Category: Equitablog

Must-reads: April 27, 2016

Posted on by Brad DeLong

Should-reads:

Must-read: David Glasner: “What’s Wrong with Monetarism?”

Posted on by Brad DeLong

Must-Read: An excellent read from the very sharp David Glasner. I, however, disagree with the conclusion: the standard reaction of most economists to empirical failure is to save the phenomena and add another epicycle. Why not do that in this case too? Why not, as someone claimed to me that John Taylor once said, stabilize nominal GDP by passing a law mandating the Federal Reserve keep velocity-adjusted money growing at a constant rate?

David Glasner: What’s Wrong with Monetarism?: “DeLong balanced his enthusiasm for Friedman with a bow toward Keynes…

…noting the influence of Keynes on both classic and political monetarism, arguing that, unlike earlier adherents of the quantity theory, Friedman believed that a passive monetary policy was not the appropriate policy stance during the Great Depression; Friedman famously held the Fed responsible for the depth and duration of what he called the Great Contraction… in sharp contrast to hard-core laissez-faire opponents of Fed policy, who regarded even the mild and largely ineffectual steps taken by the Fed… as illegitimate interventionism to obstruct the salutary liquidation of bad investments, thereby postponing the necessary reallocation of real resources to more valuable uses…. But both agreed that there was no structural reason why stimulus would necessarily counterproductive; both rejected the idea that only if the increased output generated during the recovery was of a particular composition would recovery be sustainable. Indeed, that’s why Friedman has always been regarded with suspicion by laissez-faire dogmatists who correctly judged him to be soft in his criticism of Keynesian doctrines….

Friedman parried such attacks… [saying that] the point of a gold standard… was that it makes it costly to increase the quantity of money. That might once have been true, but advances in banking technology eventually made it easy for banks to increase the quantity of money without any increase in the quantity of gold… True, eventuaally the inflation would have to be reversed to maintain the gold standard, but that simply made alternative periods of boom and bust inevitable…. If the point of a gold standard is to prevent the quantity of money from growing excessively, then, why not just eliminate the middleman, and simply establish a monetary rule constraining the growth in the quantity of money? That was why Friedman believed that his k-percent rule… trumped the gold standard….

For at least a decade and a half after his refutation of the structural Phillips Curve, demonstrating its dangers as a guide to policy making, Friedman continued treating the money multiplier as if it were a deep structural variable, leading to the Monetarist forecasting debacle of the 1980s…. So once the k-percent rule collapsed under an avalanche of contradictory evidence, the Monetarist alternative to the gold standard that Friedman had persuasively, though fallaciously, argued was, on strictly libertarian grounds, preferable to the gold standard, the gold standard once again became the default position of laissez faire dogmatists…. So while I agree with DeLong and Krugman (and for that matter with his many laissez-faire dogmatist critics) that Friedman had Keynesian inclinations which, depending on his audience, he sometimes emphasized, and sometimes suppressed, the most important reason that he was unable to retain his hold on right-wing monetary-economics thinking is that his key monetary-policy proposal–the k-percent rule–was empirically demolished in a failure even more embarrassing than the stagflation failure of Keynesian economics. With the k-percent rule no longer available as an alternative, what’s a right-wing ideologue to do? Anyone for nominal gross domestic product level targeting (or NGDPLT for short)?

Must-see: Raj Chetty and Nathaniel Hendren: “The Impacts of Neighborhoods on Intergenerational Mobility”

Posted on by Brad DeLong

Must-See: Raj Chetty and Nathaniel Hendren: The Impacts of Neighborhoods on Intergenerational Mobility: W@4PM, Wells-Fargo Room: Stream: http://bluejeans.com/617756972 : “We characterize the effects of neighborhoods on children’s earnings and other outcomes in adult- hood…

…by studying more than five million families who move across counties in the U.S. Our analysis consists of two parts. In the first part, we present quasi-experimental evidence that neighborhoods affect intergenerational mobility through childhood exposure effects. In partiular, the outcomes of children whose families move to a better neighborhood – as measured by the outcomes of children already living there – improve linearly in proportion to the time they spend growing up in that area. We distinguish the causal effects of neighborhoods from confounding factors by comparing the outcomes of siblings within families, studying moves triggered by displacement shocks, and exploiting sharp variation in predicted place effects across birth cohorts, genders, and quantiles. We also document analogous childhood exposure effects for college attendance, teenage birth rates, and marriage rates. In the second part of the paper, we identify the causal effect of growing up in every county in the U.S. by estimating a fixed effects model identified from families who move across counties with children of different ages. We use these estimates to decompose observed intergenerational mobility into a causal and sorting component in each county. For children growing up in families at the 25th percentile of the income distribution, each year of childhood exposure to a one standard deviation (SD) better county increases income in adulthood by 0.5%. Hence, growing up in a one SD better county from birth increases a child’s income by approximately 10%. Low-income children are most likely to succeed in counties that have less concentrated poverty, less income inequality, better schools, a larger share of two-parent families, and lower crime rates. Boys’ outcomes vary more across areas than girls, and boys have especially poor outcomes in highly-segregated areas. In urban areas, better areas have higher house prices, but our analysis uncovers significant variation in neighborhood quality even conditional on prices.

An interactive history of U.S. labor force participation

Posted on by Austin Clemens

If you want to know how the labor market has changed over time, you usually look at the unemployment rate or maybe the employment-to-population ratio. But while those summary statistics are important, they don’t tell us about what people outside the labor force are doing. Are they in school? Acting as a primary caregiver? Disabled? Retired from the workforce?

The chances a worker is in any of those roles at a specific age during their life has changed quite a bit over the years. Inspired by Matt Bruenig of Demos, we looked at the trends in labor force status by age since 1975, using data from the Current Population Survey.

The interactive graph below shows the share of U.S. workers at different ages who are:

  • Employed part-time or full-time
  • Officially unemployed
  • Disabled
  • In-home caregivers
  • Students in school
  • Retired
History of Labor Participation Interactive
An interactive look at participation in the labor force by age
Click an area on the chart to isolate that category. Slide along the GDP growth graph under the chart to look at a different time period.
Slide to pick a year (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. GDP data from: US. Bureau of Economic Analysis, Gross Domestic Product [GDP], retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/GDP. 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.

The basic economics of a guaranteed income

Posted on by David Hudson

In the 1975 book “Equality and Efficiency: The Big Tradeoff,” economist Arthur Okun coined the phrase “leaky bucket” to describe how efforts to redistribute income might reduce economic efficiency. Discussing the merits of his larger argument is a task for another time, but what’s interesting for right now is the contemporary policy example he uses to illustrate the idea.

In the wake of the 1972 presidential election, Okun discusses the competing proposals for guaranteed income from the candidates of the two major political parties. To someone reading 40 years later, the idea that a guaranteed income or a basic income was once in the political mainstream seems almost unbelievable. But the idea is slowly making its way back into policy debates.

At FiveThirtyEight, Andrew Flowers runs through the basics of such a plan, as well as the history of the idea, and points to attempts to implement it in the real world. With a basic or guaranteed income, the government would send a check to every citizen or resident to ensure that each individual has a certain level of income. And under a basic income, every person would receive a check of the same amount—whether that person is content with not working and can live on a small budget, or whether that person is a high-earning workaholic.

But there’s also the slightly different idea of a negative income tax, favored by economist Milton Friedman. Under a negative income tax, everyone would be guaranteed the same income, except the check from the government would decrease as the worker earns more. That description might sound familiar if you know about the workings of the Earned Income Tax Credit.

There are some major differences, however, between that credit and a negative income tax. Importantly, the Earned Income Tax Credit requires that a worker actually has a job to receive the credit whereas a negative income tax does not. By increasing the post-tax returns of employment, the Earned Income Tax Credit increases the labor supply and reduces hourly wages. The result, as a paper by University of California, Berkeley economist Jesse Rothstein shows, is that low-wage workers don’t receive the full value of the Earned Income Tax Credit because some of that value is captured by employers through lower wages. For every $1 spent on the program, after-tax incomes only go up by $0.73. But with a negative income tax, every $1 spent actually increases incomes by $1.39.

How does that happen? Because a negative income tax doesn’t require someone to work in order to get it, the reduction in the amount of work people are willing to do (labor supply) ends up boosting wages. So programs like a negative income tax or a universal basic income would likely reduce the amount of labor supply and boost wages.

Will the reduction be because workers already employed work fewer hours (a reduction on the intensive margin) or because workers drop out of the labor force (a reduction on the extensive margin)? There isn’t a sufficient amount of good and recent research on basic income to know how large the effects are or which effect would be larger. There’s also the possibility that making the program not phase out and getting rid of many antipoverty programs with drop-offs in benefits at certain levels would produce some offsetting increases in labor supply. But we just don’t know enough yet.

Thankfully, as Flowers reports, there’s been an uptick in new research starting in the area. So while these questions continue to be open, we may find some closure in the near future.

Competition in the U.S. labor market

Posted on by Bridget Ansel
The Obama administration has raised concerns about the increasing prevalence of occupational licensing and non-compete agreements.

