Must-Read: Nick Bunker: What’s the deal with U.S. wage growth?

Must-Read: Suppose you put someone in cryogenic sleep a decade ago, woke them up today, showed them this graph:

Graph Employment Cost Index Total compensation All Civilian FRED St Louis Fed

and said: “The U.S. Federal Reserve still has the same 2%/year inflation target it had in the early 2000s. Do you think it should raise or lower interest rates in June?”

I cannot think of a single reason why such a person would say “raise interest rates” (unless, of course, their compensation was an increasing function of the interest rate).

Nick Bunker: What’s the deal with U.S. wage growth?: “The U.S. unemployment rate has been at or under 5 percent for more than six months…

…But… neither inflation nor wage growth has picked up considerably, despite expectations that they would…. First… the unemployment rate may be slightly overstating the health of the country’s labor market. Measured by the employed share of workers ages 25 to 54, the labor market has a long way to go before it hits a level usually associated with strong wage growth…. Adam Ozimek… points out that… low inflation has an impact on wage growth, because employers will be less willing to pass along wage hikes to prices, and employees will need less of a wage increase…. A third argument is that… low measured wage growth is due in part to low-wage workers moving into full-time employment…. Already-full-time employees are seeing rising wages, that growth is masked by the entrance of lower-earning workers…. It seems likely… that… five percent just isn’t what it used to be…

Must-Read: Laura Tyson and James Manyika: Putting Profits in Perspective

Must-Read: Laura Tyson and James Manyika: Putting Profits in Perspective: “Corporate profits may be near all-time highs…

but their variance among firms and industries has also increased significantly. The most profitable firms in the US are… in sectors that capitalize on research and development, brands, software, and algorithms. Companies in sectors like pharmaceuticals, media, finance, information technology, and business services have the highest profit margins… excluding finance, these sectors’ share of US corporate profits has increased significantly, from 25% in 1999 to 35% in 2013…. In the most digitally advanced sectors of the economy, margins have grown 2-3 times faster than average. And even within these sectors, there are enormous spreads between the top-performing companies and the rest of the pack. The ‘winner-take-most’ dynamic of the digital economy is not only producing record profits for leading firms; it may be accelerating the pace of innovation and broadening the areas in which companies can enter and quickly establish market power…

Must-Read: Branko Milanovic: How Unequal Is India?

Must-Read: Branko Milanovic: How unequal is India?: “In the 1990s… the survey numbers began to diverge more and more from National Accounts statistics…

…NSS kept on producing a fairly stable consumption Gini… with only a small increase in inequality after India’s sharp turn toward capitalism in the early 1990s… made India inequality look about the same as in developed countries. But until recently we had no other reliable and nationally-representative survey to confront NSS with. Now… we have… the first income based surveys of Indian population for 2004 and, just released by LIS, another same survey for 2011…. First, Indian Gini is… 51… the level of Latin American countries and is some 15 points… higher than… NSS….

Now, if we replace NSS with the new income survey as I have done for the global inequality calculation for the year 2011 (unpublished), you may expect that the greater inequality revealed by IHDS would push global inequality up, especially since India is such a populous country. Right? Wrong…. Global inequality goes down by approximately 1 Gini point since the higher income levels implied by IHDS push Indians toward the middle of the global income distribution and more than offset the contribution to higher global inequality that comes from the stretched-out Indian distribution…. In conclusion, more unequal but richer India, makes the world more equal.

Must-Read: Noah Smith: Finding Better Ideas to Rebuild America

Must-Read: Noah Smith: Finding Better Ideas to Rebuild America: “‘Concrete Economics,’ by University of California-Berkeley professors Brad DeLong and Stephen S. Cohen, needs an expanded sequel…

…900 pages long, with charts, data, theory and an exhaustive list of historical case studies. That book would become the Bible of the New Industrialist movement that is just beginning to grope its way out of the ashes of the neoliberal free-market consensus. Perhaps that tome will get written. But DeLong and Cohen couldn’t wait to write it, because we need new ideas now, and they decided they had to put a sketch of those new ideas into people’s heads very quickly. And I agree with their decision. If you’re at all concerned about economic policy, this is a book you need to read. It will take you only a couple of hours, and the time will be well-spent….

The peril of this sort of historical analysis is that it’s always easy to make the past fit some pattern after the fact. Sometimes policy causes big economic shifts, and sometimes it’s just along for the ride. A cautionary tale is provided by Japan’s experience, which DeLong and Cohen extol. Although Japan’s government certainly did try to pick winners — and still does — this probably stopped working around the late 1970s. For a good primer on how Japan’s industrial policy petered out, see ‘Can Japan Compete?,’ by Michael Porter, Hirotaka Takeuchi and Mariko Sakakibara. Nor have South Korea and China, for all their fast growth, yet managed to reach the income levels of the finance-ridden U.S….

DeLong and Cohen are absolutely right — the American mind has been far too captured by the beguilingly simple and powerful theory of free-market dogma. That theory was oversold, and we need a corrective…. DeLong and Cohen don’t focus on elevating… theories…. DeLong and Cohen propose to frame economic policy programs in terms of simple, tangible, objectives. Build railroads across the West. Break up monopolies. Fund Big Science…. This short, almost casually sketched book is really the opening shot in a long campaign… to build a New Industrialism–an approach to economic policy that respects the power of the private sector but isn’t afraid of an activist government. No one quite knows what New Industrialism is going to be yet. ‘Concrete Economics’ is meant to get people thinking about what it ought to be.

Must-Reads: May 27, 2016


Should Reads:

Must-Read: Kostadis J. Papaioannou: “Hunger Makes a Thief of Any Man”: Poverty and Crime in British Colonial Asia

Must-Read: Kostadis J. Papaioannou: “Hunger Makes a Thief of Any Man”: Poverty and Crime in British Colonial Asia: “Extreme rainfall, both droughts and floods, lead to a large increase in property crimes (such as robbery, petty theft and cattle raiding)…

…but not to an increase in interpersonal violent crimes (such as murder, homicides and assault)…. We offer evidence that loss of agricultural income is one of the main causal channels leading to property crime. Additional historical information on food shortages, poverty and crime is used to explore the connection in greater detail…

Must-Read: Josh Bivens: Larry Summers, the Congressional Progressive Caucus Budget, and the Abandonment of Fiscal Policy

Must-Read: Josh Bivens: Larry Summers, the Congressional Progressive Caucus Budget, and the Abandonment of Fiscal Policy: “Federal budget season came and went this year without any budget proposal hitting the floor of the U.S. House of Representatives…

…This was an odd (and ironic) bit of incompetence by the GOP leadership, who couldn’t even wrangle a majority to support their own budget proposal. But it was especially damaging to U.S. economic policy debates because it limited attention paid to the budget of the Congressional Progressive Caucus (CPC)…. The need to resuscitate fiscal policy was usefully underscored in a widely-discussed speech by former Treasury Secretary and National Economic Council Chair Larry Summers earlier this week….

I am here to tell you that the most important determinant of our long term fiscal picture is how successful we are at accelerating the economy’s growth rate in the next three to five years, not the austerity measures that we implement…. What are the crucial elements of changing the fiscal monetary mix I would highlight?

One, the only one I have a slide on, is a substantial increase in public investment. It is insane that [net] federal and infrastructure [investment] is now negative at a moment when interest rates have never been lower and ten-year real interest rates are essentially zero and precious little good is happening at the state and local level either….

Second, strong support for social insurance. When Keynes came to the United States in 1942, he pointed out that an important virtue of Social Security was that it could absorb the excess savings that would potentially hold back U. S. economic growth after the Second World War. Those considerations were not relevant in the succeeding 60 years but they potentially are relevant in our current period of secular stagnation….

The Summers speech has been widely commented-upon, and rightly so—it contains a lot of wisdom. People should know, however, that the ideas in his remarks are embodied in real-world legislation proposed earlier this year, and which sadly disappeared without much attention, all because the Republican-led House could not even organize themselves to have the annual debate on budget proposals.

Why public assistance for children should address what happens before birth

The effects of poverty and income inequality start even before birth.

Many of the public assistance programs to help low-wage workers in the United States rest on the benefits the programs provide to children. There’s rough but broad agreement that the children of low-wage workers shouldn’t be punished for the circumstances of their birth. That’s why programs such as Temporary Assistance for Needy Families are for the children. Or consider the Earned Income Tax Credit, which is more generous for workers with children.

Focusing on children in low-income families can have huge benefits for children and our society as a whole, as Dylan Matthews details over at Vox. But maybe these programs and our thinking about the long-term effects of inequality on children are starting a bit late in the game. Perhaps we should be putting more emphasis on what happens before birth. There’s increasing evidence that the effects of poverty and income inequality start even before a child is born.

A new paper released by the National Bureau of Economic Research shows just how much the circumstances before a child’s birth can affect inequality down the line. The paper, by Claudia Persico and David Figlio of Northwestern University and Jeffrey Roth of the University of Florida, looks at the effects of exposure to environmental toxicants during childhood. Specifically, they examine what happens when children lived near a Superfund site—an area designated by the Environmental Protection Agency for cleanup—in Florida during the late 1990s and early 2000s. To gauge any causal effects of living near toxicants, the researchers look at the difference between siblings—one child who was conceived before or during clean up of the site and a younger sibling who was conceived later.

The effects are fairly significant. Children who were conceived before completion of the clean-up ended up doing much worse than their younger siblings. They were more likely to repeat a grade, have lower scores on standardized tests, and be suspended from school. And, the closer the mother of the child lived to the Superfund site, the stronger these effects were. Remember that these effects are all pre-natal. And it’s not just proximity to pollution that can have effects before a child’s birth. As Carolyn Johnson at Wonkblog writes, there’s also evidence that stress events for a mother during pregnancy can have long-term consequences for her child.

What’s the relevance of this kind of research for thinking about policymaking? Well, first of all, it’s a great argument for cleaning up Superfund sites and other polluted areas, which can have large detrimental effects on the lives of children. But in the broader sense, it’s a reminder that perhaps we shouldn’t think about public policy that helps children as something that should turn on once the child is born. Rather, the health and situation of the mother should be considered far before that date. Policies that help improve pre-natal health or the circumstances of the pregnant mother should be more strongly supported, and we should give more thought to policies that help low-income workers who are just starting a family.

Must-Read: Pedro Bordalo, Nicola Gennaioli, and Andrei Shleifer: Diagnostic Expectations and Credit Cycles

Must-Read: Very clever indeed…

Pedro Bordalo, Nicola Gennaioli, and Andrei Shleifer: Diagnostic Expectations and Credit Cycles: “We present a model of credit cycles arising from diagnostic expectations…

…a belief formation mechanism based on Kahneman and Tversky’s (1972) representativeness heuristic. In this formulation, when forming their beliefs agents overweight future outcomes that have become more likely in light of incoming data. The model reconciles extrapolation and neglect of risk in a unified framework. Diagnostic expectations are forward looking, and as such are immune to the Lucas critique and nest rational expectations as a special case. In our model of credit cycles, credit spreads are excessively volatile, over-react to news, and are subject to predictable reversals. These dynamics can account for several features of credit cycles and macroeconomic volatility.

Must-Reads: May 26, 2016


Should Reads: