Category: Equitablog

Must-Read: Elizabeth Stanton: Negishi Welfare Weights: The Mathematics of Global Inequality

Posted on by Brad DeLong

Must-Read: This seems to me to be not quite right. If, say, individuals’ utility is logarithmic in lifetime wealth, then Negishi welfare weights construct the social welfare function by weighting each person’s utility by their lifetime wealth and then adding up individual utilities.

This produces policies that are different from those that would “be optimal only in a world in which global income redistribution cannot and will not take place”. It is the case, even if global income distribution cannot and will not take place, that good government policies maximize the benefit weighting their effects on each person’s utility equally. But with Negishi welfare weights government policies are evaluated by multiplying their effect on an individual’s utility by that individual’s wealth before performing a utilitarian sum:

Elizabeth A. Stanton: Negishi Welfare Weights: The Mathematics of Global Inequality: “The importance of making transparent the ethical assumptions used in climate-economics models cannot be overestimated…

…Negishi weighting is a key ethical assumption at work in climate-economics models, but one that is virtually unknown to most model users. Negishi weights freeze the current distribution of income between world regions; without this constraint, IAMs that maximize global welfare would recommend an equalization of income across regions as part of their policy advice. With Negishi weights in place, these models instead recommend a course of action that would be optimal only in a world in which global income redistribution cannot and will not take place. This article describes the Negishi procedure and its origin in theoretical and applied welfare economics, and discusses the policy implications of the presentation and use of Negishi-weighted model results, as well as some alternatives to Negishi weighting in climate-economics models.

Must-Read: Sarah Bloom Raskin (2013): Aspects of Inequality in the Recent Business Cycle

Posted on by Brad DeLong

Must-Read: Sarah Bloom Raskin (2013): Aspects of Inequality in the Recent Business Cycle: “An issue of growing saliency…

…how… economic marginalization and financial vulnerability, associated with stagnant wages and rising inequality, contributed to the run-up to the financial crisis and how such marginalization and vulnerability could be relevant in the current recovery…. I want to zero in on the question of whether inequality itself is undermining our country’s economic strength according to available macroeconomic indicators….

I will argue that at the start of this recession, an unusually large number of low- and middle-income households were vulnerable to exactly the types of shocks that sparked the financial crisis… 30 years of very sluggish real-wage growth… unusually large share of their wealth in housing… debt…. exposure to house prices had increased dramatically. Thus, as in past recessions, suffering in the Great Recession–though widespread–was most painful and most perilous for low- and middle-income households, which were also more likely to be affected by job loss and had little wealth to fall back on. Moreover, I am persuaded that because of how hard these lower- and middle-income households were hit, the recession was worse and the recovery has been weaker. The recovery has also been hampered by a continuation of longer-term trends that have reduced employment prospects for those at the lower end of the income distribution and produced weak wage growth….

I want to explore these issues today because the answers may have implications for the Federal Reserve’s efforts to understand the recession and conduct policy in a way that contributes to a stronger pace of recovery…. I hope my remarks spur more inquiry and discussion. I should also note that the views I express are my own…. To be sure, the increase in mortgage debt prior to the recession occurred across all types of households. But it was families with modest incomes and wealth largely in their homes that were the most vulnerable to subsequent drops in home values…. Given these developments, when house prices fell, household finances were struck a devastating blow. The resulting fallout magnified this initial shock, ushering in the Great Recession….

About two-thirds of all job losses in the recession were in middle-wage occupations–such as manufacturing, skilled construction, and office administration jobs–but these occupations have accounted for less than one-fourth of subsequent job growth…. It is not only the occupational and industrial distribution of the new jobs that poses challenges for workers and their families struggling to make ends meet, but also the fact that many of the jobs that have returned are part time or make use of temporary arrangements popularly known as contingent work. The flexibility of these jobs may be beneficial for workers who want or need time to address their family needs. However, workers in these jobs often receive less pay and fewer benefits than traditional full-time or ‘permanent’ workers, are much less likely to benefit from the protections of labor and employment laws, and often have no real pathway to upward mobility in the workplace….