When the Obama administration announced a new emphasis on competition policy last week, many observers almost certainly heard “competition policy” and immediately thought “antitrust enforcement.” Yet while antitrust enforcement is a key part of competition policy, the Administration is clear that it’s just one aspect. And there are some important areas of competition policy that you may not think are related to competition at all.

The labor market, for example, has seen the rise of several trends that have reduced competition in the labor market, to the detriment of many workers. In fact, the Obama administration has raised concerns about two little-known but increasingly prevalent labor market institutions: occupational licensing, and non-compete agreements.

Occupational licensing refers to the requirement that workers in certain occupations must get a license before getting a job. According to a report from the Treasury Department’s Office of Economic Policy, the President’s Council of Economic Advisers, and the Department of Labor, about 25 percent of American workers need a license to do their jobs. That share has increased by roughly 400 percent since the 1950s.

These requirements, however, can lock workers out of occupations, reduce competition, and create economic rents for some professions. New data from the Department of Labor, as Ben Casselman of FiveThirtyEight reports, show that workers without licenses get locked out of occupations and move into lower-paying ones. This doesn’t mean all licenses are unnecessary, but policymakers should keep an eye on them.

Similarly, non-compete agreements (which we’ve detailed here) are another labor market institution that has become surprisingly common and should be looked over. According to one estimate, about 18 percent of U.S. workers are currently under non-competes, and 37 percent have been under one at some point in their career.

Given that a large percentage of non-competes are not enforceable and employers still use them, there’s evidence that their increasing use is less about protecting intellectual property and more about shifting the balance of power toward firms. And as Noah Smith points out at Bloomberg View, this kind of policy is exactly the opposite of what we want in an era of low and declining firm and labor dynamism.

Outside of these specific policies, we should also point out that a lack of competition and consolidation among firms can have effects in the labor market. If firms increasingly have power in the market for their products, they may also have increasing power in the market for labor to create those products. Say that the hospital market becomes increasingly concentrated and the remaining hospitals get more market power. Then that market power may also extend to the market for, say, nurses. Monopoly power may beget monopsony power, which in turn depresses wages and employment.

It might be nice and neat to think about competition as something just to consider when one company tries to buy another. But it’s increasingly clear that it’s an area of concern that extends across large swathes of the economy.

Must-read: John Stoehr: Thomas Frank and the Illusion of Presidential Omnipotence

Posted on by Brad DeLong

Must-Read: John Stoehr: Thomas Frank and the Illusion of Presidential Omnipotence: “In Listen, Liberal, Frank describes President-elect Barack Obama, as the financial crisis is beginning to unfold, as…

…a ‘living, breathing evidence that our sclerotic system could still function, that we could rise to the challenge, that could change course. It was the perfect opportunity for transformation.’ Yet, Frank says, that transformation didn’t happen. So Obama and the Democrats failed. But what could they have been done differently? While he excels at calling the Democrats to account, Frank falls short in offering policy recommendations, even rough sketches of policy. There are none. Populists don’t take such questions seriously, because such questions assume that knowledge, method, and procedure are more important than believing in the righteousness of the cause. Frank is no exception….

Frank and Sanders are right in one very big way—inequities of wealth, income, and power threaten our lives, livelihoods, and republican democracy. All of us need big bold ideas and the political courage to see them realized. Being right in one very big way is the primary strength of populism. Progressives do the work, but populists are the voices of conscience, the moral scolds, the screaming Jeremiahs. But they are wrong too. The current president has done more with more resistance in the name of progress than any president since nobody knows. Along with flawed-but-good health care reform, financial regulation, and sustainable energy policy, Obama has achieved: gender-equity laws; minimum wage rules for government contractors; a labor relations board that serves labor; and a tax rule barring corporate ‘inversions.’ And he formally ended two wars…

Well, Obama could have pushed the paper on appointments–a head of FHFA willing to use the GSEs as tools of macro policy should that become necessary, and a filled up-Federal Reserve Board to counteract the baneful influence of too-many regional bank presidents who did not understand the situation and would not learn. He could have used bank reliance on TARP money to take equity–and then shut down their lobbying efforts in opposition to Dodd-Frank. Given that Republican obstructionism was very predictable, the right move was to pass a very large Reconciliation package in January 2009: a carbon tax to deal with global warming, Medicare-for-all, a first Recovery Act and the path greased for a second Recovery Act to be passed by a bare majority should it become necessary, plus an infrastructure bank. Then you could bargain back to the cap-and-trade policies you really wanted from a position in which failure to come to the table was much more painful for the Republicans than coming to the negotiating table. There were lots of things that could have been done.

