Category: Equitablog

Must-Read: Olivier Blanchard: Rethinking Macro Policy: Progress or Confusion?: Fiscal Policy

Posted on by Brad DeLong

Must-Read: On this one–views of fiscal policy–put me down not for progress but for “confusion for $2000”, Alex, for on this one I think the very sharp Olivier Blanchard has got it wrong.

Graph 10 Year Treasury Constant Maturity Rate FRED St Louis Fed

The world cannot simultaneously be short of safe assets and yet there also be a correct “large consensus that [government debt] is too large today.” That just does not compute. You can say that the IMF and the exorbitant privilege-possessing reserve-currency issuers are not properly backstopping other governments (quite possibly because other governments are unwilling to allow the conditionality that would make such backstopping prudent). You can say that some countries have too much debt and other countries have too little. But you cannot say that government debt in general is too high when markets are screaming as loud as they can that the liabilities of exorbitant privilege-possessing reserve-currency issuers are the scarcest and most valuable things in the world:

Olivier Blanchard: Rethinking Macro Policy: Progress or Confusion?: Fiscal Policy: “Let me move to a brief discussion of the third pillar, fiscal policy…

…We have learned many things. Fiscal stimulus can help. Public debt can increase very quickly when the economy tanks, but even more so when contingent—explicit or implicit—liabilities become actual liabilities. The effects of fiscal consolidation have led to a flurry of research on multipliers, on whether and when the direct effects of fiscal consolidation can be partly offset by confidence effects, through decreasing worries about debt sustainability. (There has been surprisingly little work or action where I was hoping to see it, namely, on a better design of automatic stabilizers.)… Navigation by sight may be fine for the time being. The issue of what debt ratio to aim for in the long run is not of the essence when there is a large consensus that it is too large today and the adjustment will be slow in any case—although even here, Brad DeLong has provocatively argued that current debt ratios are perhaps too low….

There is no magic debt-to-GDP number. Depending on the distribution of future growth rates and interest rates, on the extent of implicit and explicit contingent liabilities, one country’s high debt may well be sustainable, while another’s low debt may not. Conceptually and analytically, the right tool is a stochastic debt sustainability analysis (something we already use at the IMF when designing programs). The task of translating this into simple, understandable goals remains to be done…

What happens if the “unicorn” bubble bursts?

Posted on by Bridget Ansel
Marc Andreessen, left, and his longtime business partner, Ben Horowitz, pose in the office of their venture capital firm, Andreessen Horowitz, in Menlo Park, California.

Take a look at the valuations of vaunted startups, the lack of initial public offerings of those startups, and the some of the available data on the earnings of those private companies and you’ll probably think very quickly there is a unicorn bubble about to burst. Certainly that’s the view of Gideon Lewis-Kraus, who took a look at the possibly impending explosion last month in the New York Times Magazine. Venture capitalists and company founders would be at the epicenter of a such a decline in the value of these companies, but could there be broader implications for the economy overall? Lewis-Kraus mentions the staff at these companies as well as the support staff as potential victims of the bubble. But could there be wider ramifications?

Well, there could be depending on how much the owners of these firms pull back on spending once these startups take a hit. As the net worth of these owners drops, they’re probably going to pull back on spending as they have fewer resources. This drop in net worth could result in a drop in consumption. But it’s not clear right away exactly how sensitive individuals are to these changes and how much this sensitivity differs by levels of wealth and the kinds of assets that are on the decline.

Thankfully, there’s research on this topic. Individuals with high levels of wealth have a lower consumption sensitivity to declines in wealth while those at the middle or the bottom have a higher sensitivity. Economists call this sensitivity the “marginal propensity to consume.” If I give you an extra dollar, how much of that dollar are you going to spend? As the research shows, the amount of wealth inequality and the distribution of ownership of assets affect the response to a bursting bubble. If an asset is broadly owned by a large chunk of the population (say close to 70 percent at one point) and its price declines by a significant amount (say about 30 percent), then that’ll affect a lot of people with high marginal propensities to consume and would (in this strictly hypothetical case) cause a major pull back in consumption and a large decline in economic growth.

