Category: Equitablog

Weekend reading: “elusive employment effects” 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 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

Why have students of for-profit colleges, who tend to have less debt that traditional students, seen their student loan default rates rise so much? Perhaps because the average for-profit student sees their earnings decline after attendance.

The relatively weak growth in business investment since the Great Recession has some economists puzzled. Maybe low interest rates have contributed to investment’s slow growth due to retirees’ investment decision-making? Given the assumptions about retirees this hypothesis requires, it seems unlikely.

Equitable Growth published our batch of working papers for June. This month’s papers include research on the effect of credit on job finding and output, a review of a new text book on immigration economics, and a paper trying to understand why a negative employment effect of the minimum wage is so hard to find.

Ben Zipperer writes about the new paper on the employment effects of the minimum wage, detailing the possible reasons why this negative effect hasn’t shown up in empirical work. The possibilities range from the effects on consumer demand to the idea that the perfectly competitive model of the labor market could be wrong.

Debates about the corporate income tax in the United States usually focus just on the marginal tax rate. While the rate is very important (it determines how much of an additional dollar is taxed), we can’t forget the importance of the tax base (how much of income is actually taxed).

Rents, you have heard, are too high in many coastal U.S. cities. Yet the trend may get worse over the next decade if trends continue. Nisha Chikhale points out important trends for rental demand and offers some possible policy solutions.

With the U.S. Department of Labor finalizing its new rule on overtime regulations, reminding ourselves of the state of overwork in the United States seems like a worthwhile endeavor. Heather Boushey and Bridget Ansel highlight three key charts from their recent report.

Links from around the web

One of the many open questions about the Federal Reserve’s unconventional monetary policies to rebound from the Great Recession is how much it affected inequality. As the responses to this IGM Forum question from a panel of economists show, we really don’t know the answer. [igm]

Negative nominal interest rates used to be unthinkable. But now moderately negative interest rates are part of central banks’ policy toolbox. Narayana Kocherlakota discusses how communications policy will be a key part of using negative rates in the future. [bloomberg view]

Public education in the United States is very segregated by race. The implications of this segregation and the resulting inequality in access to education are huge. Nikole Hannah-Jones details the segregation in New York’s public schools and efforts to change it. [nyt magazine]

In 2011, venture capitalist Marc Andreessen argued that software was “eating the world.” Five years later, Conor Sen argues that housing, after a post-crisis lull, is about to eat the U.S. economy. [csen]

Speaking of housing, Josh Lehner proposes a “housing trilemma” for U.S. cities. A city may want to have a strong economy, a high quality of life, and housing affordability. But seemingly they can only get two of those three options at once. [oregon economic analysis]

Friday figure

Figure from “Equitable Growth’s Jobs Day Graphs: May 2016 Report Edition”

Must-Read: Marco Arment: Avoiding Blackberry’s Fate

Posted on by Brad DeLong

Must-Read: Marco Arment: Avoiding BlackBerry’s Fate: “Before the iPhone, RIM’s BlackBerry was the king of smartphones…

…When the iPhone came out, the BlackBerry continued to do well for a little while. But the iPhone had completely changed the game…. The BlackBerry’s success came to an end not because RIM started releasing worse smartphones, but because the new job of the smartphone shifted almost entirely outside of their capabilities, and it was too late to catch up…. No new initiative, management change, or acquisition in 2007 could’ve saved the BlackBerry. It was too late, and the gulf was too wide.

Today, Amazon, Facebook, and Google are placing large bets on advanced AI, ubiquitous assistants, and voice interfaces…. If they’re right — and that’s a big ‘if’ — I’m worried for Apple…. [in] big-data services and AI…. Apple can do rudimentary versions of all of those, but their competitors — again, especially Google — are far ahead of them, and the gap is only widening. And Apple is showing worryingly few signs of meaningful improvement or investment in these areas….