My approach of starting with inequality and differences across households is not a feature of most analyses of the macroeconomy, and the channels I have emphasized generally do not play key roles in most macro models…. The narrative I have emphasized places economic inequality and the differential experiences of American families, particularly the highly adverse experiences of those least well positioned to absorb their ‘realized shocks,’ closer to the front and center of the macroeconomic adjustment process…. Circumstances–the outsized role of housing wealth in the portfolios of low- and middle-income households, the increased use of debt during the boom, and the subsequent unprecedented shocks to the housing market–may have attenuated the effectiveness of monetary policy during the depths of the recession. Households that have been through foreclosure or have underwater mortgages or are otherwise credit constrained are less able than other households to take advantage of the lower interest rates, either for homebuying or other purposes. In my view, these effects likely clogged some of the channels through which monetary policy traditionally works…

  • Congressional Budget Office (2011), Trends in the Distribution of Household Income between 1979 and 2007 (PDF) (Washington: CBO, October).
  • Orazio P. Attanasio and Guglielmo Weber (2010), ‘Consumption and Saving: Models of Intertemporal Allocation and Their Implications for Public Policy,’ Journal of Economic Literature, vol. 48 (September), pp. 693-751.
  • Dirk Krueger and Fabrizio Perri (2006), ‘Does Income Inequality Lead to Consumption Inequality? Evidence and Theory,’ Review of Economic Studies, vol. 73 (January), pp. 163-93
  • Mark A. Aguiar and Mark Bils (2011), ‘Has Consumption Inequality Mirrored Income Inequality?’ NBER Working Paper Series 16807 (Cambridge, Mass.: National Bureau of Economic Research, February)
  • Orazio Attanasio, Erik Hurst, and Luigi Pistaferri (2012), ‘The Evolution of Income, Consumption, and Leisure Inequality in the US, 1980-2010,’ NBER Working Paper Series 17982 (Cambridge, Mass.: National Bureau of Economic Research, April).
  • Marianne Bertrand and Adair Morse (2013), ‘Trickle-Down Consumption,’ NBER Working Paper Series 18883 (Cambridge, Mass.: National Bureau of Economic Research, March).
  • Jason DeBacker, Bradley Heim, Vasia Panousi, and Ivan Vidangos (2011), ‘Rising Inequality: Transitory or Permanent? New Evidence from a U.S. Panel of Household Income 1987-2006,’ Finance and Economics Discussion Series 2011-60 (Washington: Board of Governors of the Federal Reserve System, December).
  • Raghuram Rajan (2010), Fault Lines: How Hidden Fractures Still Threaten the World Economy (Princeton, N.J.: Princeton University Press)
  • Michael Kumhof and Romain Ranciere (2011), ‘Inequality, Leverage and Crises,’ CEPR Discussion Paper 8179 (London: Centre for Economic Policy Research, January)
  • Michael D. Bordo and Christopher M. Meissner (2012), ‘Does Inequality Lead to a Financial Crisis?’ NBER Working Paper Series 17896 (Cambridge, Mass.: National Bureau of Economic Research, March)
  • Neil Bhutta (2011), ‘The Community Reinvestment Act and Mortgage Lending to Lower Income Borrowers and Neighborhoods,’ Journal of Law and Economics, vol. 54 (November), pp. 953-83
  • Neil Bhutta (2012), ‘GSE Activity and Mortgage Supply in Lower-Income and Minority Neighborhoods: The Effect of the Affordable Housing Goals,’ Journal of Real Estate Finance and Economics, vol. 45 (June), pp. 238-61.
  • Atif Mian, Kamalesh Rao, and Amir Sufi (2011), ‘Household Balance Sheets, Consumption, and the Economic Slump (PDF),’
  • Karen Dynan (2012), ‘Is a Household Debt Overhang Holding Back Consumption?’ Brookings Papers on Economic Activity, Spring, pp. 299-358.
  • Rudiger Ahrend, Jens Arnold, and Charlotte Moeser (2011), ‘The Sharing of Macroeconomic Risk: Who Loses (and Gains) from Macroeconomic Shocks,’ OECD Economics Department Working Papers 877 (Washington: OECD Publishing, July).
  • Carmen DeNavas-Walt, Bernadette D. Proctor, and Jessica C. Smith (2012), Income, Poverty, and Health Insurance Coverage in the United States: 2011 (PDF), U.S. Census Bureau Current Population Reports P60-243 (Washington: U.S. Government Printing Office, September).
  • National Employment Law Project (2012), ‘The Low-Wage Recovery and Growing Inequality,’ Data Brief, report (New York: NELP, August), http://nelp.3cdn.net/8ee4a46a37c86939c0_qjm6bkhe0.pdf.
  • See Nir Jaimovich and Henry E. Siu (2012), ‘The Trend Is the Cycle: Job Polarization and Jobless Recoveries,’ NBER Working Paper Series 18334 (Cambridge, Mass: National Bureau of Economic Research, August)
  • Christopher L. Foote and Richard W. Ryan (2012), ‘Labor-Market Polarization over the Business Cycle,’ Public Policy Discussion Paper 12-8 (Boston: Federal Reserve Bank of Boston, December).
  • U.S. Department of Labor, Commission on the Future of Worker-Management Relations (1994), ‘Contingent Workers,’ in Fact Finding Report.
  • Steven J. Davis and Till von Wachter (2011), ‘Recessions and the Costs of Job Loss,’ Brookings Papers on Economic Activity, Fall, pp. 1-55.
  • Jesse Rothstein (2012), ‘The Labor Market Four Years into the Crisis: Assessing Structural Explanations,’ ILRReview, vol. 65 (July), figure 11, p. 486.