So what would happen if the current Silicon Valley bubble bursts? Well, first, the size of the bubble doesn’t appear to be that large. As Lewis-Kraus points out, the size of this bubble is significantly smaller than the last major tech bubble that popped in 2001. But in addition, the bubble hasn’t spread as far. The ownership of highly valued firms whose prices may drop is definitely not widely dispersed as these firms are still privately-held and not available on publicly traded stock markets. And the current owners are wealthy individuals. In other words, the pain of the bubble likely will fall mainly on the wealthy households who have low marginal propensities to consume. Now, perhaps most of their wealth is illiquid (they can’t sell it easily) so maybe for some of the founders whose wealth is tired up almost entirely in the company will have to pull back quite a bit. But that’s only for a small segment of the population.

This isn’t to say that we don’t know everything about how households react to drops in wealth. In a chapter for the Handbook of Macroeconomics, economists Atif Mian at Princeton University and the University of Chicago’s Amir Sufi— co-authors of research highlighting variances in marginal propensities to consume—note that the data needed to understand the consequences of consumption shocks are rare. Researchers need better quality consumption data, either from private companies or from governmental sources. Given how important these underlying numbers would be to help shape policy reactions to a recession, this seems like a worthy endeavor.

Must-Reads: June 2, 2016

Posted on by Brad DeLong

Must-Read: Gideon Rachman: Xi Jinping Has Changed China’s Winning Formula

Posted on by Brad DeLong

Must-Read: Gideon Rachman: Xi Jinping Has Changed China’s Winning Formula: “What Mr Xi has done is essentially to abandon the formula that has driven China’s rise…

…created by Deng Xiaoping… and then refined by his successors…. In economics, Deng and his successors emphasised exports, investment and the quest for double-digit annual growth. In politics, China moved away from the charismatic and dictatorial model created by Mao Zedong and towards a collective leadership. And in foreign affairs, China adopted a modest and cautious approach to the world that became colloquially known in the west as hide-and-bide…. Under Mr Xi, who assumed the leadership of the Chinese Communist party towards the end of 2012, all three key ingredients of the Deng formula have changed….

China has moved back towards a model based around a strongman leader…. The years of double-digit growth are over…. The Xi era has seen a move away from hide-and-bide towards a foreign policy that challenges US dominance of the Asia-Pacific region….

In economics… the shift to a new model is perilous… an unsustainable splurge of credit and investment…. China still has to get used to lower rates of growth…. A healthy economy is crucial…. The country’s leaders have relied on rapid economic growth to give the political system a ‘performance legitimacy’, which party theorists have argued is far deeper than the mandate endowed by a democratic election…. When it comes to politics, in the post-Mao era the Communist party has… embrace[d] a collective style of government, with smooth transitions…. Mr Xi has broken with this model…. Many pundits believe that Mr Xi is now determined to serve more than two terms in office…. At the same time as economic and political tensions within China have risen under Mr Xi, so the country’s foreign policy has become more nationalistic….

The key to the Deng formula that created modern China was the primacy of economics. Domestic politics and foreign policy were constructed to create the perfect environment for a Chinese economic miracle. With Mr Xi, however, political and foreign policy imperatives frequently appear to trump economics. That change in formula looks risky for both China and the world.

Must-Read: Narayana Kocherlakota: There Goes the Fed’s Credibility

Posted on by Brad DeLong

Must-Read: By now we can no longer understand the Federal Reserve Chair as needing to maintain harmony on a committee that has on it many regional reserve bank presidents who have failed to process the lessons of 2005-2015. By now all the regional bank presidents are people whom the Federal Reserve Board has had an opportunity to veto:

There Goes the Fed s Credibility Bloomberg View

Narayana Kocherlakota: There Goes the Fed’s Credibility: “The Federal Reserve promised to keep its preferred measure of inflation…

…close to 2 percent over the longer run…. Some would say that central banks are out of ammunition…. Actually, though, the Fed has been deliberately tightening monetary policy over the past three years. Just last week, Chair Janet Yellen made a point of saying that the Fed intends to keep raising interest rates in the coming months….