If Google is wrong, and computing continues to be defined by a tightly controlled grid of siloed apps that you poke a thousand times a day on a smooth rectangle of manufacturing excellence, Apple is fine…. But if Google is right, that’s a big problem for Apple.

Must-Read: Paul Krugman: Germany Austerity Policy

Posted on by Brad DeLong

Must-Read: Paul Krugman: Germany Austerity Policy: “Once the bubble burst, there was going to be a difficult time for the Euro, regardless…

…But it’s been far worse than it needed to be and Germany bears some of the responsibility because of turning what should have been viewed as essentially a technical economic problem into a morality play. That has been a very unfortunate story…. Austerity policies have taken what was fundamentally a story about excessive private capital flows and housing bubbles and turned it into lectures of fiscal responsibility that have ended up doing a lot of damage….

Greece was going to have to do a fair amount of austerity but not this much. In the end it would still have been ugly, but not on this level. What could have mitigated the damage? The thing is that what has actually happened has not worked. Greece is still in the Euro. There’s a little bit of economic growth but at the cost of an incredible slump. The ratio of debt to GDP is higher than ever. All of this austerity has not only not resolved the fiscal problem, it hasn’t even moved it in the right direction…

Must-Read: Nell Abernathy, Mike Konczal, and Kathryn Milani: How to Check Corporate, Financial, and Monopoly Power

Posted on by Brad DeLong

Must-Read: Nell Abernathy, Mike Konczal, and Kathryn Milani: How to Check Corporate, Financial, and Monopoly Power: “The policies we propose specifically address rules that have distorted private sector behavior and provided benefits to multinational corporations and rich individuals at the expense of average workers and the economy…

…If taxed and regulated properly, big business, banks, and wealth-holders can contribute to broadly shared prosperity. But tailoring the rules to serve their interests—in essence, leaving these powerful forces untamed—promotes rent-seeking and greater inequality and leads to weaker long-term growth and a less productive economy. Untamed builds on recent analysis of economic inequality and on our 2015 report, Rewriting the Rules, in which we argued that changes to the rules of trade, corporate governance, tax policy, monetary policy, and financial regulations are key drivers of growing inequality…

Must-Read: Ezra Klein: Technology Is Changing How We Live

Posted on by Brad DeLong

Must-Read: Ezra Klein: Technology Is Changing How We Live: “But it needs to change how we work…

…The closest the economics profession has to a measure of technological progress is an indicator called total factor productivity, or TFP. It’s a bit of an odd concept: It measures the productivity gains left over after accounting for the growth of the workforce and capital investments. When TFP is rising, it means the same number of people, working with the same amount of land and machinery, are able to make more than they were before. It’s our best attempt to measure the hard-to-define bundle of innovations and improvements that keep living standards rising. It means we’re figuring out how to, in Steve Jobs’s famous formulation, work smarter. If TFP goes flat, then so do living standards. And TFP has gone flat — or at least flatter — in recent decades….

What Thiel can’t quite understand is why his fellow founders and venture capitalists can’t see what he sees, why they’re so damn optimistic and self-satisfied amidst an obvious, rolling disaster for human betterment…. Thiel’s peers in Silicon Valley have a different, simpler explanation. To many of them, the numbers are simply wrong…. Hal Varian, the chief economist at Google, is… a skeptic. ‘The question is whether [productivity] is measuring the wrong things,’ he told me. Bill Gates agrees. During our conversation, he rattled off a few of the ways our lives have been improved in recent years — digital photos, easier hotel booking, cheap GPS, nearly costless communication with friends. ‘The way the productivity figures are done isn’t very good at capturing those quality of service–type improvements,’ he said.

