channels through which inequality may affect economic growth and stability. The principal investigators receiving these grants are diverse in their research interests and backgrounds, and include full-fledged researchers as well as doctoral students.
The grants are awarded in one of four categories identified in our request for proposals: macroeconomic stability; human capital and the labor market; governance and institutions; and innovation. This third round of grant-giving further enables Equitable Growth to build out a growing body of research that allows us to knit together a greater understanding of the U.S. economy. Please visit our grantee page for more information on past grantees.
Here is a brief overview of our newest, 2016 grantees.
Macroeconomics
Three academic grants will support research on how economic inequality affects macroeconomic growth and stability:
- Jess Benhabib, Alberto Bisin, and Mi Luo of New York University will assess how the distribution of earned income, the rate of return for various assets, and the nature of bequests determine wealth inequality.
- Gauti Eggertsson and Neil Mehrotra of Brown University will build a model to demonstrate how higher income inequality has reduced the natural rate of interest through increased overall saving.
- Adriana Kugler and Ammar Farooq of Georgetown University will examine whether extensions of unemployment insurance benefits improve job-match quality, and the role that unemployment insurance plays in improving worker outcomes.
Three doctoral grants will support further research on macroeconomic growth and stability:
- Alexander Bartik of the Massachusetts Institute of Technology will explore the distributional implications of fracking and mass transit expansions using longitudinal U.S. Census Bureau microdata.
- John Coglianese of Harvard University will construct a comprehensive measure of underemployment and integrate it into commonly-used economic models to showcase the effects of underemployment on the functioning of the labor market.
- Andrew Elrod of the University of California-Santa Barbara will examine how the reorganization of the U.S. banking sector after World War II altered the relationship between profitable investment and macroeconomic stability.
Human capital and the labor market
Two academic grants will support research on how economic inequality affects the development of human capital, and to what extent aggregate trends in human capital explain inequality dynamics:
- Christopher Jencks and Beth Truesdale of Harvard University will investigate the relationship between inequality and health outcomes, which will further research on the relationship between income and life expectancy.
- Marta Murray-Close and Joya Misra of the University of Massachusetts-Amherst will construct estimates of how parenthood contributes to the gender wage gap and, in turn, how supporting working parents is key to promoting gender equity.
Three doctoral grants will support further research on human capital:
- Sydnee Caldwell of the Massachusetts Institute of Technology will draw on employer-employee data to document access to high-wage firms and movements between high- and low-wage firms over the span of a worker’s career.
- Blythe George of Harvard University will focus on the lack of employment options and life outcomes on the Yurok and Hoopa Valley Native American tribal reservations.
- Mariana Zerpa of the University of Arizona will explore the impact of large-scale, publicly-funded preschool education programs on health and developmental outcomes for children ages 4 to 12.
Innovation
Two academic grants will support research on how economic inequality affects the quantity and quality of innovation, and whether technology innovations, in turn, affects inequality:
- Kyle Herkenhoff of the University of Minnesota and Gordon Phillips of Dartmouth College will study access to credit, via the removal of bankruptcy flags, on key outcomes, including business formation rates, earnings, and profitability.
- Heidi Williams of the Massachusetts Institute of Technology, Patrick Kline of the University of California-Berkeley, Neviana Petkova of the U.S. Department of the Treasury, and Owen Zidar of the University of Chicago will create a new dataset that links patent applications to business tax records to estimate the relative effects of patent-generated monopoly rents on firm returns and worker wages.
Two doctoral grants will support further research on innovation:
- Xavier Jaravel of Harvard University will examine whether economic inequality affects the type of innovation that takes place and who benefits from that innovation.
- Hannah Rubinton of Princeton University will analyze how trends in firm start-up rates affect consumer welfare and productivity growth.
Governance and institutions
Three academic grants will support research on how levels and trends in economic inequality affect the quality of social and political institutions that contribute to economic well-being and economic growth:
- Manasi Deshpande of the University of Chicago, Tal Gross of Columbia University, and Jialan Wang of the U.S. Consumer Financial Protection Bureau will quantify how public assistance affects households’ financial well-being through increasing access to credit.
