Category: Equitablog

Must-read: Nick Bunker: “Why is U.S. labor market fluidity drying up?”

Posted on by Brad DeLong

Must-Read: Nick Bunker: Why is U.S. labor market fluidity drying up?: “The U.S. labor market is a far less dynamic place than it was 30 years ago…

…Workers today are less likely to get a job while unemployed, move into unemployment, switch jobs, or move across state lines. You’d think just the opposite would be true given some of the discussion about our rapidly changing digital economy, but the data show what the data show. Even still, the reason—or reasons—for the decline in fluidity aren’t known…. Molloy… Smith… Trezzi… and… Wozniak… find that overall fluidity in the U.S. labor market has fallen between 10 percent and 15 percent since the early 1980s. But for some of the individual flows, the decline has been as large as one-third…. The authors find no evidence… that the gain from switching jobs has declined…. While the authors do find some speculative evidence that declines in fluidity are related to declines in social trust, the results aren’t particularly strong…. After their analysis, it seems more likely than not that the decline in labor market fluidity is harmful…

Must-read: Mark Muro: “Adjusting to Economic Shocks Tougher”

Posted on by Brad DeLong

Must-Read: I gotta go back and reread Blanchard and Katz on regional adjustment in the early 1992. How much of it is that adjustment is faster? How much of it is that the shock they study–to LA-sector aerospace employment–was different? How much of it is that back then aggregate demand policy was supportive of adjustment?

Mark Muro: Adjusting to Economic Shocks Tougher: “In the last six months a burst of new empirical work…

…much of it focused on the region-by-region aftermath of the Great Recession—is shredding key aspects of the standard view and suggesting a much tougher path to adjustment for people and places…. Joe Parilla and Amy Liu, David Autor, David Dorn, and Gordon Hanson focus on the ‘stunningly slow’ adjustment of exposed local labor markets to the ‘China shock’ and argue that the story challenges ‘much of the received empirical wisdom about how labor markets adjust to trade shocks.’

Autor and his colleagues do not see much evidence at all of a frictionless labor market in which the rapid mobility of workers across firms, industries, and regions guarantees rapid adjustment to new realities. Instead they see a series of slow-moving crises in particular metro areas. ‘Switching costs’ and other frictions inhibit workers’ ability to shift quickly to new, less-threatened firms or industries.  Many workers never recoup lost earnings and depend more on transfer payments. Little offsetting growth is detected in industries not exposed to the shock…

Must-read: James Kwak: “Profits in Finance”

Posted on by Brad DeLong

Must-Read: It used to be that we collectively paid Wall Street 1% per year of asset value–which was then some 3 years’ worth of GDP–to manage our investment and payments systems. Now we pay it more like 2% per year of asset value, which is now some 4 years’ worth of GDP. My guess is that, at a behavioral finance level, people “see” commissions but do not see either fees or price pressure effects.

Plus there is the cowboy-finance-creates-unmanageable-systemic-risk factor, plus the corporate-investment-banks-have-no-real-risk-managers factor. We are paying a very heavy price indeed for having disrupted our peculiarly regulated and oligopoly-ridden post-Great Depression New Deal financial system:

James Kwak: Profits in Finance: “Expense ratios on actively managed mutual funds have remained stubbornly high…

…Even though more people switch into index funds every year, their overall market share is still low—about $2 trillion out of a total of $18 trillion in U.S. mutual funds and ETFs. Actively managed stock mutual funds still have a weighted-average expense ratio of 86 basis points. Why do people pay 86 basis points for a product that is likely to trail the market, when they could pay 5 basis points for one that will track the market (with a $10,000 minimum investment)? It’s probably because they think the more expensive fund is better. This is a natural thing to believe. In most sectors of the economy, price does correlate with quality, albeit imperfectly…. And this is one area where I think marketing does have a major impact, both in the form of ordinary advertising and in the form of the propaganda you get with your 401(k) plan…. The persistence of high fees is partly due to the difficulty of convincing people that markets are nearly efficient and that most benchmark-beating returns are some product of (a) taking on more risk than the benchmark, (b) survivor bias, and (c) dumb luck.

Must-read: Paul Krugman: “In Hamilton’s Debt”

Posted on by Brad DeLong

Must-Read: Paul Krugman: In Hamilton’s Debt: “Hamilton’s pathbreaking economic policy manifestoes…

…his 1790 ‘First Report on the Public Credit’… remains amazingly relevant today…. Why did Hamilton want to take on those state debts? Partly to establish a national reputation as a reliable borrower… give wealthy, influential investors a stake in the new federal government…. Beyond that, however, Hamilton argued that the existence of a significant, indeed fairly large national debt would be good for business. Why? Because:

in countries in which the national debt is properly funded, and an object of established confidence, it answers most of the purposes of money.