There’s much to be said for this argument. Measures of productivity are based on the sum total of goods and services the economy produces for sale. But many digital-era products are given away for free, and so never have an opportunity to show themselves in GDP statistics. Take Google Maps. I have a crap sense of direction, so it’s no exaggeration to say Google Maps has changed my life. I would pay hundreds of dollars a year for the product. In practice, I pay nothing. In terms of its direct contribution to GDP, Google Maps boosts Google’s advertising business by feeding my data back to the company so they can target ads more effectively, and it probably boosts the amount of money I fork over to Verizon for my data plan. But that’s not worth hundreds of dollars to Google, or to the economy as a whole. The result is that GDP data might undercount the value of Google Maps in a way it didn’t undercount the value of, say, Garmin GPS devices. This, Varian argues, is a systemic problem with the way we measure GDP….

The gap between what I pay for Google Maps and the value I get from it is called ‘consumer surplus,’ and it’s Silicon Valley’s best defense against the grim story told by the productivity statistics. The argument is that we’ve broken our country’s productivity statistics because so many of our great new technologies are free or nearly free to the consumer. When Henry Ford began pumping out cars, people bought his cars, and so their value showed up in GDP. Depending on the day you check, the stock market routinely certifies Google — excuse me, Alphabet — as the world’s most valuable company, but few of us ever cut Larry Page or Sergei Brin a check…. The other problem the productivity skeptics bring up are so-called ‘step changes’ — new goods that represent such a massive change in human welfare that trying to account for them by measuring prices and inflation seems borderline ridiculous. The economist Diane Coyle puts this well. In 1836, she notes, Nathan Mayer Rothschild died from an abscessed tooth. ‘What might the richest man in the world at the time have paid for an antibiotic, if only they had been invented?’ Surely more than the actual cost of an antibiotic….

‘Yes, productivity numbers do miss innovation gains and quality improvements,’ sighs John Fernald, an economist at the San Francisco Federal Reserve Bank who has studied productivity statistics extensively. ‘But they’ve always been missing that.’… Consider Google Maps again. It’s true that using the app is free. But the productivity gains it enables should show in other parts of the economy. If we are getting places faster and more reliably, that should allow us to make more things, have more meetings, make more connections, create more value….

Perhaps the best way to value the digital age’s advances is by trying to put a price on the time we spend using things like Facebook. Syverson used extremely generous assumptions about the value of our time, and took as a given that we would use online services even if we had to pay for them. Even then, he found the consumer surplus only fills a third of the productivity gap…. A March paper from David Byrne, John Fernald, and Marshall Reinsdorf… comes to similar conclusions. ‘The major ‘cost’ to consumers of Facebook, Google, and the like is not the broadband access, the cell phone service, or the phone or computer; rather, it is the opportunity cost of time,’ they concluded. ‘But that time cost … is akin to the consumer surplus obtained from television (an old economy invention) or from playing soccer with one’s children.’…

There’s a simple explanation for the disconnect between how much it feels like technology has changed our lives and how absent it is from our economic data: It’s changing how we play and relax more than it’s changing how we work and produce. As my colleague Matthew Yglesias has written, ‘Digital technology has transformed a handful of industries in the media/entertainment space that occupy a mindshare that’s out of proportion to their overall economic importance. The robots aren’t taking our jobs; they’re taking our leisure’…

Must-Read: Nicholas Warino: The Bay Area Housing Crisis Is Caused by and Can Be Solved by Local Government

Posted on by Brad DeLong

Must-Read: Nicholas Warino: The Bay Area Housing Crisis Is Caused by and Can Be Solved by Local Government: “Professor Walker… presents some reasonable ideas and even some good policy solutions…

…(rent control, eviction controls, low-income public assistance, etc.) As far as I can tell, he’s on left, so I bet we’d agree on many issues. That said, Professor Walker’s analysis of the housing crisis is not good…. I’ll quote them directly and respond.

But while it’s true that we need to expand the region’s housing supply, building more housing cannot solve the problem as long as demand is out of control, as it is today. There is simply no way housing could have been built quickly enough to avoid the price spike of the current boom.