- Jane Waldfogel of Columbia University, Ann Bartel of Columbia University, Maya Rossin-Slater of the University of California-Santa Barbara, and Christopher Ruhm of the University of Virginia will investigate inequality in employer-provided paid parental leave in New York, New Jersey, and Pennsylvania.
- Joan Williams of the University of California-Hastings College of the Law, Susan Lambert of the University of Chicago, and Saravanan Kesavan of the University of North Carolina Kenan-Flager Business School will continue research on whether shifting hourly workers to more stable schedules results in cost savings and increases business productivity.
One doctoral grant will support further research on governance and institutions:
- Ellora Derenoncourt of Harvard University will use online lab experiments and employee-employer matched data to look at labor market decisions, testing for individual social preferences over payoff distributions.
For more details, please see the presentations of the 2016 grantees’ projects. And check out our 2014 and 2015 grantees’ project descriptions for a wide range of examples of the types of work that we fund.
Must-Read: Viktor Slavtchev and Simon Wiederhold: Does the Technological Content of Government Demand Matter for Private R&D?
Must-Read: : Does the Technological Content of Government Demand Matter for Private R&D?: “Governments purchase everything from airplanes to zucchini…
…This paper investigates the role of the technological content of government procurement in innovation…. Theoreticall… a shift in the composition of public purchases toward high-tech products translates into higher economy-wide returns to innovation, leading to an increase in the aggregate level of private research and development (R&D). Collecting unique panel data on federal procurement in US states, we find that reshuffling procurement toward high-tech industries has an economically and statistically significant positive effect on private R&D, even after extensively controlling for other R&D determinants. Instrumental-variable estimations support a causal interpretation of our findings.
Must-Read: Tim Duy: Why the Fed Can’t and Shouldn’t Raise Interest Rates
Must-Read: : Why the Fed Can’t and Shouldn’t Raise Interest Rates: “The Fed should consider the need for two targets…
…the level of rates and the slope of the yield curve…. For now, the Fed appears committed to just the interest rate tool. And in some ways, that is no surprise. Short-term rates are a comfortable tool for the Fed, whereas playing with the yield curve via the balance sheet is seen as fraught with danger. But with the yield curve flattening as the economy approaches full employment, they may find themselves unable to maintain the appropriate level of financial accommodation via rate policy alone…. The Fed needs to remember that how they got into this policy stance may offer a lesson for how to get out. Policy makers cut rates to zero and then instituted quantitative easing. Now they should consider selling assets before raising rates. Or, at a minimum, utilizing a mixed strategy of rate hikes and asset sales. The objective of meeting the Fed’s mandate in the context of maintaining financial stability may be unattainable using the interest rate tool and associated forward guidance alone. Unfortunately, the Fed does not appear to be debating the policy mix–at least not in public. They remain focused on interest rates, delaying balance sheet policy to a later date. On the current trajectory, however, that later date may never come.
Must-Read: Juan Carlos Suárez Serrato and Philippe Wingender: Estimating Local Fiscal Multipliers
Must-Read: : Estimating Local Fiscal Multipliers: “A large number of federal spending programs depend on local population levels. Every ten years, the Census provides a count… [with] a different method… used to estimate non-Census year populations…
…This change in methodology leads to variation in the allocation of billions of dollars in federal spending. Our baseline results follow a treatment-effects framework where we estimate the effect of a Census Shock on federal spending, income, and employment growth by re-weighting the data based on an estimated propensity score that depends on lagged economic outcomes and observed economic shocks. Our estimates imply a local income multiplier of government spending between 1.7 and 2, and a cost per job of $30,000 per year. A complementary IV estimation strategy yields similar estimates. We also explore the potential for spillover effects across neighboring counties but we do not find evidence of sizable spillovers. Finally, we test for heterogeneous effects of government spending and find that federal spending has larger impacts in low-growth areas.