Would it have started pulling back on stimulus in May 2013 if its short-term interest-rate target had been at 5 percent instead of near zero, and if it hadn’t been holding trillions of dollars in bonds? I strongly suspect that the Fed would instead have added stimulus by lowering interest rates…. The Fed’s current course is driven not by the state of the economy, but by a desire to get interest rates and its balance sheet back to what is considered ‘normal.’ Savers, bankers and many politicians agree with this objective…. The Fed, however, promised to focus on actual economic outcomes….

Investors’ doubts [about the Fed] aren’t surprising, given the Fed’s focus on ‘normalizing’ interest rates rather than on hitting its inflation target. Such concerns will create an extra drag on the economy if and when bad times do come. In other words, the Fed’s willingness to renege on its promises seems likely to make the next recession worse than it otherwise would be.

Must-Read: Heather Boushey: Investing in Early Childhood Education Is Good for Children and Good for the Economy

Posted on by Brad DeLong

Must-Read: Ross Douthat’s citations here are to journalist Joe Klein’s 2011 unprofessional trashing of Head Start and Republican Tennessee political Kevin Huffman, plus Baker, Gruber, and Milligan (2008) and Lipsey, Farran, and Hofer (2015). These are not the four citations that anybody would choose who is not actively attempting to misrepresent the state of knowledge about early childhood education programs.

This is one of the many, many things that makes me think that the New York Times does not have a long-run future. Its only possible edge is to develop a reputation as a disinterested information intermediary as the legacy position it had gained as a result of its role as central place for upper-class New York print ads ebbs. Things like this make developing such a reputation materially harder.

Smart New York Times executives would kill the op-ed page and give its budget and its newshole to David Leonhardt to fill, and then back off and let him do his thing. But these are the executives who let Nate Silver walk at least in part because of the political staff. As Nate said:

This guy Jim Rutenberg…. Jim Rutenberg and I were colleagues at the New York Times in 2012 when 538 was part of the New York Times. They were incredibly hostile and incredibly unhelpful to 538, particularly when 538 tried to do things that blended reporting with kind of more classic techniques of data journalism…. When we went to New Hampshire… the New York Times political desk is literally giving us the cold shoulder like it’s some high school lunchroom…. We filed the story pointing out… that Rick Santorum had probably won the Iowa Caucus, a story that involved a combination of data work and reporting…. They were apoplectic because their Romney sources were upset…. A story that… got things totally right pissed them off because they didn’t get the scoop and it went against what their sources wanted…

But the executives aren’t that smart…

Heather Boushey protests about the lack of journalistic quality control here:

Heather Boushey: Investing in Early Childhood Education Is Good for Children and Good for the Economy: “Ross Douthat used his New York Times column to express frustration that hoping for a “substantive debate about domestic policy” in this presidential election year is “delusional”…

…He imagines a scene from a future debate between… Hillary Clinton and… Donald Trump… over the benefits of early childhood education. Douthat even added several hyperlinks… links that alas fall short on revealing where the evidence actually stands today….

Randomized control trials that follow children from pre-school through adulthood… children who participate… do better in school, are more likely to attend and graduate college, and are less likely to smoke, use drugs, be on welfare, or become teenage mothers… the Carolina Abecedarian Study… the Milwaukee Project… Project STAR… Raj Chetty and his co-authors find that kindergarten test scores are highly correlated with outcomes at age 27, such as college attendance, home ownership, and retirement savings. Like in the Perry Preschool/High Scope study, in Project STAR, researchers found that while the cognitive effects on test scores fade as a child ages, the non-cognitive effects did not. Of course, not every study found such results… the Early Training Project….

Overall, though, the evidence points to the conclusion that investing in early childhood is important for future outcomes both for the children themselves and our economy more generally. If columnists provide hyperlinks to real-life academic studies to buttress fantasy debates between the two presidential candidates, they should at least point to the best studies available. In this case, the preponderance of evidence shows that early childhood education works for the children, their families, and the broader U.S. economy.

