Category: Equitablog

Must-Read: Paul Krugman: Is Our Economists Learning?

Posted on by Brad DeLong

Must-Read: Paul Krugman: Is Our Economists Learning?: “Brad DeLong has an excellent presentation on the sad history of belief in the confidence fairy…

…and its dire effects on policy. One of his themes is the bad behavior of quite a few professional economists, who invented new doctrines on the fly to justify their opposition to stimulus and desire for austerity even in the face of a depression and zero interest rates.vOne quibble: I don’t think Brad makes it clear just how bad the Lucas-type claim that government spending would crowd out private investment even at the zero lower bound really was….

Two things crossed my virtual desk today that reinforce the point about how badly some of my colleagues continue to deal with fiscal policy issues. First, Greg Mankiw has a piece that talks about Alesina-Ardagna on expansionary austerity without mentioning any of the multiple studies refuting their results. And… as @obsoletedogma (Matt O’Brien) notes, he cites a 2002 Blanchard paper skeptical about fiscal stimulus while somehow not mentioning the famous 2013 Blanchard-Leigh paper showing that multipliers are much bigger than the IMF thought.

Second, I see a note from David Folkerts-Landau of Deutsche Bank lambasting the ECB for its easy-money policies, because: “by appointing itself the eurozone’s ‘whatever it takes’ saviour of last resort, the ECB has allowed politicians to sit on their hands with regard to growth-enhancing reforms and necessary fiscal consolidation. Thereby ECB policy is threatening the European project as a whole for the sake of short-term financial stability. The longer policy prevents the necessary catharsis, the more it contributes to the growth of populist or extremist politics.” Yep. That ‘catharsis’ worked really well when Chancellor Brüning did it, didn’t it?…

[In] the 1970s… stagflation led to a dramatic revision of both macroeconomics and policy doctrine. This time far worse economic events, and predictions by freshwater economists far more at odds with experience than the mistakes of Keynesians in the past, seem to have produced no concessions whatsoever.

Must-Read: Paul Krugman: When Virtue Fails

Posted on by Brad DeLong

Must-Read: Paul Krugman: When Virtue Fails: “There are two narratives about the euro crisis….

…One… shocks happen, and when you establish a common currency without a shared government, you give countries no good way, fiscal or monetary, to respond…. The other narrative, however, favored by Berlin and Brussels, sees the whole thing as the wages of sin. Southern European countries behaved irresponsibly, and now they’re paying the price. What everyone needs to do, they say, is institute a reign of virtue, of fiscal responsibility with structural reform, and all will be well. So it’s important to note that the euro area’s locus of trouble is moving from the south to an arc of northern discomfort–to countries that don’t at all fit the stereotype of lazy southerners…. Finland is the new sick man of Europe. And the Netherlands… is doing slightly better than Italy but significantly worse than France and Portugal….

Finland has been hit by the fall of Nokia and the adverse effect of digital media on newsprint exports. The Dutch are suffering from a burst housing bubble, severe deleveraging, and an extra burden of austerity mania. But the overall point is that when things go wrong there’s no good answer. So maybe the woes of the euro reflect a bad system, not moral failure on the part of troubled nations? Das ist unmöglich!

Must-Reads: June 18, 2016

Posted on by Brad DeLong

Should Reads:

Must-Read: Duncan Black: Sometimes We Get Results

Posted on by Brad DeLong

Must-Read: Duncan Black: Sometimes We Get Results: “Or, at least, play a part…

…Aside from yay team, it’s important to remember that this isn’t just some ideological thing, though it is that, too. It’s a recognition that the retirement crisis is here and it’s very real. I’d say there’s a broad enough consensus (does not include zombie-eyed granny starvers) that however we get to the goal, society should be structured in such a way that the vast majority of people hit retirement age with some economic stability. The current system has not done that, and whatever Exciting New Ideas we can come up with for the ideal retirement program (obviously I’m partial to plans which rhyme with brocial maturity), we have a crop of people in retirement or entering retirement soon who have no hope of coming up with that kind of post-retirement income stream. The only way to keep them off the streets, or for the lucky few working them until they die, is to provide non-trivial across the board benefit increases. And if you’re worried Donald Trump’s Social Security payment is too large (none of them are very large, so worrying about this is silly and the only people who claim to worry about such things are just using it as an excuse to not help anyone), you can just increase tax rates on rich people. That’s the easy way to means testing, and how a progressive tax system is supposed to work.