This is a common argument: building more housing will help, but we nevertheless ‘can’t build our way out of the problem.’ This is wrong in two ways: 1) The only way for demand to be ‘out of control’ is for demand to consistently outpace supply. So it’s logically true that ‘building more housing cannot solve the problem as long as demand is out of control’ because within that sentence is the assertion that demand will always be greater than supply. In other words, this paragraph is true in the same way ‘you cannot fix The Problem as long as The Problem still exists.’ True but meaningless.

2)…. The housing crisis problem is not a binary problem, where it either exists or doesn’t. The problem with out-of-balance supply-and-demand is a continuous pressure on the housing market…. Every single additional unit added to the housing market turns the valve and releases some pressure, leading to lower prices than would be the case if that unit had never been built.

Three basic forces are driving the Bay Area’s housing prices upward: growth, affluence, and inequality. Three other things make matters worse: finance, business cycles, and geography.

Other basic forces…. People, money, consciousness, the Sun, the lack of worldwide plagues, and the Big Bang…. ‘Growth’ and ‘affluence,’ which is to say people earning more money, which is to say ‘demand,’ is a part of the problem. Hence supply-and-demand. And yes, finance contributes to the problem, in the sense ‘finance’ means the flow of money throughout our economy and the Bay Area housing market is part of our economy. Geography? You bet… but luckily we’ve invented ways to build up, not just out…. But both building up and building out require a focus on BUILDING.

All of these operate on the demand side of the equation, and demand is the key to the runaway housing market.

There is always ‘demand’ in an economy, unless everyone is dead. The relevance of demand is how it relates to supply. Even if the total amount of demand for housing in the Bay Area is accelerating, it would not be a problem if the supply of housing was also accelerating…. Reminder: demand in an economy simply means the amount of money in the economy that wants to be spent on a good or service. Generally, one of the primary goals of a society is to increase how much money people have, so they have more money to demand things and pay other people who will have more money to demand other things. And so on. This is how societies–if they ALSO focus on the equally critical goals of equity, justice, and fairness–lift people out of poverty, increase happiness, increase the tax base for new public goods and services, and increase the amount of money that can be used for innovation and progress. When the demand in an economy increases, like you’re seeing in the Bay Area housing market, the healthy response from the market is to increase supply…

A look at overwork in three charts

Posted on by Bridget Ansel

The House Education and Workforce Committee is holding a hearing today on Capitol Hill to examine several aspects of the Obama Administration’s announcement earlier this month that it would require overtime pay for most salaried employees making less than $46,476—a massive expansion of those eligible for overtime pay. The U.S. Department of Labor estimates that the new ruling will affect 4 million workers once it is implemented on December 1, with others estimating even more.

In our recent report, the Washington Center for Equitable Growth examined the causes and consequences of long work hours, a key part of the overtime debate. Below are a few graphs from the report:

Figure 1

Figure 1 shows the occupations with the share of workers working more than 40 hours and those working more than 45 hours per week on average. The legal and management occupations have the highest share of employees putting in long hours: 28.6 percent of legal workers and 29.7 percent of management workers put in more than 45 hours a week. They are followed by farming, fishing, and forestry (20.5 percent); architecture and engineering (17.1 percent); and business and financial services (15.4 percent). These occupations also have a high percentage of employees working more than 40 hours a week.

 While many of these occupations are relatively high-paying, it is not just the highest-earning families who work long hours—not by a long shot. Figure 2 shows that a worker’s hourly wage does increase as they work additional hours, also long as they work fewer than 40 hours a week. But after the 40-hour threshold, the return of additional hours of work – higher hourly wages – isn’t clear. (See Figure 2.)

Figure 2

Our report examines data that also shows occupations with a high level of wage inequality tend to have a larger share of employees working more than 40 hours a week. While this is not the case across every occupation, within many professional occupations—architecture and engineering, computer and mathematical science, legal, and business and finance operations—there is both a high share of workers putting in long hours as well as a large gap between the 10th and 90th percentiles of the wage distribution. (See Figure 3.)