Must-Read: Fred Clark: That Time I Was the Evil Opposite of Neoliberalism

Posted on by Brad DeLong

Must-Read: Fred Clark: That Time I Was the Evil Opposite of Neoliberalism: “Bill Clinton was a Neoliberal. No, no, no…

…Bill Clinton was a betrayal of Neoliberalism. Or neither. Or both. For some the ‘Neo’ just meant ‘I’m a liberal who wants our agenda to carry more states than Mondale and Dukakis’… a semantic way of avoiding the negative associations the right had worked so hard to affix to the word liberal…. For others, the term ‘Neo-liberal’ was a way of avoiding the ethical and economic baggage of their own anti-liberal legacy…. The word was contested, with competing meanings by competing claimants for ownership of it. Neoliberalism was large, it encompassed multitudes. And it still does, which is why George Monbiot can write this: ‘Neoliberalism: The ideology at the root of all our problems.’ That’s a fascinating, but muddling essay. He sometimes focuses the meaning of this word, ‘Neoliberalism,’ to mean basically what we used to call laissez-faire capitalism–unfettered free markets, Voodoo economics, the 1980s writ large, etc. But he also uses the term to refer to something more vast and expansive. That headline is really his definition of ‘Neoliberalism’–it is the word he uses to refer to ‘the ideology at the root of all our problems,’ a general name for Everything Bad. The vague generality of that fuzzes up the diagnostic usefulness of Monbiot’s essay. It’s like a doctor saying, ‘You’re unwell.’ That may be true enough, but it’s not particularly helpful.

Back in the ’90s, ownership of the term ‘Neoliberal’ was in many ways a tug of war between proponents of laissez-faire capitalism and, well, just plain liberals. Liberals embraced the term as a way of avoiding the negative connotations of being called liberals. And laissez-faire capitalists sought to claim the term as a way of avoiding the negative connotations of admitting that they were laissez-faire capitalists. My sense is the LFCs probably won that battle. (That’s bad news for many of the liberals who tried to claim the term ‘Neoliberal’ in the late 20th century, because they’re now stuck with a label retroactively defined by their primary opponents and critics.)… Now… the word is contested in pretty much the opposite way…. It used to be laissez-faire capitalist ‘Neoliberals’ attacking liberals because, in their view, anything short of pure free-market ideology was indistinguishable from a ‘statist model.’ Now those same liberals are accused of being ‘Neoliberals’ by those who say that anything short of statist models is indistinguishable from laissez-faire capitalism. Neither of those accusations strikes me as helpful.

And but so, my point here actually is this: You should read the 1977 original edition of Rich Christians in an Age of Hunger and not the later editions in which the publisher sought to appease that book’s “Neoliberal” critics by revising the policy discussions in its final section.

And also too: Share your cookies.

Must-Reads: June 1, 2016

Posted on by Brad DeLong

Should Reads:

Must-Read: Simon Wren-Lewis: Greece Under Troika Rule

Posted on by Brad DeLong

Must-Read: Simon Wren-Lewis: Greece Under Troika Rule: “‘The repayment of foreign loans and the return to stable currencies…

…were recognized as the touchstones of rationality in politics; and no private suffering, no infringement of sovereignty was considered too great a sacrifice for the recovery of monetary integrity. The privations of the unemployed made jobless by deflation; the destitution of public servants dismissed without a pittance; even the relinquishment of national rights and the loss of constitutional liberties were judged a fair price to pay for the fulfilment of the requirements of sound budgets and sound currencies, these a priori of economic liberalism. — Karl Polanyi (1944), ‘The Great Transformation’ (p142)

This quote (HT Jeremy Smith) could almost be written today about Greece. I had once thought that the lessons of the interwar period and Great Depression had been well learnt, but 2010 austerity showed that was wrong…. The Greek government borrowed too much… the scale… meant default was pretty inevitable. But Eurozone leaders, worried about their banking system (which held a lot of Greek debt), first postponed default and then made it partial. The real ‘bailing out’ was for the European banks and others who had lent to the Greek government…. Nothing… obliged Eurozone leaders to lend their voters money to bail out these creditors…. If European leaders felt their banking systems needed support, they could have done this directly….

They convinced themselves that Greece could pay them back. It was a mistake they will do anything to avoid admitting. To try and ensure they got their money back, they along with the IMF effectively took over the running of the Greek economy. The result has been a complete disaster. The amount of austerity imposed caused great hardship, and crashed the economy…. The Troika wants 3.5% primary surpluses by 2018… to start getting their money back sooner… an absurd demand…. Right now Greece needs more aggregate demand not structural reform, yet the Troika insists on taking more demand out of the economy….