David Dayen: The Real Story Behind Obama’s Radical U-turn on Social Security: “The initial impulse from the Obama administration was to use Social Security cuts as a bargaining chip in a larger deal with Republicans…

…Grand bargain talks from 2011 to 2013 repeatedly invoked a different way to calculate the consumer price index (known as ‘chained CPI’), which would have resulted in $1,000 less a year for the average 85-year-old. Obama put chained CPI in his fiscal year 2014 budget. Contrary to some after-the-fact snickering, this was a very credible threat, and it allowed Republicans to point to a Democratic president favoring entitlement cuts. Only the Tea Party’s unwillingness to consider anything resembling a compromise saved retirees from cuts.

At first, liberal groups played defense on chained CPI, accustomed to mobilizing in opposition rather than staking out a bolder claim. But the expansion movement can really be traced back to one blogger: Duncan Black, popularly known as ‘Atrios,’ who waged an initially lonely crusade in a series of 2012 columns in USA Today, explaining why the retirement crisis was coming and how expanding Social Security represented the cleanest solution. Eventually, Black found adherents. The New America Foundation, in a groundbreaking proposal, called for an entirely new, $11,000-a-year universal benefit on top of Social Security. By mid-2013, most major liberal groups adopted an old bill from former Iowa Sen. Tom Harkin to modestly expand Social Security with more generous cost-of-living increases that better reflect rising medical costs for seniors. By 2014, chained CPI was out of the president’s budget. The reason Social Security expansion was a wedge issue waiting to be wielded is that it’s massively popular….

Now President Obama, who started this all by embracing the opposite position years ago, has explicitly endorsed the expansion of Social Security. This victory is a great credit to Duncan Black and everyone who moved a minority opinion in the corridors of power in the Democratic Party into the mainstream. There are wildly varying ways to claim support for Social Security expansion, ones that are modest and ones that are disruptive. But before the question, even among Democrats, was how much to cut Social Security; now the question is how much to expand it…. Politically, Republicans know that Social Security cuts equal political death. The same was true of opposition to same-sex marriage, which is why most of the GOP caucus just stopped talking about it. The path to Social Security expansion can’t go through the courts the way marriage equality did, and it will take a lot more work. But the center-left, in Washington and in the country, is on board. And that is a testament to the power of taking a stand and not relenting. Eventually, the world might just swing your way.

Slides For: The Confidence Fairy in Historical Perspective

Posted on by Brad DeLong

History of Economics Society :: June 17, 2016 :: Geneen Auditorium, Fuqua School of Business, Duke University, Durham, NC:

https://www.icloud.com/keynote/00033GAKBnIHC53Sv0UDhbqEw#2016-06-17_HES_Confidence_Fairy_in_Historical_Perspective | http://delong.typepad.com/2016-06-17-hes-confidence-fairy-in-historical-perspective.pdf

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Weekend reading: Job openings, the state of women, the No-Job-Loss criterion, and more!

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 has published this week and the second is 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

Job openings have grown much more quickly than new hires since the end of the Great Recession. Is that a sign of a “skills mismatch” in the labor market? Not likely. Evidence points to changes in how firms are posting jobs.

Tuesday afternoon Heather Boushey, Equitable Growth’s Executive Director and Chief Economist, addressed the White House United State of Women Summit on how women are reshaping the U.S. economy. Check out her remarks here.

Occupational licensing is under increasing scrutiny. One of the potential problems with licensing is that it may reduce geographic mobility as it hinders moving for a job. But new research doesn’t find much evidence for this hypothesis.

Getting people to respond to surveys can be tough. As the response rates to U.S. government surveys go down, the fact that hard-to-reach respondents are different from those who are easy to reach may pose some problems for official statistics.

A new Equitable Growth working paper from David Howell, Kea Fielder, and Stephanie Luce argues that the framing of the debate about the minimum wage should be changed from its current focus on preventing no job losses whatsoever.

The ups-and-downs for economic growth have an effect on income and wealth inequality, but how about the other way around? New research shows how economic inequality can influence the severity of recessions and overall fragility of the economy.

Links from around the web

Right now the amount of rent a federal housing voucher will cover is set by metropolitan level, despite the huge variation in housing costs within metros. Emily Badger describes a new rule that may end up setting voucher amounts by zip code and how that could improve life opportunities for low-income children. [wonkblog]

Why is productivity growth slow despite all the apparent innovation in technology in recent years? As Dietrich Vollrath argues, it may be because overall productivity growth is determined by productivity in the service sector where it’s hard to get productivity growth. [growth economics]

“The American workplace has basically become a Thunderdome where the victors are rewarded with long hours.” Jeff Spross writes about the rise of long hours in the U.S. economy as well as the distribution of those additional hours. [the week]

Low and even negative interest rates may be necessary to boost economic growth, but their effects on the banking sector are unclear. Maybe their even contributing to the “death of banking.” Kadhim Shubber looks at some evidence. [ft alphaville]

Speaking of low-interest rates, those negative interest rates may not be as low as you’d think. Remember, interest rates need to account for the pace of inflation as well. Peter Eavis notes that once you account for the deflation (negative inflation) in Europe, the cost of borrowing isn’t on the decline. [the upshot]

Friday figure

Figure from “The open questions about the rise of U.S. job openings” by Nick Bunker

Must-Read: David Glasner: What’s Wrong with Econ 101?