Must-Reads: July 19, 2016
The Bond Market and Expectations: A Parthian Shot
In my The Need for Expansionary Fiscal Policy I quote Greg Ip:
policy makers are rightfully wary about acting in the face of so many contradictory signals. In the U.S., unemployment is moving lower and stocks are hitting new highs. Bonds could be pricing in secular stagnation, or merely a greater bias toward hyper-stimulative monetary policy by central banks…
If bond markets were pricing in a a greater bias toward hyper-stimulative monetary policy by central banks, the yield curve would be very steeply sloped indeed. Just saying.
The Need for Expansionary Fiscal Policy
I understand that we are Sisyphus here. And I accept that:
Je laisse Sisyphe au bas de la montagne! On retrouve toujours son fardeau. Mais Sisyphe enseigne la fidélité supérieure qui nie les dieux et soulève les rochers. Lui aussi juge que tout est bien. Cet univers désormais sans maître ne lui paraît ni stérile ni futile. Chacun des grains de cette pierre, chaque éclat minéral de cette montagne pleine de nuit, à lui seul, forme un monde. La lutte elle-même vers les sommets suffit à remplir un coeur d’homme. Il faut imaginer Sisyphe heureux.
But would people who ought to know better please stop adding weights to the stone that we are trying to roll uphill?
Thus I find myself quite annoyed by the sharp and usually-reliable Greg Ip this morning…
Let me back up: Here’s the story so far:
(1) They say that North Atlantic governments cannot afford to spend more to boost their economies via expansionary fiscal policy right now. We point out that current interest rates on Treasury debt are so low low private company would pass up the ability to borrow to stimulate and invest.
(2) They then say that maybe interest-rate will jump up a lot, soon, and thus make borrow to spend to stimulate and invest a bad deal. We point out that financial markets certainly do not expect any such thing. And we points out that, if you are truly worried about longer-run debt sustainability, the standard calculations tell us that debt- and amortization-to-GDP ratios will be lower with aggressive borrow and spend to stimulate and invest policies then with austerity.
(3) They then say that financial markets are irrational and wrong–it interest-rate will go up, will go up soon, and will go up far. We point out that fearful financial markets have been better forecasters then their hopes of imminent normalization every year for the past decade.
(4) They then say: let’s ignore those interest rates and pretend they are not telling us anything about the benefits and costs right now of fiscal expansion. We reply: you are economists–economists are supposed to take prices seriously, not throw the information in them away.
(5) They then say: nevertheless, running up the nominal debt through expansionary fiscal policy is somehow risky. We say: do helicopter money, which does not run up the debt.
(6) They then say: but even a half booming economy will take the pressure off of governments and bureaucrats to undertake urgent and important structural reforms. We ask: what evidence can you point to to support any claim that useful structural reform is easier and I low-pressure that in a high-pressure economy?
And we are met with silence.
And then they go back to parroting their talking point (1) again.
: Needed: A Contingency Plan for Secular Stagnation: “What if Larry Summers is right…
…[and there is] a chronic deficiency of investment relative to savings that has trapped the world in a state of low economic growth largely resistant to monetary policy[?] Events… have strengthened Mr. Summers’s case…. Formerly skeptical economists are less so: Both the International Monetary Fund and the Federal Reserve have implicitly warmed to Mr. Summers’s thesis. With yields taking another leg down after Britain’s vote to leave the European Union, the evidence of secular stagnation, Mr. Summers says, is stronger than ever. If he’s right, the world needs a contingency plan. The most direct response is more expansionary fiscal policy (i.e. lower taxes or higher spending), which would bolster demand and push interest rates up.
But policy makers are rightfully wary about acting in the face of so many contradictory signals. In the U.S., unemployment is moving lower and stocks are hitting new highs. Bonds could be pricing in secular stagnation, or merely a greater bias toward hyper-stimulative monetary policy by central banks…
Why are policy makers rightfully wary? All Ip says is:
Paolo Mauro of the Peterson Institute for International Economics notes that countries have often overestimated their long-term potential growth, resulting in too-high deficits and debts…
Um. No. The arithmetic tells us that at current interest rates fiscal expansion right now will not raise but lower the debt- and amortization-to-GDP ratios. Unless Mauro wants to take that on–which he does not–his piece is irrelevant for that reason alone. Moreover, Mauro seems to think that we have been overestimating long-term potential growth and correcting estimating long-term interest rates. That is wrong. We have been overestimating both long-term interest rates and long-term potential growth. If you overestimate both by the same amount, the biases induced in your estimates of the right current debt-to-GDP ratio are offsetting. The right level of the debt-to-GDP ratio is primarily a function of r-(n+g), the difference between the real interest rate r on Treasury debt and the real growth rate g of productivity plus the real growth rate n of the labor force. A reduction in r accompanied by an equal or smaller reduction in (n+g) is not a first-order reason to reduce government spending or the deficit right now. And that is what we have.