But in some ways what I have just written confirms Stoehr’s overall point: there were things that Obama could have done, or tried to do. But Sanders and Frank appear ignorant of them…

Memo to self: Monetary policy since 1985

Posted on by Brad DeLong
FRED Graph FRED St Louis Fed

Major Federal Reserve Policy Moves since 1985:

The Federal Reserve overshoots and overtightens. But the effect on the economy is diminished because more-responsible fiscal policy leads to a fall in the term and risk premiums:

Preview of Pounding Nails in Nevada

The Federal Reserve eases monetary policy to fight the recession and jobless recovery caused by its previous overshoot:

Preview of Pounding Nails in Nevada

The Federal Reserve tightens to–successfully–try to keep inflation from rising; the first bond market “conundrum” as the endogenous duration of mortgage-backed securities produces a much tighter-than-expected gearing between the short-term safe nominal interest rate i and the long-term risky real interest rate r:

Preview of Pounding Nails in Nevada

The Federal Reserve loosens during the international financial crisis of 1998:

Preview of Pounding Nails in Nevada

The Federal Reserve tightens to try to prevent “overheating” in the late stages of the dot-com boom:

Preview of Pounding Nails in Nevada

The Federal Reserve loosens to fight the recession brought on by the collapse of the dot-com boom:

Preview of Pounding Nails in Nevada

The Federal Reserve keeps policy stimulative and delays its interest-rate tightening cycle given the weakness of the recovery; the bond market first does not and then does credit the Federal Reserve’s statements:

Preview of Pounding Nails in Nevada

The Federal Reserve eases as the magnitude of the subprime-driven financial crisis becomes apparent; but the collapse in financial market trust and the financial crisis come anyway:

Preview of Pounding Nails in Nevada

With the recovery inadequate, the Federal Reserve decides to extend the period of emergency stimulative extraordinary monetary policy–but the long-term risky real interest rate r sticks at 3%, and does not go any lower:

Preview of Pounding Nails in Nevada

With the unemployment rate now in the range associated with full employment, the Federal Reserve decides that it is time to “normalize” interest rates:

Preview of Pounding Nails in Nevada

Inflation Control:

The Federal Reserve has overdone it on inflation control–successfully kept inflation from getting “too high”, and in fact pushed inflation “too low”:

Graph Consumer Price Index for All Urban Consumers All Items Less Food and Energy FRED St Louis Fed

Full Employment:

Before 2008, macroeconomic stabilization performance on full employment was quite good. 2008-2010 was a disaster. How we evaluate what follows depends on whether we look at unemployment or employment:

Graph Consumer Price Index for All Urban Consumers All Items Less Food and Energy FRED St Louis Fed Graph Consumer Price Index for All Urban Consumers All Items Less Food and Energy FRED St Louis Fed

Structural Adjustment: “Pounding Nails in Nevada…”

Was a recession in 2009 any sense “needed” to move people out of construction employment as the housing boom collapsed? Was a rise in unemployment a necessary first step in rebalancing the late-2000s economy?

No: Look at the key components of aggregate demand:

FRED Graph FRED St Louis Fed

As of November 2008, when John Cochrane gave his “we should have a recession… people who spend their lives pounding nails in Nevada need something else to do…” keynote address to the 2008 CRSP Forum, residential investment had already fallen by 3.5%-points of GDP and was within 0.5%-points of what had been its nadir. The recession came after the move of labor out of construction had been all but completely finished:

FRED Graph FRED St Louis Fed

*If you were going to say “we should have a recession” on the grounds that a recession was a necessary part of the structural adjustment required to climb down from overinvetment in housing, the moment to have said that was 2005. And those who said that then were wrong: we did not read a recession in order to move those “pounding nails in Nevada” into other sectors while keeping them employed…

Must-See: Omer Moav: Geography, Transparency, and Institutions

Posted on by Brad DeLong

Must-See: Omer Moav: Geography, Transparency, and Institutions: “April 25 | 4:10-5:30 p.m. | 639 Evans Hall…

…We propose a theory by which geographic variations explain cross-regional institutional differ- ences in: (1) the scale of the state, (2) the distribution of power in the state hierarchy, and (3) farmers’ property rights over land. The mechanism underlying our theory is based on the effect of geography on transparency of farming, which in turn determines the state’s extractive capacity. We apply our theory to explain differences in the institutions of Egypt, Southern Mesopotamia and Northern Mesopotamia in antiquity.

Must-reads: April 25, 2016

Posted on by Brad DeLong

Should-reads: