Category: Equitablog

Must-Read: Larry Summers: Four Common-Sense Ideas for Economic Growth

Posted on by Brad DeLong

Must-Read: Larry Summers: Four Common-Sense Ideas for Economic Growth: “Since the summer of 2009, the US economy has grown at about 2 percent…

…The 10-year interest rate at the end of trading today [February 18, 2016] was just a bit below 1.8 percent…. We are having trouble achieving… a 2 percent inflation…. This is the judgment of a market that thinks that the Fed is not going to do anything like what it says it’s going to do…. The real interest rate is at least a kind of measure of the certainty equivalent of the productivity of capital. If the market is saying that’s below 1 percent, that has to be of concern as well. [And] the Fed has been substantially too optimistic in its one-year-ahead forecast every year for the last six….

What should be done?… First, there is an overwhelming case in the United States for expanded public infrastructure investment…. Yt the rate of infrastructure investment is lower now than it’s been anytime since 1947. If you take depreciation out, federal infrastructure investment is negative…. Second, we should increase support for private investment in infrastructure…. With respect to private investment, tax reform is critical…. Third, we should grow our effective labor force…. What we do to educate our workforce matters. What we do to incentivize our workforce—through the design of our social safety net, and through disability insurance—matters. What we do to change our immigration policies—particularly our immigration policies on highly skilled workers—matters….

Fourth, our financial system requires continuing attention… the 1987 crash, the 1990 real-estate bubble, the S&L crash, the Mexican financial crisis, the Asian financial crisis, the internet bubble, Enron, and then the Great Recession of 2008. On average, a crisis every three years for the last 30 years. That surely has taken a toll on growth. At the same time, because pendulums swing, at a time of substantial unemployment, a large number of middle-class Americans are not able to get mortgages today with reasonable down payments. It appears, though the matter is in some dispute, that there are significant impediments in the flow of capital to small businesses as well. Financial reform, labor-force support, stimulus to private investment, increases in public investment—this stuff is not rocket science. Most of it operates on both the demand side and the supply side….

If all you care about is that we’ve got an excessive federal debt, the most important determinant of the debt-to-GDP ratio in 2030 is how rapidly the economy grows between now and then. If what you care about is American national security, the most important determinant of how much we are respected and how much influence we have in the world is how well our economy performs. If what you care about is inequality and poverty, the most important determinant of the employment prospects of the poor is how rapidly the economy is growing…

Must-read: Dean Baker: “The Elite’s Comforting Myth: We Had to Screw Rich Country Workers to Help the World’s Poor”

Posted on by Brad DeLong

Must-Read: Dean Baker: The Elite’s Comforting Myth: We Had to Screw Rich Country Workers to Help the World’s Poor: “Roger Cohen gave us yet another example of touching hand-wringing from elite types…

…about the plight of the working class in rich countries…. Cohen acknowledges that there is a real basis for their rejection of the mainstream: they have seen decades of stagnating wages. However Cohen tells us the plus side of this story, we have seen huge improvements in living standards among the poor in the developing world. In Cohen’s story, the economic difficulties of these relatively privileged workers is justified by the enormous gains they allowed those who are truly poor. The only problem is that these workers are now looking to these extreme candidates. Cohen effectively calls for a more generous welfare state to head off this turn to extremism, saying that we may have to restrain ‘liberty’ (he means the market) in order to protect it. This is a touching and self-serving story. The idea is that elite types like Cohen were winners in the global economy. That’s just the way it. Cohen is smart and hard working, that’s why he and his friends did well. Their doing well also went along with the globalization process that produced enormous gains for the world’s poor. But now he recognizes the problems of the working class in rich countries, so he says he and his rich friends need to toss them some crumbs so they don’t become fascists.

We all should be glad that folks like Cohen support a stronger welfare state, but let’s consider his story… imagine that mainstream economics wasn’t a make it up as you go along discipline. The standard story in economics is that capital is supposed to flow from rich countries to poor countries…. Rich countries lend poor countries the capital they need to develop… [run] large trade surpluses with the developing world. In effect, the rich countries would be providing the capital that poor countries need to build up their capital stock and infrastructure, while still ensuring that their populations are fed, housed, and clothed. We actually were seeing a pattern of development largely along these lines in the early 1990s….

This pattern was reversed in 1997 with the U.S.-I.M.F.’s bailout from the East Asian financial crisis…. The countries directly affected began to run huge trade surpluses in order to accumulate massive amounts of reserves. Other developing countries also decided to go the same route in order to avoid ever being in the same situation as the countries of East Asia. From that point forward developing countries like China and Vietnam ran enormous trade surpluses. This implied huge trade deficits and unemployment for manufacturing workers in the United States and to a lesser extent Europe…. Cohen is giving us this impressive display of hand-wringing…. It’s very touching, but in the standard economics, it was hardly necessary. The standard economics would have allowed the pattern of growth of the early and mid-1990s to continue…. The fact that the textbook course of development was reversed, with massive capital flows going from poor countries to rich countries, was due to a massive failure of the international financial system…. The fact that manufacturing workers paid this price, and not doctors, lawyers, and other highly paid professionals, was by design….

It’s touching that folks like Roger Cohen feel bad for the losers from the process of globalization. But the story is that they didn’t just happen to lose, his friends designed the game that way.

Another interactive look at changes in U.S. labor force participation

Posted on by Austin Clemens

Last week we published an interactive graph showing trends in U.S. labor force participation since 1975, using data from the Current Population Survey. While that graph lets you select which time period you want to look at, we thought it might be informative to be able to pick which age group you want to look at. That’s what the interactive below allows you to do.

Select an age bracket and see trends in the share of U.S. workers who are:

• Employed part-time or full-time
• Officially unemployed
• Disabled
• In-home caregivers
• Students in school
• Retired

History of Labor Participation by Age Bracket
A history of labor market participation by age bracket
Choose an age bracket to see how labor participation within that bracket has changed over time. Click on an area of the chart to isolate that category.
Recessions are shaded, red lines indicate a major change to the CPS survey.
Note: This chart is updated monthly. Data is from the Census Bureau's Current Population Survey. Basic monthly data are used and all months are averaged together for each year. The survey was revised in 1989 and 1994; changes to both question wording and survey weights result in discontinuities in these years that may not be attributable to real changes in the economy. Recession data from: Federal Reserve Bank of St. Louis, NBER based Recession Indicators for the United States from the Period following the Peak through the Trough [USREC], retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/USREC, March 1, 2016.

Methodology

The data assembled span three versions of the Current Population Survey, with new surveys being instituted in 1989 and 1994. All three surveys feature a labor force participation item that is generated based on responses to a series of yes/no questions on the survey. This variable is called ESR, LFSR, and PEMLR, respectively, on the three versions of the survey. A second variable—called major activity, or MAJACT, on the first two surveys and PENLFACT on the post-1994 survey—was used to distinguish between certain categories of non-labor force respondents. Finally, a question on total hours worked was used to distinguish full-time workers from part-time workers.

The results are fairly consistent across surveys for certain age groups but there are important discrepancies. Most notably, the pre-1989 survey did not allow respondents to specifically identify themselves as retired. Instead, the “other” category included retirees. The wording and question order of the 1989-1993 survey appears to bias respondents in favor of choosing “carer” over “retired,” so another break in the retired series is evident in 1994. Minor changes in the survey may also have contributed to the uptick in respondents identifying as “disabled” in the most recent version of the survey.

This project’s github includes the Python code that was used to analyze the raw monthly CPS data, including our survey-weighting procedure and all coding decisions made.

Must-reads: May 4, 2016

Posted on by Brad DeLong

Should-reads:

Must-read: Nick Rowe et al.: The Leijonhufvud Tradition

Posted on by Brad DeLong

Must-Read: Nick Rowe et al.: The Leijonhufvud Tradition:

Must-read: Tamim Bayoumi and Joseph E. Gagnon: “Time to Be Bold, Mr. Kuroda”

Posted on by Brad DeLong

Must-Read: Tamim Bayoumi and Joseph E. Gagnon: Time to Be Bold, Mr. Kuroda: “The surprise decision by the Bank of Japan (BOJ) last Thursday to leave policies essentially unchanged…

…while downgrading the growth and inflation forecasts has unnerved markets…. Markets needed a surprise, but this one was in the wrong direction. What is required is a bold initiative rather than renewed paralysis…. Strong, decisive policy action is needed—and soon—to convince markets the BOJ is still determined to achieve 2 percent inflation. With 10-year government bond yields now below zero, the most effective option is to ramp up purchases of other assets. Currently, the BOJ is buying about 0.5 percent of outstanding equities per year. Raising the rate of purchase to 10 percent would herald a major break with the past, pushing up equity prices and encouraging consumption and investment through higher household wealth and lower cost of capital.

Must-read: Wolfgang Munchau: “The Revenge of Globalisation’s Losers”

Posted on by Brad DeLong

Must-Read: Wolfgang Munchau: The Revenge of Globalisation’s Losers: “A process once hailed for delivering universal benefit now faces a political backlash…

…The establishment view, in Europe at least, is that states have neglected to forge the economic reforms necessary to make us more competitive globally. I would like to offer an alternative view. The failure of globalisation in the west is in fact down to democracies failure to cope with the economic shocks that inevitably result from globalisation, such as the stagnation of real average incomes for two decades. Another shock has been the global financial crisis–a consequence of globalisation–and its permanent impact on long-term economic growth….

Voters’ insurrection is neither shocking nor irrational. Why should French voters cheer labour market reforms if it could result in the loss of their jobs, with no hope of a new one?… Germany’s acclaimed labour market reforms in 2003 succeeded in the short term because they raised the country’s cost competitiveness through lower wages relative to other advanced countries. The reforms produced a state of near full employment only because no other country did the same. If others had followed, there would have been no net gain. The reforms had a big downside. They reduced relative prices in Germany and pushed up net exports in turn generating massive savings outflows, the deep cause of the imbalances that led to the eurozone crisis. Reforms such as these can hardly be the recipe for how advanced nations should address the problem of globalisation….

Globalisation has overwhelmed western societies politically and technically. There is no way we can, or should, hide from it. But we have to manage the change. This means accepting that the optimal moment for the next trade agreement, or market liberalisation, may not be right now.

Must-read: Martin Ford: “How Unprepared We Are for the Robot Revolution”

Posted on by Brad DeLong

Martin Ford: How Unprepared We Are for the Robot Revolution: “Machines are rapidly taking on ever more challenging cognitive tasks…

…encroaching on the fundamental capability that sets humans apart as a species: our ability to make complex decisions, to solve problems — and, most importantly, to learn…. In the coming decades, machine learning is likely to be the primary driving force behind a Cambrian explosion of applications…. The near-term future is likely to be transformed not by general purpose robots or AI systems but rather a nearly limitless number of specialised applications… ultimately consuming nearly any kind of work that is on some level routine and predictable….

Low-wage service sector jobs in areas such as fast food and retail… are certain to be heavily affected. Even more important will be all the white-collar occupations that involve relatively routine information analysis and manipulation. As these ‘good’ jobs, often held by university graduates, begin to evaporate, faith in evermore education and training as the common solution to technological disruption of the job market seems likely to also erode. All of this portends a social, economic and political disruption for which we are completely unprepared…. If we fail to have a meaningful public conversation about what robotics and artificial intelligence mean for the future, and develop workable ways in which to adapt our economy and society, then far greater, and more frightening, volatility is sure to soon arrive.

Must-read: Gary Gorton: “The History and Economics of Safe Assets”

Posted on by Brad DeLong

Must-Read: Gary B. Gorton: The History and Economics of Safe Assets: “Safe assets play a critical role in an(y) economy…

…A ‘safe asset’ is an asset that is (almost always) valued at face value without expensive and prolonged analysis. That is, by design there is no benefit to producing (private) information about its value. And this is common knowledge. Consequently, agents need not fear adverse selection when buying or selling safe assets. Safe assets can easily be used to exchange for goods or services or to exchange for another asset. These short-term safe assets are money or money-like. A long-term safe asset can store value over time or be used as collateral. Human history can be written in terms of the search for and production of safe assets. But, the most prevalent, privately-produced short-term safe assets—bank debt, are subject to runs and this has important implications for macroeconomics and for monetary policy.

Income mobility over a lifetime might be on the decline

Posted on by David Hudson

Ask five people about economic mobility and you might end up with six definitions of the term. It’s a knotty subject because the term really does have a number of definitions. Lots of discussions about mobility center on the intergenerational kind—about how much of a parent’s economic situation gets passed onto their children. But there’s also intragenerational mobility—a lesser-discussed kind of mobility that looks at how much a person changes their position on the income ladder within their own lifetime.

Research over the past couple of years indicates that intergenerational mobility in the United States has stayed relatively constant since the early 1980s. In contrast, a new paper shows that intragenerational mobility has been on the decline amid rising income inequality.

The new paper, released today as part of Equitable Growth’s working paper series, is by Michael D. Carr and Emily E. Wiemers, both of the University of Massachusetts-Boston. It looks at how mobility over a career has changed since the early 1980s. Previous research on intragenerational mobility using data from the Social Security Administration found the overall level hasn’t changed that much. Carr and Wiemers also use data from the Social Security Administration, but they include administrative data from the Internal Revenue Service as well. Both of these datasets are linked to data from the Survey of Income and Program Participation, or SIPP, which follows households over time and has information on demographics and education levels.

The two economists find that a person’s initial place in the income distribution mattered more in the early 1990s than it did in the early 1980s. Specifically, they look at the mobility of workers over 15-year periods, the first spanning 1981 to 1996 and the second from 1993 to 2008. In the more recent cohort they find a stronger correlation between a person’s rank when they start a career and that person’s position later in life. A stronger correlation means that a person’s position earlier in life is more predictive of their later position, and therefore there are lower levels of movement up and down the distribution.

What’s particularly interesting is that the inclusion of the SIPP data lets the authors look at how trends in mobility have differed by educational levels. For workers with less than a high school diploma, intragenerational mobility hasn’t changed that much. The difference isn’t statistically significant in Carr and Wiemers’s analysis. But mobility has declined (as shown by a stronger correlation) for workers with a college degree. In fact, for the 1993-2008 cohort, college-educated workers didn’t experience more mobility than workers with less education. The results indicate that this may be because college-educated workers now have a higher starting point than in the past.

These results all come with the usual caveats of new working papers. But if the results stand, they require some careful thought from both researchers and policymakers.

(featured photo credit: Flickr/GurtyGurt)