Category: Equitablog

Must-read: Justin Fox: “The U.S. Could Use a New Economic Strategy”

Posted on by Brad DeLong

Must-Read: Justin Fox: The U.S. Could Use a New Economic Strategy: “In his four-plus years as the country’s first treasury secretary…

…Alexander Hamilton crafted an economic strategy that helped the U.S. rise from agrarian former colony to global economic power… [write] Stephen S. Cohen and J. Bradford DeLong write in their brand-new book, Concrete Economics: The Hamilton Approach to Economic Growth and Policy…. No U.S. leader since has articulated and then put in place an all-encompassing economic plan in quite the way Hamilton did. But the country has always followed some sort of economic strategy, even if it has seldom been clearly defined… a succession of strategies–culled from Cohen and DeLong’s book, but given titles by me–that went something like this: The era of free stuff…. The era of intervention…. The era of investment…. The era of financialization…. It is at least possible that this last era has come to an end, with the beginning of financial re-regulation in the U.S. and a halt to the long upward trend in global trade that accompanied the rise of the East Asian export economies. It’s not at all clear, though, what’s going to replace it.

DeLong… and Cohen… don’t offer a plan. They simply recommend that discussion of economic policy focus on the concrete–what works–rather than theory and ideology. How’s that been going lately? Donald Trump’s economic platform, however muddled and unrealistic, is at least a break from the narrow ideological orthodoxy on economics that has held the national Republican Party in thrall for the past couple decades. On the Democratic side, Bernie Sanders and Elizabeth Warren have offered a challenge to the financial-sector-friendly approach that the party’s mainstream settled on in the 1990s. Some in that mainstream have been reconsidering their stance as well…. The economics profession’s turn away from theory and toward empirical work, which I wrote about in January, will presumably offer pragmatically inclined policy makers more material to work with in the coming years.

Still, it’s not easy to figure out what the U.S. should do next. Nations playing catch-up… have concrete examples…. But the U.S. of 2016 is the biggest economy on the planet…. In the latest World Economic Forum global competitiveness rankings, for example, it trailed only Switzerland and Singapore. There is surely much we can learn… but… the U.S. remains largely sui generis.

I’m almost certain that more infrastructure investment would be a smart part of any new U.S. economic strategy. But I’m not so sure what should be built and where, or what else…. Got any suggestions?…

For an explanation of this, I recommend ‘Cabinet Battle #1’ from the musical ‘Hamilton.’

Must-read: David M. Byrne et al.: “Does the United States Have a Productivity Slowdown or a Measurement Problem?”

Posted on by Brad DeLong

Must-Read: Is it really credible that the rapid growth in potential output over 1995-2004 was 90+% an “anomaly… upward shift in the level of productivity rather than… thanks to the Internet, the reorganization of distribution sectors, and the like…” and 10-% a supply-side consequence of a high-pressure economy? Surely the coincidence of sustained high demand relative to current potential in this one single decade of the past four and rapid potential output growth create a strong and unrebutted presumption that the split is 50%-50% or 70%-30% and not 95%-5%?

David M. Byrne et al.: Does the United States Have a Productivity Slowdown or a Measurement Problem?: “After 2004, measured growth in labor productivity and total-factor productivity (TFP) slowed…

…We find little evidence that the slowdown arises from growing mismeasurement of the gains from innovation in IT-related goods and services…. Underlying macroeconomic trends–not mismeasurement of IT-related innovations — are responsible for the slowdown in U.S. labor productivity and total factor productivity (TFP) since the early 2000s…. Because the slowdown predated the Great Recession, and growth was similar in the 1970s and 1980s to what it’s been since 2004, it was the fast-growth of 1995-2004 period that was the anomaly — a one-time upward shift in the level of productivity rather than a permanent increase in its growth rate – thanks to the Internet, the reorganization of distribution sectors, and the like. ‘Looking forward, we could get another wave of the IT revolution. Indeed, it is difficult to say with certainty what gains may yet come from cloud computing, the internet of things and the radical increase in mobility represented by smartphones,’ they write. Still, those hypothetical benefits have not appeared yet.

I also confess to being annoyed by:

Second, many of the tremendous consumer benefits from smartphones, Google searches, and Facebook are, conceptually, non-market: Consumers are more productive in using their nonmarket time to produce services they value. These benefits do not mean that market-sector production functions are shifting out more rapidly than measured, even if consumer welfare is rising…

Isn’t “measuring consumer welfare” the point? We (a) arrange atoms (b) in forms we find pleasing and convenient, and then use them in combination with (c) information and (d) communication to accomplish our purposes. That our measures of economic growth are overwhelmingly “market” measures that capture the value of (a), much of the value of (b), and little of the value of (c) and (d) is an indictment of those measures, and not an excuse for laziness by shrugging them off as “non-market” and claiming that measuring the shifting-out of market-sector production functions is our proper business.

What is the economy’s speed limit?

Posted on by Brad DeLong

More on the very-sharp Ryan Cooper’s gotten one mostly wrong…

The two questions are (a) how much higher could expansionary fiscal and cooperative monetary policy permanently push annual GDP up above its current trend without triggering massive inflation, and (b) how large would the expansionary policies have to be to push the economy up that far? My guesses are 5% to (a)–that we could permanently raise annual GDP $800 billion relative to our current trajectory without triggering an upward spiral in inflation–and that we would need $300 billion more of annual government purchases. to get us there to (b).

Ryan Cooper:

Ryan Cooper: Who’s Afraid of John Maynard Keynes?: “Does the economy have room to grow?…

…Could we create many more jobs and wealth if we really tried, or have we reached the limits of what we can produce? This… is at the heart of a recent dispute among academic economists… nominally centered on Bernie Sanders’ economic plan, but also illustrates a major fault line in the practice of theoretical economics today…. [Gerald] Friedman… assumed a model in which Sanders’ huge stimulus would push the economy up to full capacity (meaning full employment and maximum output), after which it would stay permanently at a higher level…. However, the key assumption behind the mainstream model is that an economy always tends towards full employment…. [But] even by conservative assumptions we are still something like $500 billion under total economic capacity, productivity has been consistently very weak, and there is absolutely nothing on the horizon that looks like it will return us to the level of employment we had in 2007, let alone 1999…. What’s more, a Friedman-style model in which a stimulus delivered to a depressed economy returns it to full capacity, after which it stays there, is not ridiculous…

Let’s start with one of my favorite workhorse graphs:

Playfair equitable graphs

Starting in 2006 residential construction fell to the very bottom of the chart, and it has stayed there: more than 1.5%-points of GDP below its 2007-peak share of potential GDP. Starting in 2008 business investment fell to the very bottom of the chart, and then took a long tine to recover from its nadir of 2.5%-points below its 2007-peak share of potential GDP. Between 2007 and, say, the end of this year the cumulative shortfall has been some 18%-point years of residential construction not undertaken, and some 8%-point years of business investment not undertaken.

In a world with a capital-output ratio of 3 and a capital share of income of 30%, that shortfall would generate (under somewhat heroic analytical assumptions) a reduction of some 2.6%-points of GDP in the cumulative growth of potential output relative to what it would otherwise have been. That is the damage done to growth in America’s long-run economic potential from the investment shortfall since 2007. And then there is the equal or larger reduction in the growth in America’s long-run economic potential from the labor shortfall–workers not trained, workers not gaining experience, the breaking of ties to people who might hire you or might know of people who might higher you. Add up those two, and I get a 6%-point reduction in what our productive potential is relative to the pre-2008 trend. Thus 6%-points of the current gap between production now and the pre-2008 trend has been lost to the years that the locust hath eaten. And 5%-points remains as a gap that could quickly be closed by expansionary fiscal policy.

And we should close that gap. But a mere $140 billion or so of increased government spending is very unlikely to get us there. That would require a multiplier of nearly six–that only 17.5% of dollars earned as income from higher government spending leak out of the flow of spending on domestically-produced commodities either as savings or as spending on imports. And we know that it’s more like 33%-40% of dollars that so leak. That gives us a multiplier of 2.5-3. And that gives me my desire to see $300 billion more of government purchases.

What if we don’t get that extra spending? Well, perhaps we will get a residential construction boom to return us to economic potential. But don’t bet on it. Perhaps we will get an export boom to return us to economic potential. But don’t bet on it. Perhaps businesses will become wildly more optimistic about the future and a business investment boom will return us to economic potential. But don’t bet on it. Perhaps consumers will decide–after just living through 2007-2016–that they have not borrowed enough, and go on a spending spree to run their debts up further. But don’t bet on it.

No, if we don’t take active steps to boost spending, what will happen is not that economic growth will accelerate to return us to an economic potential that is itself growing at 2+%/year. What will happen is that low investment and underemployment will continue to do damage to the growth of potential and our economic potential will grow at 2-%/year until actual output is once again at potential output. But that will not be because actual has sped up its growth to catch up to potential. It will be because potential has slowed down to fall back to actual.