Posted on by Brad DeLong

Must-Read: David Glasner: What’s Wrong with Econ 101?: “The deeper problem… [with] Econ 101 is… fragility…

…Its essential propositions.. are deducible from the basic postulates of utility maximization and wealth maximization…. Not only are the propositions based on questionable psychological assumptions, the comparative-statics method imposes further restrictive assumptions designed to isolate a single purely theoretical relationship…. The bread and butter of Econ 101 is the microeconomic theory of market adjustment in which price and quantity adjust to equilibrate what consumers demand with what suppliers produce. This is the partial-equilibrium analysis derived from Alfred Marshall…. [But] all partial-equilibrium analysis relies on the–usually implicit–assumption that all markets but the single market under analysis are in equilibrium…. start[s] from an equilibrium state… [which] must be at least locally stable… restricted to markets that can be assumed to be very small relative to the entire system….

So the question naturally arises: If the logical basis of Econ 101 is as flimsy as I have been suggesting, should we stop teaching Econ 101? My answer is an emphatic, but qualified, no. Econ 101 is… still the most effective tool we have for systematically thinking about human conduct and its consequences, especially its unintended consequences. But we should be more forthright about its limitations and the nature of the assumptions that underlie the analysis…

Barack Herbert Hoover Grover Cleveland Obama?: Hoisted from 6.5 Years Ago

Posted on by Brad DeLong

Hoisted from 6.5 Years Ago: Barack Herbert Hoover Grover Cleveland Obama?

UPDATE II: It seems that it is not a freeze in non-security discretionary outlays, but rather an overall cap on non-security discretionary–which is a diffrent animal. And it seems that it is not an overall cap on non-security discretionary outlays, but instead an overall cap on non-security discretionary authority–which is a different animal. And it seems that it is not a binding cap on overall non-security discretionary: that ARRA extensions and other job-boosting deficit-spending measures, plus other “emergencies”, are exempt…

UPDATE An administration source says that he believes that discretionary non-security is not frozen at 2010 ex-stimulus levels for 2011, but is instead bumped up from 2010 to 2011–that the freeze part applies to fiscal 2012, 2013, and 2014.

For some time I have been worried about fifty little Herbert Hoovers at the state level. Right now it looks like I have to worry about one big one:

Jackie Calmes: Obama to Propose Freeze on Some Spending to Trim Deficit: President Obama will call for a three-year freeze in spending on many domestic programs, and for increases no greater than inflation after that, an initiative intended to signal his seriousness about cutting the budget deficit, administration officials said Monday.

The officials said the proposal would be a major component both of Mr. Obama’s State of the Union address on Wednesday and of the budget he will send to Congress on Monday for the fiscal year that begins in October.

The freeze would cover the agencies and programs for which Congress allocates specific budgets each year, from air traffic control and farm subsidies to education, nutrition and national parks. ut it would exempt the budgets for the Pentagon…. The estimated $250 billion in savings over 10 years would be less than 3 percent of the roughly $9 trillion in additional debt the government is expected to accumulate over that time…

There are two ways to look at this. The first is that this is simply another game of Dingbat Kabuki. Non-security discretionary spending is some $500 billion a year. It ought to be growing at 5% per year in nominal terms (more because we are in a deep recession and should be pulling discretionary spending forward from the future as fast as we can)–that’s only $25 billion a year in a $3 trillion budget and a $15 trillion economy.

But in a country as big as this one even this is large stakes. What we are talking about is $25 billion of fiscal drag in 2011, $50 billion in 2012, and $75 billion in 2013. By 2013 things will hopefully be better enough that the Federal Reserve will be raising interest rates and will be able to offset the damage to employment and output. But in 2011 GDP will be lower by $35 billion–employment lower by 350,000 or so–and in 2012 GDP will be lower by $70 billion–employment lower by 700,000 or so–than it would have been had non-defense discretionary grown at its normal rate. (And if you think, as I do, that the federal government really ought to be filling state budget deficit gaps over the next two years to the tune of $200 billion per year…)

And what do we get for these larger output gaps and higher unemployment rates in 2011 and 2012? Obama “signal[s] his seriousness about cutting the budget deficit,” Jackie Calmes reports.

As one deficit-hawk journalist of my acquaintance says this evening, this is a perfect example of fundamental unseriousness: rather than make proposals that will actually tackle the long-term deficit–either through future tax increases triggered by excessive deficits or through future entitlement spending caps triggered by excessive deficits–come up with a proposal that does short-term harm to the economy without tackling the deficit in any serious and significant way.

As Jackie Calmes writes, this isn’t a real plan to control the deficit but a “symbolic” one:

[O]ne administration official said that limiting the much smaller discretionary domestic budget would have larger symbolic value. That spending includes lawmakers’ earmarks for parochial projects, and only when the public believes such perceived waste is being wrung out will they be willing to consider reductions in popular entitlement programs, the official said. “By helping to create a new atmosphere of fiscal discipline, it can actually also feed into debates over other components of the budget,” the official said, briefing reporters on the condition of anonymity.

As another deficit-hawk points out: it would be one thing to offer a short-term discretionary spending freeze (or long-run entitlement caps) in return for fifteen Republican senators signing on to revenue enhancement triggers. It’s quite another to negotiate against yourself and in addition attack employment in the short term. The fact that the unemployment rate is projected to remain stable over the next year means that there is a 30% chance it will go down, a 40% chance it will stay about the same, and a 30% chance that it will go up–and whatever it turns out to do, the administration’s budget has just given it an extra bump upwards.

Jonathan Zasloff:

Obama’s Self-Inflicted Lobotomy Proceeds Apace « The Reality-Based Community: I’m trying to think of what could possibly be a worse plan.  Let’s see: we might be entering a double-dip recession and unemployment is in double-digits, and you are going to freeze spending?  What in God’s name are they thinking? Perhaps the worst thing about this is how it cedes the ideological ground to the Republicans.  At some point someone must make an argument for government.  I think it was former Senator Paul Simon who said: “give the voters a choice between a Republican and a Republican and they will choose a Republican every time.”

What next?  The rotting corpse of Andrew Mellon as Treasury Secretary?  Or do we already have that?

How wealth and income inequality may affect U.S. economic downturns

Posted on by Bridget Ansel
In this March 15, 2009 photo, a man walks through his empty living room as he vacates his home in Culver City, California after losing his property in foreclosure.

In a recent poll of prominent economists, the IGM Forum at the University of Chicago Booth School of Business asked about the effects of unconventional U.S. monetary policy on the level of income inequality in the country. The respondents weren’t very confident in their answers, but the question is a sign of interest in the relationship between inequality and macroeconomic performance. Policymakers and economists often investigate about how growth and recessions affect inequality, but are also increasingly wondering about how inequality might affect growth and stability. One of the most interesting areas of research in this vein, however, explores how income and wealth inequality might shape recessions. Two new papers offer interesting investigations into this question.

The first paper is a National Bureau of Economic Research working paper, “Microeconomics and Household Heterogeneity,” which was released earlier this week by economists Dirk Krueger of the University of Pennsylvania, Kurt Mitman of Stockholm University and Fabrizio Perri of the Federal Reserve Bank of Minneapolis. The paper, as you can guess from the title, focuses on how differences among households affect the macroeconomy. To be clear, the paper doesn’t try to understand if inequality causes recessions, but rather how much worse does a recession get when wealth inequality is high.

According to the model built by Krueger, Mitman, and Perri, higher levels of inequality result in more severe economic downturns. When there are more households with no net worth then the response of households to the shock of a recession is more acute as these households pull back significantly on consumption. This means that the level of wealth held by those at the bottom at the income spectrum may matter greatly when a recession occurs.

The second working paper is from economist Jeffery Thompson of the Board of Governors of the Federal Reserve System. He doesn’t directly explore the impact of economic inequality on recessions but rather how income inequality specifically can set up the conditions that affect recessions. The paper looks at how income inequality might affect the amount of household borrowing, focusing on borrowing levels in different U.S. states. Some papers hypothesize that “keeping up with the Jones” might mean that higher levels of wealth and income inequality cause more borrowing by households not on the top rungs of society. Thompson’s paper finds some suggestive evidence for this hypothesis, identifying a strong correlation between higher incomes among the top 5 percent of income earners at the state level and increasing mortgage borrowing. This increased mortgage exposure can have consequences as economic research already shows that increased household debt can significantly affect the macroeconomy.

The two papers, side by side, tell different stories. The first paper argues that wealth inequality may determine the severity of a recession. The second shows how income inequality might affect the borrowing of the broader population, which may affect the fragility of the economy. But these stories are probably not the only possible ones in this area. So while these papers are a good sign for policymakers and academics interested in the potential effects of inequality on economic stability, clearly more research in this area is needed.