That is, bonds issued by the U.S. government would provide a safe, easily traded asset that the private sector could use as a store of value, as collateral for deals, and in general as a lubricant for business activity. As a result, the debt would become a ‘national blessing’…. This argument anticipates, to a remarkable degree, one of the hottest ideas in modern macroeconomics: the notion that we are suffering from a global ‘safe asset shortage.’ The private sector, according to this argument, can’t function well without a sufficient pool of assets whose value isn’t in question–and for a variety of reasons, there just aren’t enough such assets these days. As a result, investors have been bidding up the prices of government debt, leading to incredibly low interest rates. But it would be better for almost everyone, the story goes, if governments were to issue more debt, investing the proceeds in much-needed infrastructure even while providing the private sector with the collateral it needs to function. And it’s a very persuasive story to just about everyone who has looked hard at the evidence.

Unfortunately, policy makers won’t do the right thing, largely because they keep listening to fiscal scolds…. Alexander Hamilton knew better. Unfortunately, Hamilton isn’t around to help counter foolish debt phobia. But maybe reminding policy makers of his wisdom is one way to chip away at the wall of folly that still constrains policy. And having his face out there every time someone pulls out a ten can’t hurt, either.

Must-reads: April 24, 2016

Posted on by Brad DeLong

Should Reads:

Must-read: Joshua Gans: “Ford hedges to deal with disruption”

Posted on by Brad DeLong

Must-Read: Joshua Gans: Ford hedges to deal with disruption: “The auto industry is facing a trio of disruptive technologies: electric batteries, autonomous vehicles, and the mobile phone…

…The first two have been long-standing threats, relatively speaking, and are embodied in one company, Tesla. Which is why the auto industry’s reaction to Tesla’s announcement on March 31 of its Model 3 is so strange. They feel a bit relieved, maybe even overjoyed. More than 325,000 people have made a $1,000 down payment to pre-order the Model 3, sight unseen, even though the excepted delivery date was two years away. CEOs of competing automakers are reassured to see a large group of consumers getting excited about purchasing cars again. Tesla may seem ahead in the electric car game, but that doesn’t take away from the fact that, this time around, they are playing a familiar game: find out what people want in a car and deliver it to them. Traditional car companies need to play catch up, for sure, and it’s not clear that they can. But at least they have a clear target.

But the mobile phone… has enabled ride-sharing apps…. If these apps continue to grow, then people could have less of a need to but own their cars since they can hire them at will. That could potentially force carmakers into business-to-business sellers rather than business-to-consumer sellers. And the specifications of what one wants in a car would change, too…. BMW… recently paired with a car sharing firm in Seattle. But Ford is taking the most interesting approach. It launched a spinoff company, Ford Smart Mobility, LLC, which will try to tackle these three potential disruptors at once…. Ford is handling disruption by investing in a separate business unit. This is a play straight out of Clay Christensen’s disruption playbook….

Here is the problem: none of the three disruptors I have outlined here are traditional Christensen-style innovations. They are supply-side architectural innovations…. Ford should go in the other direction: toward integration. Fujifilm, for example, outlasted Kodak not only because it changed from being a film to an image company two decades ago but because it built its entire organization around its new approach…. It’s a potentially reasonable decision for a company to decide that it can’t meet the challenge…. But, if they decide that they can meet the challenge, they should bet everything on that new world vision. They can’t hedge, like Ford is doing.

(Early) Monday DeLong Smackdown (Perhaps?): Carbon pricing, coal, free trade, comparative advantage, and technology transfer

Posted on by Brad DeLong

Typically smart thoughts by Paul Krugman on carbon pricing:

Paul Krugman: 101 Boosteris: “I see that @drvox is writing a big piece on carbon pricing…

…I don’t want to step on his forthcoming message, but what he’s said so far helped crystallize something I’ve meant to write about… ‘101 boosterism’… a takeoff on Noah Smith’s clever writing about ‘101ism’, in which economics writers present Econ 101 stuff about supply, demand, and how great markets are as gospel, ignoring the many ways in which economists have learned to qualify those conclusions in the face of market imperfections. His point is that while Econ 101 can be a very useful guide, it is sometimes (often) misleading…. My point is… even when Econ 101 is right, that doesn’t always mean that it’s… the most important thing…. Economists… delight in talking about issues where 101 refutes naïve intuition, but that doesn’t… mean… these are the crucial policy issues….

In my original home field of international trade. Comparative advantage says that countries are made richer by international trade, even if one trading partner is more productive than the other across the board, and the less productive country can only export thanks to low wages. Paul Samuelson once declared this the prime example of an economic insight that is true without being obvious–and to this day you get furious attempts to refute the concept…. [But] there are a variety of reasons why, despite this big insight, free trade may not be the right policy–that’s Noah’s 101ism. But… even if comparative advantage is a profound insight, does this make free trade versus protectionism a front-burner issue?…. The answer… from standard trade models… is, not as important as many people seem to think…. If you want enormous benefits to trade, you have to invoke things like technology transfer that aren’t in the very analysis that gives the case for free trade such prestige….

There’s a kind of bait and switch, in which people invoke Ricardo and the gains from trade to say “free trade good”, then tell scare stories… [which have] nothing to do with the classical analysis of the gains from trade.

It seems to me that there’s something similar involved in discussions of carbon pricing…. How important is it that our carbon-emissions strategy take the form of a universal or near-universal price on carbon? The answer… is that it depends on the complexity of the required response. If reducing emissions really has to involve moving on many fronts, anything that looks like an administrative solution… is going to be much more costly than carbon pricing that exploits all the possibilities. But if a large part of the solution is going to involve… putting a quick end to the practice of burning coal… getting to broad-based carbon pricing is much less central…. Just because Econ 101 makes a smart, counterintuitive point doesn’t make that point of central importance…. People should know what’s in the textbook…. But never imagine that it’s the be-all and end-all…

And–perhaps, perhaps not–this:

There’s a kind of bait and switch, in which people invoke Ricardo and the gains from trade to say “free trade good”, then tell scare stories… [which have] nothing to do with the classical analysis of the gains from trade…

is a deserved criticism and smackdown of me here on March 12:

The Benefits of Free Trade: Time to Fly My Neoliberal Freak Flag High!: So I guess it is time to say ‘I think Paul Krugman is wrong here!’ and fly my neoliberal freak flag high…

On the analytics, the standard HOV models do indeed produce gains from trade by sorting production in countries to the industries in which they have comparative advantages. That leads to very large shifts in incomes toward those who owned the factors of production used intensively in the industries of comparative advantage: Big winners and big losers within a nation, with relatively small net gains.

But the map is not the territory. The model is not the reality. An older increasing-returns tradition sees productivity depend on the division of labor, the division of labor depends on the extent of the market, and free-trade greatly widens the market. Such factors can plausibly quadruple The Knick gains from trade over those from HOV models alone, and so create many more winners.

Moreover, looking around the world we see a world in which income differentials across high civilizations were twofold three centuries ago and are tenfold today. The biggest factor in global economics behind the some twentyfold or more explosion of Global North productivity over the past three centuries has been the failure of the rest of the globe to keep pace with the Global North. And what are the best ways to diffuse Global North technology to the rest of the world? Free trade: both to maximize economic contact and opportunities for learning and imitation, and to make possible the export-led growth and industrialization strategy that is the royal and indeed the only reliable road to anything like convergence.

So I figure that, all in all, not 5% but more like 30% of net global prosperity–and considerable reduction in cross-national inequality–is due to globalization. That is a very big number indeed. But, remember, even the 5% number cited by Krugman is a big deal: $4 trillion a year, and perhaps $130 trillion in present value.

As for the TPP, the real trade liberalization parts are small net goods. The economic question is whether the dispute-resolution and intellectual-property protection pieces are net goods. And on that issue I am agnostic leaning negative. The political question is: Since this is a Republican priority, why is Obama supporting it without requiring Republican support for a sensible Democratic priority as a quid pro quo?

That said, let me wholeheartedly endorse what Paul (and Mark) say here:

as Mark Kleiman sagely observes, the conventional case for trade liberalization relies on the assertion that the government could redistribute income to ensure that everyone wins—but we now have an ideology utterly opposed to such redistribution in full control of one party…. So the elite case for ever-freer trade is largely a scam, which voters probably sense even if they don’t know exactly what form it’s taking….

Must-read: Benjamin Mitra-Kahn: “Keynes passed away 70 years ago today–his copyright follows”

Posted on by Brad DeLong

Must-Read: Benjamin Mitra-Kahn: Keynes passed away 70 years ago today–his copyright follows: “The most frustrating (or magical) thing about doing archival research…

…is the need to first identify and then physically inspect every box of unknown letters. But what if… we could… move the history of economics scholarship from dusty rooms around the world to the web…. The Carnegie Mellon University digitisation of Herbert Simon’s papers shows it can be done though. Building an on-line Keynes archive would be a sizeable task, but not impossible. Including Keynes’ published, unpublished (possible through Rod O’Donnell’s INET project) and uncategorised work could be a real boon to scholars and people interested in Keynes…. I think there are a number of institutions out there with a real interest in Keynes’s work, meaning this could be done…

Must-read: Noah Smith: “Policy Recommendations and Wishful Thinking”

Posted on by Brad DeLong

Must-Read: I must say I am getting more than a whiff of the disastrous trope that “it is the duty of an organic intellectual to support the Movement” here.

The technocratic view is that there will be a bunch of competing ideological views and material interests pulling and hauling, and that by always wading in and joining the tug-of-war side that has the better policy idea at the moment in the issue under dispute one will get better governance and higher societal well-being. The opposite view is: There is a Movement, the Movement is good because the Movement is supported by the class whose interest is the general interest and by Correct Ideological Thought, and all progressives must support the movement.

That is a disastrous pattern of thought. I am 100% with Noah Smith here:

Noah Smith: Policy Recommendations and Wishful Thinking: “There was a bit of a blow-up earlier this year over Gerald Friedman’s analysis of Bernie Sanders’ economic plans…

…To me, it seemed that the coup-de-grace was delivered by Justin Wolfers…. Friedman admits he made a mistake and then says that his conclusion was right anyway, because we can go find some alternative assumptions that make his original conclusion hold. To me this is transparently assuming the conclusion. That’s a big no-no, and while a lot of macroeconomists probably do this, it looks really bad to admit to it! (I’m also starting to realize that ‘Joan Robinson’ is a sort of an invincible rhetorical refuge for lefty macro types, the way ‘Friedrich Hayek’ is for righty macro types.)….

The fracas quieted down, but now it’s back. Friedman and allies are no longer saying that their analysis is ‘just standard economics’, since they had to switch to non-standard economics to make the conclusions come out the way they wanted. The line now is that Krugman, the Romers, et al. are just a bunch of pessimists, who are unintentionally playing into the hands of conservatives…. Krugman was not happy about this, and blogger ProGrowthLiberal was pretty mad:

The claim that economists like Christina and David Romer bought into the New Classical revolution is both absurd and dishonest…[W]e critics do admit we are below full employment and we have been calling for fiscal stimulus. On this score, the latest from J.W. Mason is even more dishonest than the latest from Gerald Friedman. Guys–you do not win a debate by lying about the other side’s position….

I don’t like what Friedman and Mason are doing. I think economists have a duty to look at the facts as objectively as they can, regardless of their emotions and desires. You shouldn’t prefer Model B over Model A just because one leads to ‘hope’ and the other to ‘hopelessness’…. Friedman and Mason seem to be arguing that our belief about the facts should be driven, at least in part, by our desire to avoid a feeling of powerlessness. They also seem to be saying that if the facts seem to support conservative policies, even a tiny bit, we should reinterpret the facts. I don’t like this approach. It seems anti-rationalist to me, and I think that if wonks behave this way, they’ll end up recommending lots of bad policies.

Cf. Henry Farrell’s 2011 attack on Matt Yglesias:

Henry Farrell (2011): The Limits of Left Neo-Liberalism: “[Doug Henwood is] wrong in the particulars…

…But… Doug is onto something significant…. Left neo-liberalism in the US… have always lacked a good theory of politics… tend[s] to favor a combination of market mechanisms and technocratic solutions to solve social problems. But… politics… requires strong collective actors…. I see Doug and others as arguing that successful political change requires large scale organized collective action, and that this in turn requires the correction of major power imbalances (e.g. between labor and capital). They’re also arguing that neo-liberal policies at best tend not to help correct these imbalances, and they seem to me to have a pretty good case…. It’s hard for me to see how left-leaning neo-liberalism can generate any self-sustaining politics. I’m sure that critics can point to political blind spots among lefties (e.g. the difficulties in figuring out what is a necessary compromise, and what is a blatant sell-out), but these don’t seem to me to be potentially crippling, in the way that the absence of a neo-liberal theory of politics (who are the organized interest groups and collective actors who will push consistently for technocratic efficiency?) is…

People should say that policies are good if they tend to do good things–to make people freer and richer. People should not say that policies are good if they tend to build the Movement, for there is neither Correct Ideological Thought nor a universal class whose interests are identical to the general interest. And people should, especially, not misrepresent what policies are likely to do in the interest of building the Movement.

And where the Movement is good, the policies that advance it will also be the policies that make technocratic sense…