And the claim that in the long run (in which we are all dead) the economy’s actual level of output converges to potential? Four things can cause this to happen:

  1. Potential can slow.
  2. Something–a spending boom by somebody–can boost actual.
  3. Deflation can lead to lower interest rates as deflation carries with it a decline in the intensity of demand for a stable nominal stock of money. But in the modern world we certainly do not have inflation. We double-certainly do not have central banks that keep the nominal stock of money stable. And we triple-certainly have no room for interest rates to fall further
  4. The gap between potential and actual production can lead the central bank to lower interest rates. That cannot happen. It could lead the central bank to resort to additional extraordinary stimulative measures. But that is not going to happen either.

You may ask: Why can’t we recover more than 5%-points of the 11%-point gap between current production and what we thought back in 2007 was our trend growth destiny? If a low-pressure economy can reduce potential, why won’t a high-pressure economy increase potential? The key is easily recover. Easily. When a lack of markets or a lack of financing keeps investments that had obvious payoffs from being made, the costs are large. When a boom encourages investments to be made that look profitable only as long as the boom and the exuberance that accompanies it lasts, the long-run benefits are smaller. We as a country did benefit from MCI-WorldCom’s investments in the fiber-optic backbone in 1998-2000. But we did not benefit by nearly as much as MCI-WorldCom was calculating in its irrational exuberance bordering on fraud.

I would love to be wrong. I would love to discover that a high-pressure economy with spending more than halfway back to the pre-2008 trend would be consistent with relatively-stable inflation and with rapid-enough growth of economic potential to quickly catch us back up to that trend. But I don’t expect that that would be the case.

Must-read: Ryan Cooper: “Who’s Afraid of John Maynard Keynes?”

Posted on by Brad DeLong

Must-Read: I think the very-sharp Ryan Cooper has gotten this mostly wrong. The two questions are (a) how much higher could expansionary fiscal and cooperative monetary policy permanently push annual GDP up above its current trend without triggering massive inflation, and (b) how large would the expansionary policies have to be to push the economy up that far? My guesses are 5% to (a)–that we could permanently raise annual GDP $800B relative to our current trajectory without triggering an upward spiral in inflation–and that we would need $300B more of annual government spending to get us there:

Ryan Cooper: Who’s Afraid of John Maynard Keynes?: “Does the economy have room to grow?…

…Could we create many more jobs and wealth if we really tried, or have we reached the limits of what we can produce? This… is at the heart of a recent dispute among academic economists… nominally centered on Bernie Sanders’ economic plan, but also illustrates a major fault line in the practice of theoretical economics today…. [Gerald] Friedman… assumed a model in which Sanders’ huge stimulus would push the economy up to full capacity (meaning full employment and maximum output), after which it would stay permanently at a higher level…. However, the key assumption behind the mainstream model is that an economy always tends towards full employment…. [But] even by conservative assumptions we are still something like $500 billion under total economic capacity, productivity has been consistently very weak, and there is absolutely nothing on the horizon that looks like it will return us to the level of employment we had in 2007, let alone 1999…. What’s more, a Friedman-style model in which a stimulus delivered to a depressed economy returns it to full capacity, after which it stays there, is not ridiculous…

Weekend reading: Our new working paper series, UI extensions, and more

Posted on by David Hudson

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

Equitable Growth launched our working paper series this week, which will feature research by our grantees, our in-house researchers, and other researchers in our network. The first three papers cover school finance reform, labor standards in the restaurant industry, and econometric techniques.

There’s a still-simmering debate among left-leaning economists about the potential impact of Sen. Bernie Sanders’ economic plan. But as Heather Boushey points out, researchers and policymakers shouldn’t ignore the important role of policy that focuses on supporting care and work-life balance.

Extending the duration of unemployment insurance benefits during a recession increases the unemployment rate. But looking at studies that only consider the first step of the process misses something important: Less job searching can help more unemployed workers find jobs.

U.S. business investment is weak. Productivity growth is slow. Our companies are less dynamic than in the past. All of these trends are intertwined and in ways that researchers and policymakers don’t quite understand. If we care about economic growth, we need to pay more attention to these trends.

