Category: Equitablog

Must-read: Ben Casselman: “The Next Amazon (Or Apple, Or GE) Is Probably Failing Right Now”

Posted on by Brad DeLong

Must-Read: Ben Casselman: The Next Amazon (Or Apple, Or GE) Is Probably Failing Right Now: “Amazon’s success was almost completely unpredictable, at least from the outside…

Policymakers concerned with entrepreneurship at both the local and national level have long favored what economist Robert Litan dubbed a ‘shots on goal’ approach: Try to encourage as many startups as possible. Most of those companies will fail. Of the survivors, most will never grow into major economic engines. But statistically, a few will turn out to be the next Amazon, with huge rewards for their local economies…. Scott Stern and Jorge Guzman call that… into question. Startups as a whole may be declining, they find, but the kind of entrepreneurship that economists care the most about–fast-growing, innovative companies like Amazon–hasn’t shown the same downward trend… But all is not well…. The U.S. may have as many would-be Bezoses as ever, but it’s getting fewer Amazons…. ‘It’s a scaling problem,’ Stern said. ‘The machine that turned those kinds of companies into that kind of economic engine seems to be less robust today.’…

Ambitious startups share certain qualities. Their names, for example, tend to be shorter and are less likely to include the founder’s name. They tend to be set up as corporations… often incorporated in Delaware… often apply for patents early…. Stern and Guzman calculate what they call an Entrepreneurial Quality Index…. When it was founded, Amazon would have scored in the top 1 percent of all new companies on the index….

Stern and Guzman used business-registration data from 15 states to calculate both quality and success indexes for different metro areas. Some, like Silicon Valley, showed both high rates of entrepreneurship and successful growth. Others, like Miami, have seen a steep drop in the number of high-potential startups in recent years. Perhaps not coincidentally, cities with high rates of startup activity have also experienced faster economic growth over the past decade…

Must-read: Tim Duy: “Stanley Fischer and Lael Brainard Are Battling for Yellen’s Soul”

Posted on by Brad DeLong

Must-Read: Tim Duy: Stanley Fischer and Lael Brainard Are Battling for Yellen’s Soul: “Stanley Fischer sits on Chair Janet Yellen’s left shoulder, muttering:

…we may well at present be seeing the first stirrings of an increase in the inflation rate…

Fed Governor Lael Brainard perches on the right, whispering:

…there are risks around this baseline forecast, the most prominent of which lie to the downside.

Yellen is caught in a tug of war between Fischer and Brainard. At stake is the Fed chair’s willingness to embrace a policy stance that accepts the risk that inflation will overshoot the U.S. central bank’s target. At the moment, Brainard has the upper hand in this battle. And she has a new weapon on her side: increasing concerns about the stability of inflation expectations….

Fischer’s not alone. In his group sit Federal Reserve Bank of San Francisco President John Williams, Kansas City Fed President Esther George, and Cleveland Fed President Loretta Mester. And Yellen is believed to be reasonably sympathetic to this camp. She’s repeatedly voiced her support of a Phillips curve view of the world—or the idea that, after accounting for the temporary impacts of a strong U.S. dollar and weak oil, inflation will rise as unemployment rates fall…. Indeed, a Phillips curve view is fairly common among monetary policymakers….

So, given the Phillips curve framework’s consistency among policymakers, why delay further rate hikes?… The challenge for further rate hikes is that recent financial instability has exposed the downside risks to the forecast… New York Fed President William Dudley, Philadelphia Fed President Patrick Harker, and Boston Fed President Eric Rosengren…. Financial instability certainly gives the Fed reason to stand still this week. And it gives reason for the Fed to continue to be cautious…

Must-read: David Wessel: “Are We Ready for the Next Recession?”

Posted on by Brad DeLong

Must-Read: David Wessel: Are We Ready for the Next Recession?: “Financial markets seem to be anxious that a U.S. recession is on the horizon…

…even though economic forecasters disagree. When the next recession arrives, will fiscal and monetary policy be able to respond? If so, how? The Federal Reserve is holding short-term interest rates near zero and faces resistance, internally and externally, to reviving large-scale purchases of assets. The federal debt is larger, as a share of the economy, than at any time since the end of World War II and is projected to climb further. On March 21, the Hutchins Center on Fiscal and Monetary Policy will consider which fiscal and monetary policy tools will be available in the event of a recession—and which won’t—and how effective additional fiscal and monetary stimulus is likely to be, along with new ideas to make fiscal policy more effective…. David Wessel… Wendy Edelberg… Ben Spielberg… Phillip Swagel… Richard Clarida… Jon Faust… Louise Sheiner… Jared Bernstein

Appreciating the new economics of the minimum wage

Posted on by Bridget Ansel
Activists cheer during a minimum wage rally in New York.

In the introduction to their book, “Myth and Measurement: The New Economics of the Minimum Wage,” authors David Card and Alan Krueger cite a poll of economists from the late 1940s in which 90 percent of respondents agreed that raising the minimum wage increased unemployment for minimum-wage workers. Last year, however, the Initiative on Global Markets Forum at the University of Chicago Booth School of Business asked a panel of prominent economists if employment for low-wage workers in the United States would “substantially” decline if the nation’s minimum wage were increased to $15 by 2020. Only 26 percent of the economists polled agreed with that statement; 38 percent of the economists were uncertain.

What shifted the opinion among economists on the impact of raising the minimum wage? Much of the shift can be attributed to Card and Krueger’s book and the economic research that followed.

“Myth and Measurement” was recently re-released as a 20th anniversary edition. While it’s common now to hear that raising the minimum wage won’t increase unemployment, the initial empirical work by Card and Krueger wasn’t immediately embraced by other economists. According to a recent profile of Card by Peter Walker of the International Monetary Fund, some economists staged panels at the annual meeting of the American Economic Association criticizing Card’s work on the minimum wage and other topics after he won the John Bates Clark medal in 1995.

And it makes sense why some economists would find Card and Krueger’s results so shocking and at times literally unbelievable. Simple supply and demand tells us that if a higher minimum wage pushes a wage rate above its equilibrium level, then the amount of labor demanded by firms will decline and the number of jobs will drop as a result. But that’s the simple theory of supply and demand in a perfectly competitive labor market. Card and Krueger’s analysis—along with further work by other economists—shows that the predictions of the perfectly competitive market don’t come true.

Of course, not everyone in the economics profession hasn’t come to the same conclusion as Card and Krueger. There are recent studies that find significant and sizable negative effects on employment. However, a look at studies on this question since 2000 finds the average effect on employment from raising the minimum wage is pretty small. That’s one reason why many economists see a role for imperfect competition in the labor market. Whether these results are applicable for bigger increases in the minimum wage, say to $15, remains an open question, reflected by the uncertainty of economists answering the IGM survey.

Still, this is a remarkable shift from where the economics profession was before the release of “Myth and Measurement.” There’s now a robust debate about not just the effect of a specific public policy, but the correct model for understanding the low-wage labor market. Appeals to supply-and-demand curves just won’t cut it anymore. We can all only wish something we write has that kind of impact.

Must-Read: Matthew Yglesias: Conservatives Turn on the White Working Class

Posted on by Brad DeLong

Must-Read: Matthew Yglesias: Conservatives Turn on the White Working Class: “One of the great conceits of conservative punditry over the past 15 years…

…has been the notion that American politics is dominated by affluent liberal snobs who disdain white working-class America and its communities…. Charles Murray… Clive Crook… merely assert its existence via broad generalities. But now… some conservative pundits are unleashing sentiments about white working-class communities that are a good deal more vicious than snobbish disdain.

National Review’s Kevin Williamson…

the truth about these dysfunctional downscale communities is that they deserve to die: Economically, they are negative assets. Morally, they are indefensible. Forget all your cheap theatrical Bruce Springsteen crap….The white American underclass is in thrall to a vicious, selfish culture whose main products are misery and used heroin needles…. They need real change, which means that they need U-Haul.

David French… backs up Williamson using less colorful language… makes an even more explosive charge–that conservatives should regard economically struggling white people in rural communities in the same way they regard… [the] inner-cit[ies]….

It was consistently astounding how little effort most parents and their teen children made to improve their lives…. Always–always–there was a sense of entitlement. And that’s where disability or other government programs kicked in….

These are essays making the case that suffering white working-class communities don’t deserve help of any kind. That’s a correct application of the strict principles of free market ideology, but it’s also a signpost of how American political discourse has changed since the end of the Cold War. If you said in 1966, or even 1986…. It was taken for granted that the governing class had an obligation–a practical one, if not a moral one–to actually make the system work for average people. Over the past 20 years, that idea has been increasingly abandoned on the American right…

Economists of the world, unite!

