Category: Equitablog

Equitable Growth’s Jobs Day Graphs: June 2016 Report Edition

Posted on by Nick Bunker

Earlier this morning, The U.S. Bureau of Labor Statistics released new data on the U.S. labor market during the month of June. Below are five graphs compiled by Equitable Growth staff highlighting important trends in the data.

The share of prime-age workers with a job ticked up to 77.8 percent, but it’s still below its low point during the last expansion.

Annual wage growth for production and nonsupervisory workers held steady at 2.4%, showing no sign of accelerating in nominal wage growth.

Involuntary part-time employment fell dramatically after a jump in May, but is still above pre-recession levels.

The official unemployment rate increased to 4.9%, but the broader U-6 rate declined to 9.6%.

The overall unemployment rate has been on the decline, but the level varies tremendously by race.

Photo credit: Tony Dejak, AP Photo

Must-Read: Antonio Fatás and Lawrence H. Summers: The Permanent Effects of Fiscal Consolidations

Posted on by Brad DeLong

Must-Read: Antonio Fatás and Lawrence H. Summers: The Permanent Effects of Fiscal Consolidations: “The global financial crisis has permanently lowered the path of GDP in all advanced economies…

…At the same time, and in response to rising government debt levels, many of these countries have been engaging in fiscal consolidations that have had a negative impact on growth rates. We empirically explore the connections between these two facts by extending to longer horizons the methodology of Blanchard and Leigh (2013) regarding fiscal policy multipliers. Our results provide support for the presence of strong hysteresis effects of fiscal policy. The large size of the effects points in the direction of self-defeating fiscal consolidations as suggested by DeLong and Summers (2012). Attempts to reduce debt via fiscal consolidations have very likely resulted in a higher debt to GDP ratio through their long-term negative impact on output.

Must-Read: Jonathan Chait: Why ‘Fix the Debt’ Just Can’t Quit Paul Ryan

Posted on by Brad DeLong

Must-Read: I concur with Jonathan Chait here: “Fix the Debt” has lost its way, and does not look like it will ever be able to find it again. People funding it and working for it should be well advised to go and find something else more productive to do with their money and time…

Jonathan Chait: Why ‘Fix the Debt’ Just Can’t Quit Paul Ryan: “Last week, House Republicans released a plan for a gigantic, regressive tax cut…

…Since gigantic tax cuts increase the budget deficit, you would think an organization devoted to the singular mission of reducing the deficit would oppose it. But no. The anti-deficit lobby Fix the Debt released a statement of qualified praise, which I ridiculed. Fix the Debt responds with a new, brief defense of its position. What its argument actually reveals is its denial about the state of the Republican Party. Here is the relevant portion of Fix the Debt’s response:

We don’t endorse the plan, but we do welcome it because it puts tax reform on the agenda in Washington. It also moves in the right direction by eliminating or limiting many of the tax breaks that complicate the tax code and shrink the tax base. Tax reform should contribute to deficit reduction, and definitely not increase deficits. We hope that the new plan will spur discussion and bipartisan negotiation on reform that will simplify the tax code, make the country more competitive, and help to fix the debt.

The nub of the argument is that the Republican plan, while admittedly imperfect, ‘moves in the right direction.’ But if you define the right direction as reducing the debt, then the plan doesn’t move in the right direction. It moves in the wrong direction. The Republican plan is for massive cuts in tax rates, including the complete elimination of the estate tax. It is true that the proposal gestures vaguely in the direction of closing loopholes and expenditures, but it does not define what these would be. What’s more, the plan’s authors have made clear that the proposal will be a net tax cut.

So how can Fix the Debt claim that a plan to increase the debt can ‘help to fix the debt’? It can only be understood as an extension of the organization’s dysfunctional enabling relationship…. During President Obama’s first term, anti-deficit activists came up with a plan that they hoped would induce Republicans to abandon their fanatical opposition to higher tax revenue. First, they would get Democrats to support cuts to Social Security and Medicare as part of the trade. And second, the higher revenue would come not in the form of tax-rate increases but instead by reducing loopholes and [tax] expenditures…. In reality, Republicans refused to go for this deal. They didn’t just refuse once. They refused time after time. In 2010, the Simpson-Bowles commission came up with a plan that traded revenue-increasing tax reform for cuts to retirement programs, and leading Republicans like Paul Ryan all rejected the deal. Then, in 2011, Obama tried to strike a similar bargain with House Republicans when they held the debt ceiling hostage, but they rejected it again. That standoff led to the creation of a ‘supercommittee’ that was tasked with creating another version of the revenue-increasing tax-reform-for-retirement-cuts deal, which predictably failed again. And then, when the Bush tax cuts were set to expire at the end of 2012, the Obama administration hoped the pressure of an imminent tax increase would force Republicans to make some version of the deal, but once again they refused, instead using their leverage to minimize the tax hit on upper-income households…. The debt-hawk theory on how Republicans could be induced to give up their fanatical opposition to higher revenue failed….