Despite Martin Sandbu’s optimism, the recent deal is essentially more of the same. The IMF, which knows it makes no sense to ‘extend and pretend’, has again capitulated. The reaction to the IMF’s paper on neoliberalism has generally missed the key point. It is not fanciful to believe that the paper is directed at those within the IMF like Poul Thomsen, the head of their European department. Falling GDP will continue to be blamed on the Greek government, even without its former finance minister. Of course one day the Greek economy will recover, just as the Irish famine came to an end. But history, as taught in Britain as well as Ireland, does not remember the British troops guarding the shipments of grain leaving Ireland during the famine as heroic upholders of the rules of law and contract. Nor will it do the same for the members of the Troika that keep Greece in poverty.

Investing in early childhood education is good for children and good for the economy

Posted on by Nick Bunker
There is a consensus among researchers that early childhood matter quite a bit for a child’s future outcomes.

Over this past holiday weekend, Ross Douthat used his New York Times column to express frustration that hoping for a “substantive debate about domestic policy” in this presidential election year is “delusional.” He imagines a scene from a future debate between the two presumed contestants, former Secretary of State Hillary Clinton and businessman Donald Trump, in which at one point in the fantasy dialogue the two tangle over the benefits of early childhood education. Douthat even added several hyperlinks in the imagined Trump tirade—links that alas fall short on revealing where the evidence actually stands today.

It is now well-accepted among economists that pre-school matters, especially for low-income and disadvantaged children. Even former Chairman of the Federal Reserve Ben Bernanke and the U.S. Chamber of Commerce agree that this evidence is quite conclusive. A joint report by Chamber and the Institute for a Competitive Workforce stated that investment in early childhood education could benefit the business community as a “smart investment with positive returns, but [also] is the right thing to do.”

There is consensus because of the findings of a number of studies based on randomized control trials that follow children from pre-school through adulthood. Researchers have found that children who participate in these programs do better in school, are more likely to attend and graduate college, and are less likely to smoke, use drugs, be on welfare, or become teenage mothers. One major case in point is the Carolina Abecedarian Study, an experiment begun in 1972 that assigned 112 “at-risk” children six-to-12 weeks of age to enter pre-school or a control group when they reached age three and then followed the children to age 21. Researchers found that children in the program group had higher IQ and test scores and were more likely to attend a four-year college than control group children. In another study, the Milwaukee Project, researchers assigned six-month-old children and their mothers to either an educational program, or a control group. Investigators found that at grade eight children in the program had higher IQs than those assigned to the control group.

Much of this research on early interventions focuses specifically on low-income, minority, or “high-risk” children, but research that includes children up and down the income ladder also finds persistence of skills learned early in life. In Project STAR, an experiment implemented across 79 schools in Tennessee from 1985 to 1989, 11,571 students and their teachers were randomly assigned to classrooms of differing sizes within their schools from kindergarten to third grade, and followed through age 27. Based on analysis of this experiment, Stanford University economist Raj Chetty and his co-authors find that kindergarten test scores are highly correlated with outcomes at age 27, such as college attendance, home ownership, and retirement savings. Like in the Perry Preschool/High Scope study, in Project STAR, researchers found that while the cognitive effects on test scores fade as a child ages, the non-cognitive effects did not.

Of course, not every study found such results, In the 1960s, the Early Training Project assigned African American, low-income children, ages four and five, to two separate groups. One group consisted of weekly meetings and pre-school program, while the control group did not. Researchers found that the children in the experimental groups outperformed children in the control group on various cognitive assessment tests administered during the intervention, yet these differences faded in later follow-ups three years after the intervention ended.

Overall, though, the evidence points to the conclusion that investing in early childhood is important for future outcomes both for the children themselves and our economy more generally. If columnists provide hyperlinks to real-life academic studies to buttress fantasy debates between the two presidential candidates, they should at least point to the best studies available. In this case, the preponderance of evidence shows that early childhood education works for the children, their families, and the broader U.S. economy.