Here Larry Summers is right. Greg Ip is wrong. Larry has by now written a huge amount about his. Yet Ip counterposes his body of work to one working paper by Paulo Mauro that is, as best as I can see, irrelevant to secular stagnation arguments and concerns.
Why is it irrelevant? Mauro does correctly point out that lower future growth is a reason to slow the future growth of real government spending. But what Mauro does not point out is that such a fall in projected future growth is a reason to cut the level of spending now–or to avoid increases in the level of spending that would otherwise be good policy now–only if the slower expected growth is unaccompanied by an equal reduction in Treasury interest rates. Our reduction in expected future economic growth appears to have accompanied by a larger reduction in Treasury interest rates.
This opinions-of-shape-of-earth-differ-both-sides-have-a-point framing is… beneath what Greg ought to be writing. If he thinks Larry is wrong–or even that the anti-Larry case is arguable–he needs to find and quote real arguments that have real relevance here, and more than one of them, not a single piece from the Peterson Institute that is off-point.
Must-Read: Greg Ip: Needed: A Contingency Plan for Secular Stagnation
Must-Read: Um. No. Larry Summers is right. The sharp and usually-reliable Greg Ip is wrong. This opinions-of-shape-of-earth-differ-both-sides-have-a-point framing is simply wrong.
The right level of the debt-to-GDP ratio is primarily a function of r-(n+g), the difference between the real interest rate r on Treasury debt and the real growth rate g of productivity plus the real growth rate n of the labor force. A reduction in r accompanied by an equal or smaller reduction in (n+g) is not a first-order reason to reduce government spending or the deficit now–or to postpone or cancel plans to increase the deficit right now that would otherwise be good policy
: Needed: A Contingency Plan for Secular Stagnation: “If Larry Summers is right…
…the most direct response is more expansionary fiscal policy…. But policy makers are rightfully wary about acting in the face of so many contradictory signals. In the U.S., unemployment is moving lower and stocks are hitting new highs. Bonds could be pricing in secular stagnation, or merely a greater bias toward hyper-stimulative monetary policy by central banks…
Why are policy makers rightfully wary? All Ip says is:
Paolo Mauro of the Peterson Institute for International Economics notes that countries have often overestimated their long-term potential growth, resulting in too-high deficits and debts…
And chasing the link:
: Fiscal Policy in the Era of Stagnation: “Policymakers often mistake a long-lasting growth slowdown for a temporary slowdown…
…and systematically fail to increase the primary fiscal surplus sufficiently when the long-run economic growth rate declines. Economic history provides several examples of debt crises or near-crises caused by unexpected, long-lasting slowdowns in economic growth that were not recognized in time…. Ignoring a permanent slowdown in the rate of economic growth can lead to policy mistakes. For example, a country projecting a stable government debt ratio of 100 percent of GDP over the next decade or two would experience an increase in that ratio to 140 percent in 10 years if growth turns out to be 1 percentage point lower than assumed. As deficits rise, the ratio would balloon to more than 200 percent after 20 years…
Source: P. Mauro, R. Romeu, A. Binder, and A. Zaman, 2013, A Modern History of Fiscal Prudence and Profligacy (link is external), IMF Working Paper 13/5, Washington: International Monetary Fund.
The implication Ip takes from this is simply wrong. Slower future growth is a reason to slow the future growth of real government spending. It is a reason to cut the level of spending now–or to avoid increases in the level of spending that would otherwise be good policy–only if the slower expected growth is unaccompanied by an equal reduction in Treasury interest rates. But that is not the case: our reduction in expected future economic growth is accompanied by a larger reduction in Treasury interest rates.