Must-Read: Richard Mayhew: Medicare Reimbursement, Public Options and Medicare Buy-In

Posted on by Brad DeLong

Must-Read: Richard Mayhew: Medicare Reimbursement, Public Options and Medicare Buy-In: “There has been a flurry of liberal health wonk reform proposals this week…

…@HuffPostPol: Clinton formally endorses public option and Medicare for under-55s by @citizencohn http://huff.to/29vZ1Td

…I want to see details just exactly what is meant by the Clinton proposal as it can range from aggressive administrative action small ball (as we talked about in February) to another whack at the legislative pinata…. But before I do a long wonk dive, I just want to re-iterate a very simple point. Most liberal health policy goals have a very simple summary: get more people on insurance that pays providers rates that are closer to Medicare rates than commercial large group rates. Large group rates pay providers between 40% and 100% more than Medicare for physical health service. Moving the entire employer sponsored coverage universe to paying Medicare like rates would knock 30% off of the current bill. We see this in Exchange…. Plans that are profitable tend to be paying providers Medicare plus a little bit while offering narrow networks. We see this in the proposal to move the Medicare buy-in age to 55. We see this in the proposal to have a public option…. All of these efforts are just different ways to achieve an underlying goal of reducing provider compensation by lowering the average payment per service by having more people move from high payment to provider coverage to Medicare based pricing. Everything else is details. Those details matter a lot, but the core policy thrust is fairly simple.

Must-Watch: Robert Skidelsky et al.: Too Much Maths, Too Little History: The Problem of Economics

Posted on by Brad DeLong

Must-Watch: Robert Skidelsky et al.: Too Much Maths, Too Little History: The Problem of Economics: “The debate hosted by the LSE Economic History Department…

…in collaboration with the LSESU Economic History Society and the LSESU Economics Society. . Speakers: Lord Robert Skidelsky & Dr. Ha-Joon Chang; Prof. Steve Pisckhe & Prof. Francesco Caselli. Chair – Professor James Foreman-Peck:

The LSE is currently the only institution to have a separate EH department. We want to encourage students and academics alike to rethink the methodologies used to explain how our world works.