Links from around the web

Economists and policymakers are concerned with the drop-off in the rate at which new businesses are being started. But not all startups are created equal. Ben Casselman highlights new research showing that ambitious startups are growing slower than in the past. [fivethirtyeight]

How do we accelerate economic growth? Well, it depends on the timeframe over which you want to boost growth. Dietz Vollrath discusses how policies that focus on aggregate demand work for the short term, and the long term is the provenance of supply-side reforms. [growth economics]

Poverty and housing policy are inextricably linked. Emily Badger highlights a new book by sociologist Matthew Desmond on eviction in U.S. cities, which explores how the rental housing market helps perpetuate U.S. urban poverty. [wonkblog]

A new study shows that a large portion of financial advisers in the United States have histories of “misconduct.” And these brokers and advisers seem to be concentrated in certain firms and certain areas of the country. Matthew C. Klein takes a deeper look at the research. [ft alphaville]

The presidential election season is a time for hearing plans about how the federal government can improve the country. Presidential administrations can make tremendous differences, but some areas are outside of their control, such as housing supply. Derek Thompson argues for the importance of housing constraints. [the atlantic]

Friday figure

 

Figure from “History shows why New Hampshire has room for higher minimum wages” by Ben Zipperer.

Must-reads: March 4, 2016

Posted on by Brad DeLong

Must-read: Thorstein Beck et al.: “The Global Crisis Special Issue of Economic Policy”

Posted on by Brad DeLong

Must-Read: Thorstein Beck et al.: The Global Crisis Special Issue of Economic Policy: “The Global Crisis was a watershed… for economies around the world… [and] for economics as a discipline…

…[This] special issue of Economic Policy… chart[s] the evolution of economists’ thinking on the causes of and cures for the Global and EZ Crises…. A large literature has explored commonalities across crisis countries, relating to macroeconomic imbalances, financial sector fragilities and policy variables. Applying this to the the euro periphery countries shows that their pre-crisis domestic vulnerabilities resemble those of earlier crises…. The extensive knowledge accumulated through these past banking crises… could have helped to both provide early warning signals and design recovery policies…. Evidence from the Great Depression shows that the decision by many countries to use fiscal stimulus policies was the right one….

International capital flows were an important part of the pre-crisis boom as much as their retrenchment was an important dimension of the crises…. Current account imbalances were financed mostly by intra-Eurozone capital inflows, which permitted external imbalances to grow over many years until the EZ Crisis hit…. Iceland has often been pointed to as having taken a very different approach to resolving the crisis, with the government cutting banks loose early on (with the result that the Icelandic government never lost its investment grade credit rating)…. The Greek sovereign debt crisis was at the core of the EZ Crisis…. One of the countries suffering from ‘contagion’ of the Greek debt restructuring was Cyprus….

Early on, observers noted the difference between the rapid and coordinated reaction of monetary policymakers to the crises – providing ample liquidity to unfreeze markets on the one hand – and the uncoordinated and rather inefficient reaction to bank failures on the other…. In the absence of bank resolution frameworks that allowed an effective and swift intervention into failing banks, most European countries (with the notable exception of Iceland) decided in 2008/9 for bailouts in the form of public recapitalisation…. Only large recapitalisations and infusions of common equity are associated with higher total regulatory capital ratios and sustained loan growth. These findings send the important message that if you bail out, you better do it well!…

The deadly embrace of sovereign and banks has been at the core of the EZ Crisis. This vicious cycle started in January 2009 when the nationalisation of Anglo-Irish by the Irish government showed the limitations of fiscal support for national banks…. The banking union is partly a response to this deadly embrace, although many observers would argue that it has not completely solved the problems….

The papers included in this special issue are just a sample… have… been an important source for the crisis consensus narrative…. Stay tuned for more…

Must-read: Abbe Gluck et al.: “Yale Health Care Industry Symposium”

Posted on by Brad DeLong

Must-Read: Abbe Gluck et al.: Yale Health Care Industry Symposium: “The New Health Care Industry—Consolidation, Integration, Competition In The Wake Of The ACA…

…Building An ACO—What Services Do You Need And How Are Physicians Impacted? Michael Chernew…. States’ Critical Role Overseeing Vertical Health Care Integration Jaime King and Erin Fuse Brown…. A Healthy Skepticism Of Incumbents, A Healthy Commitment To Entry Barak Richman… Unpacking The Issues Of Vertical And Horizontal Consolidation—The St. Luke’s Case Toby Singer…. Physicians And The New Health Care Industry—Benefits Of Generational Change William Sage…. High Prices And Payment Reform—Let’s Get Practical Robert Berenson…. Consolidation And Competition In US Health Care Martin Gaynor…. Dubious Health Care Merger Justifications—The Sumo Wrestler And ‘Government Made Me Do It’ Defenses Thomas Greaney…. No Evidence That Insurance Market Consolidation Leads To Greater Innovation Leemore Dafny and Christopher Ody…

Must-read: Simon Wren-Lewis: “Understanding the Austerity Obsession”

Posted on by Brad DeLong

Must-Read: Simon Wren-Lewis: Understanding the Austerity Obsession: “The diagnosis in the case of the Republican party in the US is reasonably clear…

…The main economic goal is to cut taxes, particularly for the very rich. That requires, sooner or later, less public spending. What about evidence that more public investment would help everyone?… This group suffers from the delusion that the only way to help the economy is to tax the rich less and starve the beast that is the state… infect[ion] by the neoliberal ideology virus….