Figure 3

 

As we laid out in the report, rising economic inequality may be one cause of long hours—even for those near the top of the income and wealth ladders. In recent decades, employers have been downsizing their labor force—a trend exacerbated by the Great Recession that began in 2007 as employers laid off a massive number of employees while demanding more from those who survived. As work became more precarious, many salaried workers lost the bargaining power to demand compensation for the increase in hours. As competition for jobs grew, spending extra time in the office increasingly feels like a small price to pay even for those who are exempt and do not receive extra pay.

Scholars have found that, over time, the long work hours become embedded in certain organizational and workplace cultures. Within professional, white-collar occupations, there may be a greater element of individual control and choice over one’s work hours compared to blue-collar occupations. But researchers note that the “choice” to work long hours is heavily influenced by a number of social, economic, and psychological factors. As a greater number of workers within some professions put in longer hours, a culture of overwork becomes entrenched in the workplace culture. This phenomenon has spillover effects as the long hours create the need for 24/7 services to support those who cannot do their shopping during the Monday-Friday workweek or who need child care early in the morning or late at night. Thus, long hours for professionals trickle down into non-traditional hours for service workers.

=We’ve all heard the common success story, that of the successful lawyer, banker, businessman, or doctor who counsels young professionals that an extreme work ethic is key to their success.

There is no doubt that success cannot be had without hard work. But arbitrarily increasing work hours can also backfire for individuals, firms, and the U.S. economy alike. Extending the regulation of overtime pay and hours worked to a larger group of workers will make employers think twice before mandating long hours, and will help create a more pragmatic approach to work hours that is mindful of consequences of working without restriction.

 

The level of the U.S. corporate income tax rate is important, but it’s not everything

Posted on by Bridget Ansel
The Internal Revenue Service Headquarters (IRS) building is seen in Washington, D.C.

For the past few years, policymakers on both sides of the aisle in Washington DC have hoped that the next U.S. election cycle would create the right conditions for “tax reform.” More specifically, the hope is that the U.S. corporate income tax could be reformed, with the assumption being that the statutory rate could be lowered alongside efforts to close numerous corporate tax loopholes. Yet it’s worth remembering that the corporate tax rate isn’t everything when it comes to taxing business income.

First, let’s be clear that the statutory marginal tax rate of 35 percent is extremely important. But the rate itself can’t and shouldn’t be the end of the conversation about how policymakers can reform the U.S. corporate income tax. When thinking about taxes, we have to consider not only the rate at which something is being taxed but also how much of the income is actually taxed. Increasing the amount of income that’s taxable is known as “broadening the base.” When it comes to the corporate income tax, the base is eroding. Through profit shifting, U.S. corporations are increasingly adept at getting profits earned in the United States to appear as profits registered in low-tax jurisdictions.

Some policymakers argue that lowering the tax rate would lead companies to move some of these profits back to the United States. But that argument—taken to its logical conclusion—would require bringing down U.S. rates to the lowest rate elsewhere in the world. In effect, that would be outsourcing the U.S. corporate income tax rate to whichever jurisdiction wanted to decrease its rate the most.

There are other, more viable, options. Policymakers could help broaden the base through other reforms that make sure the base isn’t eroded. Such reforms are discussed in an Equitable Growth report from Reed College economist Kimberly A. Clausing.

Pulling our lens back a bit further, there’s another trend that’s reducing the corporate income tax base—increasingly, U.S. businesses are no longer publicly held and instead are private companies. The number of companies listed on U.S. stock exchanges peaked in 1996 and the majority of business income is now earned by pass-through entities such as limited liability partnerships. Even if policymakers could halt and then reverse the erosion of the corporate tax base, the corporate income tax would still not cover a considerable amount of business income because privately-held businesses income isn’t taxed at the corporate rate.

Again, all this isn’t to say that debates about the level of the U.S. corporate tax rate aren’t important—just that policymakers need to consider not only how much each dollar of business profits are taxed, but also how many dollars earned by companies are taxed.