Posted on by David Hudson

When some 13,000 members of the American Economic Association (AEA) gathered for their annual convention in San Francisco during the first week of January, few of them may have been aware that their organization turned 131 this year. Fewer still would probably have ever read the organization’s 1885 “platform.” The original draft of that founding document stated the group’s objectives as the encouragement of economic research and of “perfect freedom in all economic discussion.” Then it went on:

We regard the state as an educational and ethical agency whose positive aid is an indispensable condition of human progress. While we recognize the necessity of individual initiative in industrial life, we hold that the doctrine of laissez-faire is unsafe in politics and unsound in morals; and that it suggests an inadequate explanation of the relations between the state and the citizens.

We do not accept the final statements which characterized the political economy of a past generation. . . . We hold that the conflict of labor and capital has brought to the front a vast number of social problems whose solution is impossible without the united efforts of Church, state, and science.

This undisguised manifesto of rebellion against the economic orthodoxy of the Gilded Age raised eyebrows among the established preachers of “political economy.” The state as an “ethical agency” whose aid was “indispensable”? The “conflict of labor and capital”? Even after the denunciation of laissez-faire as “unsafe in politics and unsound in morals” was removed from the final document, lest it appear that the new association had any motives beyond scientific advancement, the AEA was still understood as a challenge to the status quo.

Read more here.

This article was originally published in the Spring 2016 issue of Democracy.

Must-reads: March 15, 2016

Posted on by Brad DeLong

Must-read: Jonathan Portes and Simon Wren-Lewis: “Issues in the Design of Fiscal Policy Rules”

Posted on by Brad DeLong

Must-Read: Jonathan Portes and Simon Wren-Lewis: Issues in the Design of Fiscal Policy Rules: “The potential conflict in designing rules between the need to mimic optimal policy…

…where debt is a shock absorber and is adjusted only very slowly, and the need to prevent deficit bias…. It may therefore make sense to make different recommendations depending on… the nature of governments…. [In] governments… not… subject to deficit bias… simple debt feedback rules come close to reproducing the optimal fiscal policy… [if] the exchange rate is floating and there is little risk of hitting the ZLB…. [G]overnment[s] behav[ing] in a non-benevolent manner… need… operational targets… fixed for the end of the natural term of the government… [to] provide strong incentives… for cyclically adjusted primary deficits…. These targets should be set in cooperation with a fiscal council, which would monitor progress… [and,] in exigent circumstances… suggest that the target be revised….

These rules should not apply if interest rates have hit the ZLB. In that case, fiscal policy should focus on demand stabilization… the suspension of the rule while the ZLB constraint applies, and not its modification. This ‘knockout’ should be an explicit part of the rule…

How extending credit can fight recessions

Posted on by David Hudson
The Fannie Mae headquarters is seen in Washington.

When you’re fighting a recession, you want to use the policies with the most “bang for your buck.” Given what we now know about the potential scarring effects of recessions, using inefficient policies not only waste resources but also risk damaging the future potential of workers and the economy as a whole. Policymakers attempting to hasten the return of strong growth often think of fiscal and monetary policy, but a new paper by Deborah Lucas of the Massachusetts Institute of Technology highlights the often-overlooked stimulus power of federal credit policies, which made a sizable contribution to the fight against the last recession.

If fiscal policy is about the government transferring income to households, and monetary policy is about the central bank affecting the flow of credit to households, businesses, and governments, then the kinds of credit policies Lucas highlights—such as Fannie Mae, Freddie Mac, and student loans—are about the government affecting the flow of credit. Lucas notes that there have been few papers on the recession-fighting effects of these federal credit programs for almost 25 years. So that’s what she sets out to do in the paper: to see how effective these programs are at fighting recessions.

Lucas goes about figuring out their effectiveness by calculating how much additional economic output happens after an additional dollar is spent on a specific program—a metric known as a “multiplier” to those familiar with fiscal policy. Economists frequently calculate the multiplier of an additional dollar spent on unemployment insurance during recessions, for example. The relative size of multipliers varies over the business cycle: There’s more bang for your buck during recessions, when there are more idle resources—unemployed workers and underutilized capital—to mobilize.

Lucas ends up finding some pretty significant effects for the federal credit programs during the Great Recession, which helped increase the amount of funds borrowed by households and businesses. And given the substantial multipliers (up to 2, which is the upper end of estimates from the Congressional Budget Office) that she assigns to these programs, the effect of all the credit programs appears to be quite sizable. Overall, the credit programs made a considerable contribution to the fight against the recession: According to Lucas’s estimates, the credit programs in total had a similar impact—$344 billion in additional output—as the American Recovery and Reinvestment Act, better known as the stimulus bill, in 2010.

The scope of these credit programs is clearly underappreciated. And if economists, analysts, and policymakers are starting to think about the proper mix of fiscal and monetary policy to fight future recessions, perhaps they should start considering the role of these programs.