Germany… is much more difficult to diagnose… Swabian syndrome: a belief that the economy is just like a household, and the imperative is to balance the books. This seems like a case of labelling rather than explaining a disease. There may be an allergy involved: an aversion to Keynesian economics, and anything that sounds vaguely Keynesian. But the microeconomic case for additional public investment in Germany is also strong… the German public capital stock has been shrinking for over a decade…. The nature of the illness in Germany is therefore more of a mystery….

The Conservative Party in the UK also seem to have the symptoms associated with Swabian syndrome…. Some… argue that in reality the party are feigning the symptoms as a means of winning elections, while still others claim that tests have revealed clear traces of the ideology virus. What has become clear is that the traditional way of treating the austerity obsession, which involves occasional counselling with well trained economists, is having little effect. We also now know that the financial crisis shock treatment only makes the neoliberal virus more virulent. Extended therapy is the only known cure for this virus. As for Swabian syndrome, our best hope may be that the public gradually develop an immunity to the disease as its consequences become clear.

How concerned should we be about business investment and productivity growth?

Posted on by Bridget Ansel
Jason Furman, the Council of Economic Advisers Chairman, gives a talk at the Eisenhower Executive Office Building in the White House complex.

While the U.S. economy certainly has some considerable cyclical problems to work through right now, we can’t forget the longer-term problems that also plague us—such as the low rate of productivity growth in the United States, fewer business startups, and declining business investment. These problems are not unrelated. The changes in business behavior in recent decades are factors in the recent slowdown in productivity growth.

But how concerned should we be about these trends? Are they cyclical problems that will soon be corrected? Or are they deeper structural changes we should grapple with more?

A couple of speeches by Jason Furman, Chair of the President’s Council of Economic Advisers, provide a good starting point for this conversation. The first speech, delivered at the Peterson Institute of International Economics last July, is about productivity growth. Furman covers a wide range of topics in the talk, but for our purposes, we’ll focus on his analysis of the current productivity slowdown.

Furman focuses on labor productivity, which can be broken down to improvements in “labor quality” (education levels, essentially), increases in capital investment, and total factor productivity. He points out that since 2010, the decline in labor productivity growth in the United States has been driven mostly by a decline in capital per worker—or in other words, by a slowdown in business investment. As Dietz Vollrath points out, the decline in capital per worker has been widespread across all classes of capital.

This, then, raises the question: How do we boost business investment? That brings us to Furman’s second speech, given at the Progressive Policy Institute this past September. Furman cites research that argues the extremely weak growth in U.S. business investment since the Great Recession is due to the nation’s weak economic growth during the recovery. Businesses plan investment based on expectations of future spending by consumers, so investing based on future growth makes sense.

But while this “accelerator” view of the slowdown makes sense, Furman notes some puzzles. In particular, the return to capital has increased substantially while investment has not. What are firms doing with all these profits they’re earning and not investing, then?

The data show that a large chunk of these profits are being distributed to shareholders in the form of increased dividends and stock buybacks—a trend highlighted by economist J.W. Mason of the Roosevelt Institute and John Jay College. Mason noted that this change in the distribution of profits goes back to the 1980s, presenting the possibility that this is a structural impediment to increased business investment.

In his speech (and subsequent work), Furman notes that the increase in the rate of return on capital may be a result of increased rents in the economy, due to increased business consolidation and market power. Given that a more consolidated market will invest less, that’s another possible structural roadblock to higher investment and stronger labor productivity growth.

But let’s return to Furman’s first speech. Although labor productivity has slowed on average, this is not true for all firms.  On that front, Furman points to research from the Organisation for Economic Co-operation and Development showing that productivity growth at leading firms is doing well. Again, Furman interprets this as a sign that the recent productivity decline is mostly about the investment slowdown. The problem is that the innovations at “frontier” firms aren’t spreading to the rest of the economy. In part, this may be due to the declining business dynamism in the United States, with fewer firms being started and ended every year. That’s a problem of misallocation that may require a policy response.

Declining business investment and dynamism, insomuch as they are affecting productivity growth, should concern policymakers and everyday Americans. Stronger productivity is a necessary requirement for higher living standards. Of course, we know productivity isn’t always entirely captured by workers. It’s not sufficient, but it is necessary. We should be watching these trends, concerned about them, and wondering how we might be able to change them.