Do we use the theoretical and econometrical method to create models with assumptions to distil the complexities of human nature and produce measurable results? Or do we use the historical process of considering all factors to provide a more holistic explanation? More importantly, which method should be adopted to better understand increasingly complex economic phenomena in the future?

We are striving to provide our students breadth that exceeds their current theoretical studies. Hence, whilst we recognise the importance of economic history in allowing us to become closer to the truth and produce more intricate portrayal of events, the significance of models and mathematics remains to be emphasised.

Indeed, we wish to have this controversially named debate in order to both highlight the tension between the two disciplines and to produce a more nuanced overview in defence of the future of Economics.

Must-Reads: July 15, 2016

Posted on by Brad DeLong

Should Reads:

Must-Watch: Barry Ritholtz: Ha-Joon Chang: Economics Is For Everyone!

Posted on by Brad DeLong

Must-Watch: Barry Ritholtz: Ha-Joon Chang: Economics Is For Everyone!: “Really interesting stuff…

…legendary economist Ha-Joon Chang in a mind-blowing RSA Animate…. explains why every single person can and SHOULD get their head around basic economics. He pulls back the curtain on the often mystifying language of derivatives and quantitive easing, and explains how easily economic myths and assumptions become gospel. Arm yourself with some facts, and get involved in discussions about the fundamentals that underpin our day-to-day lives:

Weekend reading: “Slipping on rungs of the income ladder” 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

You’ve probably heard of concerns about “short-termism” among companies which prioritize hitting earnings targets over investing in research and development. A new paper details the phenomenon and its potential costs to U.S. productivity and economic growth.

Will the robots unleash amazing amounts of economic growth and throw us all out of our jobs? Well, it depends a lot on how increased mechanization of the economy affects labor demand.

The latest data from Job Openings and Labor Turnover Survey—known as JOLTS—was released on Tuesday morning. A look at a few important relationships between JOLTS data show any structural changes in the labor market seem more likely to be on the employer side.

An investment in a college degree lasts a lifetime, yet the time to repay student loans in the United States is usually only 10 years. Other countries allow a much longer time frame and there would likely be benefits to moving to such a system here.

“In general, a worker’s starting position has become more predictive of their final position across the income spectrum.” Austin Clemens shows with two interactive graphs how income mobility during a lifetime is on the decline in the US., according to new research by a pair of 2015 Equitable Growth grantees Michael D. Carr and Emily E. Wiemers at the University of Massachusetts-Boston.

Links from around the web

Does a universal basic income make sense in today’s economy? Greg Ip argues that in an era of declining labor force participation, an untargeted policy that would likely further depress the amount of workers in the labor force doesn’t make sense. [wsj]

“If countries want to carry international surpluses indefinitely the suggestion here is they need also to reinvest those “savings” into capacity expanding investments abroad. If not, those savings will eventually end up constraining global growth by turning everything into a simple zero sum game.” Izabella Kaminska writes on global imbalances. [ft alphaville]

Why some people so concerned about inflation? Noah Smith argues that fears of slightly higher inflation—say 4 percent annually—are overwrought and that central banks would shoot for higher inflation and boost real growth. [bloomberg view]

The decline of competition in the United States “is a decline that stunts entrepreneurship, hinders workers’ mobility and slows productivity growth.” And potentially, Eduardo Porter writes, decreased corporate competition could be a reason for high levels of inequality. [nyt]

Estimates of potential economic growth in the United States have been revised downward for years. But what’s behind these declines? J.W. Mason argues that a large chunk of these downward revisions are due to the continuing effects of the Great Recession. [slackwire]

Friday figure

Figure from “A graphical update on the latest data on the U.S. jobs market” by Nick Bunker

Must-Read: Aaron Carroll: So What Did the Medicaid Expansion Actually Do?