Conceding that this is the Republican position would subvert Fix the Debt’s entire theory of change. So instead the group continues to reside in a fantasy world where the GOP can be coaxed into doing the thing it has proven extensively it won’t do. In this fantasy world, a Republican using the words ‘tax reform’ means a step toward ‘discussion’ and ‘bipartisan negotiation’ and, ultimately, a result that would be the precise opposite of what Republicans actually want to do.

Must-Reads: July 8, 2016

Posted on by Brad DeLong

  • Larry Summers: A Remarkable Financial Moment

  • Paul De Grauwe and Yuemei Ji: Animal Spirits and the Optimal Inflation Target
  • Federal Reserve Bank of Boston: 60th Economic Conference
  • Scott Lemieux: Why Did Obama Do so Well at the Supreme Court?
  • Pseudoerasmus: Did Inequality Cause the First World War? Contra Hobson-Lenin-Milanovic

    • Should Reads:

    Must-Read: Larry Summers: A Remarkable Financial Moment

    Posted on by Brad DeLong

    Must-Read: Larry Summers: A Remarkable Financial Moment: “10 and 30 year interest rates today reached all time low levels of 1.32 percent and 2.10 percent…

    …Record low 10 year interest rate were also registered in Germany, France, Switzerland and Australia.  Notably Swiss 50 year interest rates are now for the first time negative.  Rates out 15 years are negative in Germany and 9 years in France. Such rates would have seemed inconceivable a decade ago and very unlikely even a couple of years ago…. Extraordinarily low rates reflect both subtarget expected inflation even over long horizons and very low real interest rates…. Remarkably the market does not now expect a full Fed tightening until early 2019. This is despite all the Fed speeches expressing optimism about the economy and a desire to normalize interest rates… very low long term real rates, sluggish growth expectations, concerns about the ability even over the fairly long term to get inflation to average 2 percent, and a sense that the Fed and the world’s major central banks will not be able to normalize financial conditions in the foreseeable future….

    Policymakers still have not made sufficiently radical adjustments in their world view to reflect this new reality of a world where generating adequate nominal GDP growth is likely to be the primary macroeconomic policy challenge for the next decade. Having the right world view is essential if there is to be a chance of making the right decisions.  Here are the necessary adjustments…. Neutral real interest rates are likely close to zero going forward…. Second, as counterintuitive as it is to central bankers who came of age when the inflation of the 1970s defined the central banking challenge, our problem today is insufficient inflation…. Evidence from markets and some surveys suggests that inflation expectations are becoming unhinged to the downside…. In a world where interest rates over horizons of more than a generation are far lower than even pessimistic projections of growth, traditional thinking about debt sustainability needs to be discarded…. The conditions Brad Delong and I set out in 2012 for expansionary fiscal policy to pay for itself are much more easily satisfied today than they were at that time.

    Fourth, the traditional suite of structural policies to promote flexibility are not especially likely to be successful in the current environment…. In the presence of chronic excess supply structural reform has the risk of spurring disinflation rather than the contributing to a necessary increase in inflation. There is in fact a case for strengthening entitlement benefits so as to promote current demand…. Traditional OECD-type recommendations cannot be right as both a response to inflationary pressures and deflationary pressures.  They were more right historically than they are today…. Treatments without accurate diagnosis have little chance success.  We need to begin with a much clearer diagnosis of our current malaise than policymakers have today.  The level of interest rates provides a very strong clue.

    Must-Read: Paul De Grauwe and Yuemei Ji: Animal Spirits and the Optimal Inflation Target

    Posted on by Brad DeLong

    Must-Read: Paul De Grauwe and Yuemei Ji: Animal Spirits and the Optimal Inflation Target: “Low inflation targets can cause economies to hit the zero lower bound during deflationary periods caused by even mild shocks…

    …In such circumstances, central banks lose their ability to stimulate the economy. This column assesses the risk of this happening using a model that endogenises self-perpetuating optimism and pessimism in the economy. Given agents’ intrinsic chronic pessimism during times of recession, central banks should raise their inflation targets to 3 or 4% to preserve their ability to stimulate the economy when needed.

    Must-Read: Scott Lemieux: Why Did Obama Do so Well at the Supreme Court?

