Category: Equitablog

Whose are the ruling macroeconomic ideas?

Posted on by Brad DeLong

It is now six years since Olivier Blanchard called for “outlining the contours of a new macroeconomic policy framework”. Yet what is that framework? Where is it? Who outlines it? And what processes will give it political traction?

Looking back to 2010:

Olivier Blanchard et al. (2010): Rethinking Macro Policy: “The global crisis forced economic policymakers…

…to react in ways not anticipated by the pre-crisis consensus…. Here the IMF’s chief economist and colleagues (i) review the main elements of the pre-crisis consensus, (ii) identify the elements which turned out to be wrong, and (iii) take a tentative first pass at outlining the contours of a new macroeconomic policy framework…

You can argue that the elements of such a framework are there. But they are disassembled, lying on the ground, disconnected. And as far as political traction, they are next to nowhere.

I am ending my invited lectures these days with this:

It is traditional to close lectures like this with Keynes’s “madmen in authority” quote:

Is the fulfilment of these ideas a visionary hope? Have they insufficient roots in the motives which govern the evolution of political society? Are the interests which they will thwart stronger and more obvious than those which they will serve?

I do not attempt an answer in this place…. But if the ideas are correct… it would be a mistake, I predict, to dispute their potency over a period of time…. The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas….

There are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.

Yet when I look around, I see lots of ideas with a potency that is extremely great but with influence that is nowheresville.

The ruling ideas are not those of “academic scribblers”. They are, rather, much simpler. At the moment I count five:

  1. The bankers have us by the plums…: Thus it is important to cosset, coddle, and enrich our bankers, because only if they are confident will the engine of financial intermediation that is the only thing that can create a booming full-employment economy run smoothly.

  2. Debt is bad (except when it is used to fund tax cuts for “job creators”)…: Hence it is important to cut Social Security and make sure that not an extra drop is spent on public infrastructure.

  3. Today’s extremely low interest rates must be unnatural…: Hence they need to be reversed and monetary policy “normalized” as quickly as normalization can be accomplished without renewed recession.

  4. Only pain can drive reform…: Hence boosting employment and restoring fast growth would be bad as it would impeded the essential process of actually undertaking the badly-needed “structural reforms”.

  5. We couldn’t have done any better…: The most urgent economic problems of the North Atlantic aren’t the standard ones of too-little “money” (of various kinds) chasing a normal amount of goods, but are complicated and irresolvable.

If the ruling ideas were those of Bagehot, Kindleberger, Keynes, Friedman–even a Hayek–we could do something, although in the last case it would take a lot of intellectual ingenuity to make a silk purse out of that particular sow’s ear. But the ruling ideas are barely ideas–they are, rather slogans. The bipartisan technocratic policy center of politicians who listen to arguments about what policies might actually work is gone–or at least paralyzed. And too many key levers of power are held by a right–in Germany, in Britain, and in the U.S.–that appears profoundly uninterested in argument abut policy effectiveness, if not uninterested in policy effectiveness itself.

Must-read: Olivier Blanchard: “Rethinking Macro Policy”

Posted on by Brad DeLong

Must-Read: It is now six years since Olivier Blanchard called for “outlining the contours of a new macroeconomic policy framework”. Yet what is that framework? Where is it? Who outlines it? And what processes will give it political traction?

Olivier Blanchard et al. (2010): Rethinking Macro Policy: “The global crisis forced economic policymakers…

…to react in ways not anticipated by the pre-crisis consensus…. Here the IMF’s chief economist and colleagues (i) review the main elements of the pre-crisis consensus, (ii) identify the elements which turned out to be wrong, and (iii) take a tentative first pass at outlining the contours of a new macroeconomic policy framework.

Must-read: Jim Tankersley: “The world has too many workers. Here’s one way to fix it”

Posted on by Brad DeLong

Must-Read:I really do not like the “too many workers” framing: I vastly prefer either:

  • Too little public investment
  • Too little government purchases
  • Too little government debt
  • Too little risk-bearing capacity
  • Too little in the way of safe assets for savers to hold

But the argument seems 100% right to me:

Jim Tankersley: The world has too many workers. Here’s one way to fix it: “overcomplicating America’s economic challenges today…

…Maybe the problem is simple: too many workers. That is the argument made in a new paper released by the centrist Democratic think tank Third Way, which theorizes that the world economy is suffering from an oversupply of labor and too little demand for the goods and services those workers produce…. Daniel Alpert… [makes] Third Way’s latest effort to shape the liberal policy conversation in the 2016 presidential primaries. It does so in decidedly un-centrist fashion — by embracing a larger infrastructure spending program than Bernie Sanders does….

Alpert laments the ‘suddenness and extent of the integration of over 3 billion people into a global capitalist market, that really only hitherto consisted of about 800 million in the advanced economies.’ He argues that worker influx has triggered a wave of low-wage job creation in America. He notes that nearly half of the jobs created in the current recovery have come in traditionally low-wage sectors…. Intervening, he says, requires a ‘bold change in policy focus’ for the United States. Which is to say, a $1.2 trillion infrastructure spending program, at a time when Congress remains dead set against big new spending plans. Alpert estimates it would create 5.5 million jobs….

It might seem an unusual position for a centrist think-tank, outflanking the most liberal presidential candidate on the left. But Third Way officials argue it’s an economic imperative. ‘Whether it’s through some sort of spending deal, where you’re getting more money into infrastructure, or repatriation or some other means, you have to get this done’ in Congress, said Jim Kessler, the group’s senior vice president for policy. ‘That glut of worldwide labor is not going to go away, magically.’

Must-read: Ben Thompson: “Obsoletive: Revolutionary Products in Tech Don’t Disrupt–They Obsolete”

Posted on by Brad DeLong

Must-Read: Ben Thompson (2013): Obsoletive: Revolutionary Products in Tech Don’t Disrupt–They Obsolete: “[Christiansenian] disruption is low-end…

…a disruptive product is worse than the incumbent technology on the vectors that the incumbent’s customers care about. But, it’s cheaper, and better on other vectors that different customers care about. And, eventually, as the new technology improves, it takes the incumbent’s market.

This is not what happened in cell phones. In 2006, the Nokia 1600 was the top-selling phone… the BlackBerry Pearl the best-selling smartphone. Both were only a year away from their doom, but that doom was not a cheaper, less-capable product, but in fact the exact opposite: a far more powerful, and fantastically more expensive product called the iPhone…. The problem for Nokia and BlackBerry was that their specialties–calling, messaging, and email–were simply apps: one function on a general-purpose computer. A dedicated device that only did calls, or messages, or email, was simply obsolete. An even cursory examination of tech history makes it clear that ‘obsoletion’–where a cheaper, single-purpose product is replaced by a more expensive, general purpose product–is just as common as ‘disruption’–even more so, in fact…. The Mac (and PC), iPod, and iPhone weren’t so much disruptive as they were obsoletive. They absorbed a wide range of specialized tools for a price far greater than any one of those tools cost on their own….

Christensen’s theory of disruption remains an incredibly elegant and insightful framework for understanding why some companies–like Microsoft, to name the best example–decline. But it’s dramatically over-applied in technology. Most new products are simply better… while the most revolutionary products… are obsoletive. They are more expensive, more capable, and change the way we live…

Must-reads: April 30, 2016

Posted on by Brad DeLong

Should-reads:

Must-read: Ben Thompson: “Antitrust and Aggregation”

Posted on by Brad DeLong

Must-Read: Ben Thompson: Antitrust and Aggregation: “With zero distribution costs and zero transaction costs…

…consumers are attracted to an aggregator through the delivery of a superior experience, which attracts modular suppliers, which improves the experience and thus attracts more consumers, and thus more suppliers in the aforementioned virtuous cycle. It is a phenomenon seen across industries including search (Google and web pages), feeds (Facebook and content), shopping (Amazon and retail goods), video (Netflix/YouTube and content creators), transportation (Uber/Didi and drivers), and lodging (Airbnb and rooms, Booking/Expedia and hotels)…. All things being equal the equilibrium state in a market covered by Aggregation Theory is monopoly: one aggregator that has captured all of the consumers and all of the suppliers.

This monopoly, though, is a lot different than the monopolies of yesteryear…. Consumers are self-selecting onto the Aggregator’s platform because it’s a better experience. This has completely neutered U.S. antitrust law, which is based on whether or not there has been clear harm to the consumer… it’s why the FTC has declined to sue Google for questionable search practices….

Once competitors die the aggregators become monopsonies — i.e. the only buyer for modularized suppliers. And this, by extension, turns the virtuous cycle on its head: instead of more consumers leading to more suppliers, a dominant hold over suppliers means that consumers can never leave, rendering a superior user experience less important than a monopoly that looks an awful lot like the ones our antitrust laws were designed to eliminate….

There was one remedy from the European Commission settlement with Microsoft that actually worked out quite well: Windows was required to document interoperability protocols for work group servers, which while designed for the benefit of established competitors like Sun, was actually more important for the open-source Samba project. Samba made it possible for non-Windows PCs and servers to be fully compatible with Windows-based networks, making it viable to use a Mac or Linux machine in corporate environments, or (more importantly) in corporate data centers, one of the first areas where the Windows monopoly started to come apart. Of course Windows remained dominant on the desktop thanks to its application lock-in…. Both of these approaches — interoperability and API disclosure — could be solutions when it comes to defusing the market power of aggregators…

Must-read: Amos Tversky and Daniel Kahneman (1974): “Judgment under Uncertainty: Heuristics and Biases”

Posted on by Brad DeLong

Must-Read: Amos Tversky and Daniel Kahneman (1974): Judgment under Uncertainty: Heuristics and Biases: “Many decisions are based on beliefs concerning the likelihood of future events…

…These beliefs are usually expressed in statements such as ‘I think that…’, ‘the chances are…’, ‘it is unlikely that…’, and so forth. Occasionally, beliefs concerning uncertain events are expressed in numerical form as odds or subjective probabilities. What determines such beliefs? How do people assess the probability of an uncertain event or he value of an uncertain quantity?… People rely on a limited number of heuristic principles which reduce the complex tasks of assessing probabilities and predicting values to simpler judgmental operations. In general, these heuristics are quite useful, but sometimes they lead to severe and systematic errors…

Live at Project Syndicate: “Rescue Helicopters for Stranded Economies”

Posted on by Brad DeLong

Live at Project Syndicate: Rescue Helicopters for Stranded Economies: BERKELEY – For countries where nominal interest rates are at or near zero, fiscal stimulus should be a no-brainer…. Some point to the risk that, once the economy recovers and interest rates rise, governments will fail to make the appropriate adjustments to fiscal policy. But… governments that wish to pursue bad policies will do so no matter what decisions are made today…. Aversion to fiscal expansion reflects raw ideology, not pragmatic considerations…. This debate is no longer an intellectual discussion–if it ever was. As a result, a flanking move might be required. It is time for central banks to assume responsibility and implement ‘helicopter money’… **Read MOAR at Project Syndicate

Weekend reading: “Participating in the labor market” 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

This week we published the third installment in our “Equitable Growth in Conversation” series. In this interview, Ben Zipperer talks to David Card and Alan Krueger about advances in empirical techniques in labor economics among other topics.

Increasing concern about a lack of competition in the U.S. economy has most people thinking about how to reduce consolidation among companies. But we shouldn’t ignore the importance of competition in the labor market.

U.S. labor force participation has changed quite a bit over the past 40 years. But as workers have entered and exited the labor force, where have they ended up? And how have these trends changed across the income distribution? Check out our interactive graph to find out.

After being in the wilderness for a few decades, the idea of a universal basic income is making a bit of a comeback. While there aren’t a lot of recent research ideas, it’s worth thinking about some of the potential effects of the program.

In their interview, Card and Krueger talk about advances in techniques to draw out the causal effect of programs and economic shocks. These advances are important and quite interesting, but there is no gold standard when it comes to the techniques.

Links from around the web

Productivity growth has been quite weak in the wake of the Great Recession. Toby Nangle argues that the lack of strong productivity gains may mean the global economy faces a “new impossible trinity”—unless stronger labor bargaining power actually starts to boost productivity. [ft alphaville]

The decline of the middle class in the United States has a number of causes. But the decline of government jobs in recent years looks to be a significant contributor, especially for the black middle class. Annie Lowrey dives into the subject. [nyt magazine]

When it comes to U.S. government debt, the public and policymakers are usually concerned that there’s too much of it. But Narayana Kocherlakota makes a good argument that there should actually be more government debt to help the global economy. [bloomberg view]

The source of low measured productivity growth in the United States is far from clear. And there are a number of hypotheses for why it’s happening. Neil Irwin runs through three scenarios: the depressing, the neutral, and the happy. [the upshot]

Gross domestic product, probably the most cited economic statistic, has come under attack in recent years. A number of researchers, policymakers, and advocates have argued that the statistic is outdated, doesn’t accurately represent changes in living standards, and doesn’t measure economic output well. The Economist joins the skeptical choir. [the economist]

Friday figure

Figure from “What explains the rise in income inequality at the top of the income distribution?” by Matt Markezich

When it comes to causality, no one technique should have all that power

Posted on by Bridget Ansel
Economist Alan Krueger speaks at the 2014 Fiscal Summit in Washington.

In the most recent interview in our “Equitable Growth in Conversation” series, our own Ben Zipperer talks with David Card of the University of California, Berkeley and Alan Krueger of Princeton University. The interview covers a number of areas, but it centers on Card and Krueger’s role in advancing empirical methods that help show causality. As you’ve probably heard a few hundred times in your life, correlation doesn’t imply causation. But the two economists sparked thinking about how other researchers could show the actual causal impact of a new policy or a shock to the economy—and this thinking is now a key part of the profession.

When it comes to showing causation in a hard science like physics or chemistry, the path forward is relatively well tread: Set up an experiment that controls for all the factors except the one you want to understand the impact of. But that’s not exactly possible when it comes to a social science like economics. You might want to understand what happens to economic growth when you implement a new policy, but it’s really hard to sort out the impact of everything else going on in the economy.

But researchers, like Card and Krueger, have figured out ways to tease out causality—one of which is a natural experiment. Think of Card and Krueger’s famous study on the minimum wage, for example. They used the fact that the minimum wage was going up in New Jersey but not Pennsylvania, and then looked at what happened to employment at fast food restaurants along the border in both states. The intent of raising the minimum wage wasn’t to cause an experiment, but the two economists used it as such.

Another way to get at causal effect is to use an instrumental variable. Let’s say you’re trying to understand how the amount of schooling a person has affects the wages he or she will earn. You’ll run into the problem that there are factors that affect how long a person will attend school while also affecting how much they might earn, such as innate talent. So how would you tease out just the effect of an exact year of school? You could find something that’s strongly correlated with the amount of time spent in school but not correlated at all with the other factors—say, talent—that might also affect wages, and then see how that affects how much a person earns.

A third option is to set up something very close to a real-world experiment, in a technique known as a randomized controlled trial, or RCT. A good example is the well-known Oregon Health Insurance Experiment. In 2008, the state of Oregon had enough money to expand its Medicaid plan but not enough money to expand it to all the people who wanted it. So the state ended up using a lottery to decide who got Medicaid and who didn’t. As the lottery was random, researchers could compare very similar people with and without health insurance knowing that difference was determined by nothing but chance. That certainty about randomness helps show the causal impact of health insurance.

But as Card says in the interview, all these methods have “some strengths and some weaknesses.” Natural experiments, for example, are great because they actually happen in the real world, but it’s not always clear how random they are. It’s tough to know how random the changes to policy are. At the same time, a randomized controlled trial is great for knowing the effect of the change in the trial to a great degree of confidence, but it’s hard to know how applicable those results are to circumstances outside those that happened during the trial. So while it might be nice to be able to point to one technique to rule over all others, giving such power to one technique probably isn’t for the best.