Posted on by Brad DeLong

Must-Read: Aaron Carroll: So What Did the Medicaid Expansion Actually Do?: “In 2014, only 26 states and the District of Columbia chose to implement the Patient Protection and Affordable Care Act (ACA) Medicaid expansions for low-income adults…

…Laura Wherry and Sarah Miller…. By the second half of 2014, adults in the expansion states had seen their health insurance coverage increase 7.4%; Medicaid coverage increased 10.5%. This isn’t surprising, as increased coverage was the main intent of the Affordable Care Act. Coverage was found to have ‘improved’ as well (7.1%)…. In Medicaid expansion states, there were increased in physician visits (6.6%), hospital stays (2.4%), rates of diagnoses of diabetes (5.2%) and high cholesterol (5.7%). Of course, this is an observational study…. Insurance coverage is just the first step in improving access. What this study adds are some data showing that expanding Medicaid through the ACA resulted in increased coverage, improved coverage, more physician visits, and more disease diagnosed…

Must-Read: Izabella Kaminska: Why the World Needs Investment

Posted on by Brad DeLong

Must-Read: Nick Bunker sends us to:

Izabella Kaminska: Why the World Needs Investment: “The liquidity trap, when monetary policy becomes ineffective at very low or zero interest rates…

…may be old news but the global dimension of the problem is a new and worrying phenomenon…. So engrained is the notion saving is always thrifty and good that it’s become extremely hard to articulate why this state of affairs is so disastrous for the global economy.On Monday, however, Citi’s rates team does an excellent job of summing up the problem…. In their opinion liquidity traps–symptomatic of the secular stagnation phenomenon more broadly–are exported abroad by way of four different channels:

  1. Capital markets transmit secular stagnation and can transmit recessions in a world with low interest rates.
  2. Policies that trigger current account surpluses are beggar-thy-neighbor.
  3. Reserve currencies bear a disproportionate share of the global liquidity trap, because of a shortage of safe assets. This works by leaving real rates too low in the face of a negative shock (e.g. Brexit) to give confidence in the ability to stimulate demand.
  4. Large fiscal expansions can eliminate secular stagnation (= bearish bonds).

In that regard, it’s worth paying attention to the growing euroglut phenomenon. As the analysts note, the Euro area in 2015 contributed to the glut phenomenon with a large surplus of 3.2% of GDP, adding to the more traditional surpluses from Japan (3.3%) and China (3%). This, in short, isn’t funny anymore. If countries want to carry international surpluses indefinitely the suggestion here is they need also to reinvest those ‘savings’ into capacity expanding investments abroad. If not, those savings will eventually end up constraining global growth by turning everything into a simple zero sum game. We’ve not seen it spelled out that simply before. But it’s an elegant and logical explanation.

Screen Shot 2016 07 11 at 11 20 28 png 762×436 pixels

Cf.: Ricardo J. Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas (2015): Global Imbalances and Currency Wars at the ZLB: “The consequences of extremely low equilibrium real interest rates in a world with integrated but heterogenous capital markets and nominal rigidities…

…(i) Economies experiencing liquidity traps pull others into a similar situation by running current account surpluses; (ii) Reserve currencies have a tendency to bear a disproportionate share of the global liquidity trap|a phenomenon we dub the ‘reserve currency paradox’; (iii) While more price and wage flexibility exacerbates the risk of a deflationary global liquidity trap, it is the more rigid economies that bear the brunt of the recession; (iv) Beggar-thy-neighbor exchange rate devaluations provide stimulus to the undertaking country at the expense of other countries (zero-sum); and (v) Safe public debt issuances, helicopter drops of money, and increases in government spending in any country are expansionary for all countries (positive-sum). We use these results to shed light on the evolution of global imbalances, interest rates, and exchange rates since the beginning of the global financial crisis.