    Posted on by Brad DeLong

    Must-Read: Scott Lemieux: Why Did Obama Do so Well at the Supreme Court?: “The last week of the Supreme Court’s last full term of the Obama era…

    …was a microcosm of his administration’s relationship with the Roberts Court…. In a one-sentence opinion, the Supreme Court left in place a lower court ruling that the president’s DAPA immigration program… was illegal, meaning that it will almost certainly not be implemented before President Obama leaves office. Still, the news… was good. A surprising majority opinion upheld the University of Texas’s affirmative action program, and a somewhat less surprising majority opinion struck down Texas’s draconian abortion statute…. Looking at the Supreme Court’s major decisions during the Obama administration as a whole, the story is similar. The last time a Democratic president successfully passed an ambitious progressive agenda with a Republican-controlled Supreme Court, the result was a constitutional crisis…. [But] the Roberts Court left Obama’s domestic agenda mostly intact, while delivering the Democratic coalition some major victories it would not have been able to win any other way, most notably on abortion and LGBT rights.

    One interpretation of the Court’s behavior is that it is isolated from the pressures that have caused the other institutions of American politics to become cripplingly polarized. This interpretation, however, is probably wrong. The relative moderation of the Roberts Court is likely the last gasp of the previous partisan order…. There have been plenty of… major conservative judicial victories during the Obama era, most notably the gutting of the most important civil rights statute since Reconstruction in the 2013 decision Shelby County…. Even worse than the result of the case was the shoddiness of Roberts’s opinion…. Since then, many Republican-controlled states have wasted little time passing discriminatory voting restrictions, undercutting the Court’s conclusion that the strong enforcement of the Voting Rights Act was no longer necessary. While the Roberts Court has permitted the states to engage in a wide array of vote suppression tactics on the one hand, it has prevented state and federal governments from passing campaign finance restrictions on the other. And in lower-profile cases, the Court has consistently ruled against the interests of consumers and the rights of employees when interpreting federal law….

    With the admittedly crucial exception of Sebelius, the liberal victories of the Roberts Court were due to one man: Anthony Kennedy…. Since early in the Nixon administration, the median vote on the Court on the most politically salient issues has been a Republican, but a moderate, country-club Republican: Potter Stewart, Lewis Powell, Sandra Day O’Connor, and now Kennedy. The issue going forward is that this kind of Republican is rapidly going extinct…. Future Republican nominees are going to be in the mold of Samuel Alito and Roberts….

    The Supreme Court has historically been a centrist institution… [because] elites—from whose ranks Supreme Court justices are generally chosen—tend to have less polarized views than ordinary members of the party…. A decade from now, the Supreme Court will almost certainly not be controlled by either a moderate Republican like Anthony Kennedy or a heterodox liberal like Byron White…. The median vote on the Court will almost certainly be a conservative in the mold of Alito or Roberts, or a liberal in the mold of Ruth Bader Ginsburg…. This polarization is not symmetrical…. Alito is further to the right than Ginsburg is to the left…. Could anything stop the Court from becoming as polarized as the rest of the political order? If current party polarization persists, probably not…. In the short term… whether the Court will be controlled by a liberal Democratic faction or a conservative Republican one… means that the presidential and Senate elections in November will be high-stakes contests indeed.

    Have mutual funds boosted CEO pay in the United States?

    Posted on by Bridget Ansel
    A new working paper finds a relationship between common ownership of an industry and the kind of compensation contracts that chief executives receive

    Understanding the rise in CEO pay is important for understanding the rise of top-end inequality in the United States. There are a number of possible explanations for why U.S. corporate executives make so much more relative to the rest of the workforce than they did back in the late 1970s. Firms are larger today, increasing the importance of good management at the top. Declining tax rates for those at the very top also induces executives to bargain for higher salaries. Or, as a new paper argues, perhaps increased common ownership of public firms by way of the mutual fund industry leads to higher executive pay.

    The new paper is by economists Miguel Anton of the Universidad de Navarra, Florian Ederer of Yale University, Mireia Gine of the University of Pennsylvania, and Martin Schmalz at the University of Michigan. They build on an argument that increased common ownership of public firms is creating problems for competition in the U.S. economy—Increasingly because the ownership of public firms is becoming more and more concentrated in the hands of mutual funds. These funds buy stakes in a number of firms in order to diversify their risk. This common ownership means that a fund often owns shares in competing firms in the same industry. These passive owners have an incentive for these firms not to compete against each other. The lack of competition drives up total profits across the same industry, which in turn increases the returns to these diversified mutual fund investors.

    Previous work shows how increased common ownership in the airline industry led to higher prices. The new paper argues that increased common ownership results in higher CEO pay that is less tied to competition. The four economists find that funds with large common ownership stakes want to see less competition in the markets they have invested in, so industries with higher common ownership are more likely to see managers have contracts with fewer incentives to compete and more unconditional pay (that is, pay not based on performance).

    Looking at the data, the co-authors show a relationship between common ownership of an industry and the kind of compensation contracts that chief executives receive. In more commonly-owned industries, executive compensation is less tied to the performance of the specific firm and more with the performance of rivals, meaning its more closely tied to the overall performance of the industry. More common ownership is also correlated with higher unconditional pay for executives, again showing less of a connection between executive pay and performance. The authors additionally use variation in ownership from a mutual fund scandal to argue that these correlations reflect a causal relationship between compensation and common ownership.

    This paper draws another connection between declining competition in the U.S. economy and rising income inequality. Similar to other research connecting increased economic rents and higher inter-firm inequality—increasing market power for firms resulting in “superfirms” that pay relatively well—the findings in this new paper also a link between competition and income inequality. These trends might also negatively affect economic growth, a clear and troubling possibility.

    Must-Read: Pseudoerasmus: Did Inequality Cause the First World War? Contra Hobson-Lenin-Milanovic

    Posted on by Brad DeLong

    Must-Read: Pseudoerasmus: Did Inequality Cause the First World War? Contra Hobson-Lenin-Milanovic: “In a small section in his new book, Branko Milanovic argues that the First World War…

    …was ultimately caused by income & wealth inequality within the belligerent countries… John A. Hobson, Rosa Luxemburg, and Lenin…. High domestic inequality => ‘underconsumption’ by the masses & ‘surplus’ savings by the elites => capital exports, i.e., search for overseas outlets for investment => the ‘scramble for colonies’ & imperialism => (a major cause of the) WAR…. But… Ferguson’s The Pity of War has many problems, but one thing he’s very right about is the war that never broke out in the late 19th century between Britain and France, or between Britain and Russia…. Annoyingly, the Great Powers kept on resolving colonial disputes peacefully… too much European compromise and cooperation….

    Furthermore, the ‘financier parasites’ of Hobson and Lenin had simply the wrong interest… feared rivalry… for the very good and rational reason that they had everything to lose from it…. The colonial disputes which Britain took most seriously and was willing to go to war over–Egypt (Fashoda), South Africa (German tensions over Transvaal), Afghanistan (Russian relations)–were all related in some way to monopolising maritime access, and eliminating all traces of threat, to India…. All else… was largely open to negotiation. Except, of course, for the naval rivalry in the North Sea. What actually soured Anglo-German relations was that Germany’s naval programme was perceived as an existential threat…. German dreadnoughts just a ‘few hours from the English coast’ were somewhat more important than Samoa or the Caprivi Strip….

    Germany’s rulers believed the country’s political standing and national prestige was incommensurate with its sudden and dramatic rise as an economic superpower…. Imagine the chafing if Taiwan, and not the PRC, still represented China on the UN Security Council…. Who actually took the decision to go to war in Germany[?]… ‘Structural factors’ still require some kind of mechanism exerting pressure on the actual actors…. Mark Harrison…. “No country went to war for commercial advantage. Business interests favoured peace in all countries. Public opinion was considered mainly when the leading actors worried about the legitimacy of actions they had already decided on. If capital and labour had been represented in the Austrian, German, and Russian cabinets, there would have been no war.”

    The capitalist bourgeoisie did not have the final power in Germany (let alone Austria or Russia). And the small and specific group of decision-makers is identifiable…. Fritz Fischer… [argued] that Germany had already taken the decision to go to war in 1912, based on a high-level meeting that year which seemed eerily to reflect much of German behaviour in July 1914…. In all three [of] Germany, Austria, and Russia, a feudal-agrarian-military elite governed over an increasingly bourgeois-industrial society (but especially in Germany). Those decision-makers held the unilateral power to go to war. And they took the decision unaccountably. When it came to matters of war, it’s not even clear that the East-Elbian Prussian Junker class really cared about the opinions of the country’s industrial and banking magnates.

    I must confess I am considerably more sympathetic to Hobson (if not to Luxemburg and Lenin). As I read Hobson, his argument goes thus: (1) Income inequality leads to underconsumption–which means that investment and government purchases must be high share of national income in order for anything like full employment to be maintained. (2) Governments that do not maintain near-full employment most of the time are likely to fall. (3) Governments that do maintain near-full employment most of the time are likely to persist in office. (4) Imperialist governments that spend public money on overseas wars for vent-for-surplus colonies are likely to have higher shares of exports, investment, and government purchases in national income. (5) Militaristic governments that seek military advantage over other European powers are likely to have even higher shares of government purchases in national income. (6) Thus the political-economic logic of underconsumption puts pressure on the political system to produce more high politicians in office who like to build, play with, and ultimately use their military toys.

    This seems to me to be not implausible, in contrast to the Lenin-Luxemburg version of the argument, which I agree is very implausible.

    Must-Reads: July 6, 2016

    Posted on by Brad DeLong

    Should Reads: