- : Confidence as a Political Device
- : Can Economics Change Your Mind?
- : Free Capital Flows Can Put Economies in a Bind
- : Facing Up to Climate Reality
- : From Welfare State to Innovation State
- : Jeb Bush, Please Talk to Bob Dole About Food Stamps
Category: Equitablog
Must-read: Simon Wren-Lewis: “Confidence as a Political Device”
Must-Read: : Confidence as a Political Device: “The leap from the statement that ‘in some circumstances confidence matters’…
…to ‘we should worry about bond market confidence in an economy with its own central bank in the middle of a depression’ is a huge one…. For the US and UK in 2009, was there the slightest chance that either government wanted to default?… The answer has to be a categorical no…. The argument goes that if the market suddenly gets spooked and stops buying debt, printing money will cause inflation, and in those circumstances the government might choose to default. But we were in the midst of the biggest recession since the 1930s. Any money creation would have had no immediate impact on inflation…. The Corsetti and Dedola paper is not applicable. (Robert [Waldmann] makes a similar point about the Blanchard paper. I will not deal with the exchange rate collapse idea because Paul already has….
Ah, but what if the market remains spooked for so long that eventually inflation rises?… In Corsetti and Dedola agents are rational, so we have left that paper way behind. We have entered, I’m afraid, the land of pure make believe. So there is no applicable model that could justify the confidence effects that might have made us cautious in 2009 about issuing more debt. There are models about an acute shortage of safe assets on the other hand, which seem to be ignored by those arguing against fiscal stimulus…. When people invoke the idea of confidence… it frequently allows those who represent the group whose confidence is being invoked to further their own self interest…. Bond market economists never saw a fiscal consolidation they did not like…. If the economics point towards a conclusion, and people argue against it based on ‘confidence’, you should be very, very suspicious…
Must-read: Adam Ozimek: “Can Economics Change Your Mind?”
Must-Read: : Can Economics Change Your Mind?: “Work from David Autor, David Dorn, and Gordon Hanson has convinced me that in some local areas…
…the job losses from free trade can be substantial, and that these communities have been slower to adjust than I expected…. Mark Zandi… tells me the paper ‘Potential Output and Recessions: Are We Fooling Ourselves?’ by Robert Martin, Teyanna Munyan, and Beth Anne Wilson changed his mind recently… that recessions tend to have a permanent negative effect on output…. Raj Chetty and John Friedman were skeptical of standardized test-based measures of teacher performance, and they set off to do research… their evidence convinced them they were wrong…. Amy Finkelstein… [found] people changed behavior and used less healthcare when they moved from geographies where people on average spend a lot on healthcare to places with low spending…. Narayana Kocherlakota spent three years at the head of the Minneapolis Fed criticizing monetary policy as risking out-of-control inflation and unlikely to help the economy. Then in 2012, he made an about face, telling the New York Times that ‘a wave of research gradually convinced him that he was wrong.’… And some even take the step of repudiating their own earlier work…. Emily Oster… ‘Hepatitis B Does Not Explain Male-Biased Sex Ratios in China,’ with an abstract that concludes ‘…hepatitis B cannot explain skewed sex ratios in China, and the conclusions about this in Oster (2005) were incorrect’…
Trying to think about the Trans-Pacific Partnership
Live from Toronto: The Trans Pacific Partnership: Options for Canada and the World: “In partnership with Global Affairs Canada’s Ministry of International Trade…
…the Munk School of Global Affairs and the Faculty of Law will host an invite-only workshop on the Trans Pacific Partnership (TPP) on January 15. Guest speakers from universities around the world will discuss the economic and geo-political implications of the trade agreement, as well as its impact on Canadian policy and governance. Panel discussions for the day include The Economy: Growth and Innovation, Geo-politics and the Global Economic Order, and Democratic Governance. The conference aims to offer new perspectives on the TPP.
Follow @MunkSchool on Twitter for updates on the conference and use the hashtag #MunkTalks to share your thoughts on the TPP conference.
James Bradford DeLong is a professor of economics at U.C. Berkeley, a weblogger for the Washington Center for Equitable Growth, and a research associate of the National Bureau of Economic Research. From 1993-5 he was a deputy assistant secretary of the U.S. Treasury, working then on, among other things, NAFTA and the Uruguay Round of GATT. (See “The Case for Mexico’s Rescue” (1996) and “Aftathoughts on NAFTA” (2006).) He is best-known right now for “Fiscal Policy in a Depressed Economy” (2012, joint with Lawrence Summers), “The Scary Debate Over Secular Stagnation”, “The Melting-Away of North Atlantic Social Democracy”, and “Noise Trader Risk in Financial Markets” (1990, joint with Larry Summers, Andrei Shleifer, and Lawrence Waldmann).
Must-read: Wolfgang Munchau: “Free Capital Flows Can Put Economies in a Bind”
Must-Read: : Free Capital Flows Can Put Economies in a Bind: “We might now ask whether the removal of the policy instrument of capital controls may have contributed to a succession of financial crises…
…In the good times, Prof Rey finds, credit flows into emerging markets where it fuels local asset price bubbles. When, years later, liquidity dries up and the hot money returns to safe havens in North America and Europe, the country is left in a mess. There is very little the central bank can do to moderate inflows and outflows of foreign money. Unless you accept financial instability as inevitable, then, you may soon be thinking about imposing capital controls of a particularly stubborn variety–the kind that involves telling foreign investors you do not want their cash. The point is to prevent hot money flowing in during the good times, and to stop it from draining out in the bad times. This is not yet a subject of polite conversation among policymakers. Central bankers have instead been peddling a concept known as macroprudential regulation, a cuddly version of capital controls…
Must-read: Timothy Aeppel: “Silicon Valley Doesn’t Believe U.S. Productivity Is Down”
Must-Read: : Silicon Valley Doesn’t Believe U.S. Productivity Is Down: “Contrarian economists at Google and Stanford say the U.S. doesn’t have a productivity problem…
…it has a measurement problem. Google Inc. chief economist Hal Varian says sluggish U.S. productivity doesn’t reflect a high-tech wave of innovations that save people time and money. ‘There’s a lack of appreciation for what’s happening in Silicon Valley,’ he says, ‘because we don’t have a good way to measure it.’…
U.S. productivity, meanwhile, has hit the skids. From 1948 to 1973, it grew at an annual average of 2.8%. The rate through the 1980s slowed to half that, even as computers spread through the economy, driving everything from welding robots in auto plants to bank ATMs. In 1987, during the last period of productivity hand-wringing, Nobel Prize winning economist Robert Solow quipped: ‘You can see the computer age everywhere but in the productivity statistics.’ From 1995 to 2004, it finally looked like the digital age was paying off: Productivity growth rates closed in on post-World War II highs of near 3%. Then average gains fell to 2% from 2005 to 2009; since 2010, they have dipped below 1%…. ‘You can’t be in the Valley without thinking we’re in the middle of a productivity explosion,’ Mr. Bloom says. ‘And when they do discuss it, everyone jumps to Hal’s conclusion here.’…
Outside Silicon Valley, the arguments aren’t as persuasive. University of Chicago economist Chad Syverson said there might be some measurement problems, but that has always been the case. And, he says, he doubts it would account for more than a small part of the recent productivity slowdown…. ‘I’m always reluctant to point a finger at failure in measurement because it feels like you’re making excuses, ’ says Marco Annunziata, chief economist for General Electric Co. One explanation for the paradox of low productivity in a time of technical advances may be the uneven way innovation spreads, he says…. American business since the recession has, in fact, been stingy about investing in new equipment…
Must-read: Adair Turner: “Facing Up to Climate Reality”
Must-Read: : Facing Up to Climate Reality: “Achieving a low-carbon economy is essential…
…new technologies make that goal attainable at an acceptable cost; but technological progress alone will be insufficient without strong public policies…. The climate agreement reached in Paris last month represents a valuable but still insufficient response…. Wind energy is now cost-competitive in many locations, and the costs of solar energy continue to plummet–down around 70% since 2008. Rapid cost reductions are also being achieved in battery and other energy-storage technologies, bringing electric cars closer to economic viability and enabling flexible electricity supply even where a large percentage of power comes from intermittent sources…. Strong public-policy interventions are… essential to support an adequately fast energy transition that is as cost efficient as possible…
Must-read: Dani Rodrik: “From Welfare State to Innovation State”
Must-Read: : From Welfare State to Innovation State: “A specter is haunting the world economy – the specter of job-killing technology…
…When the new industrial working class began to organize, governments defused the threat of revolution from below that Karl Marx had prophesied by expanding political and social rights, regulating markets, erecting a welfare state that provided extensive transfers and social insurance, and smoothing the ups and downs of the macroeconomy. In effect, they reinvented capitalism to make it more inclusive and to give workers a stake in the system. Today’s technological revolutions call for a similarly comprehensive reinvention…. The bulk of these new technologies… entail the replacement of low- and medium-skilled workers with machines operated by a much smaller number of highly skilled workers…. Skill and capital-intensive technologies are the leading culprit behind the rise in inequality since the late 1970s. By all indications, this trend is likely to continue…. It doesn’t have to be this way. With some creative thinking and institutional engineering, we can save capitalism from itself – once again….
Achieving the socially desirable level of innovative effort… requires either foolhardy entrepreneurs… or a sufficient supply of risk capital. Financial markets in the advanced economies provide risk capital…. But there is no reason why the state should not be playing this role on an even larger scale…. As Mariana Mazzucato has pointed out, the state already plays a significant role in funding new technologies…. Designing the right institutions for public venture capital can be difficult. But central banks offer a model of how such funds might operate independently of day-to-day political pressure….
The welfare state was the innovation that democratized – and thereby stabilized – capitalism in the twentieth century. The twenty-first century requires an analogous shift to the ‘innovation state.’ The welfare state’s Achilles’ heel was that it required a high level of taxation without stimulating a compensating investment in innovative capacity. An innovation state, established along the lines sketched above, would reconcile equity with the incentives that such investment requires.
Must-read: Robert Greenstein: “Jeb Bush, Please Talk to Bob Dole About Food Stamps”
Must-Read: : Jeb Bush, Please Talk to Bob Dole About Food Stamps: “[Jeb] Bush could profit from a conversation with… Bob Dole…
…Dole’s conclusion, after years of work… was that food stamps represent the single most important accomplishment in American social policy since Social Security…. Before the early 1970s, each state set its own food stamp eligibility standards…. Surveys by medical researchers in the late 1960s found shocking rates of malnutrition and nutrition-related diseases — akin to those in some Third World countries — among poor children in parts of the South and Appalachia. These findings prompted President Nixon to lead a successful bipartisan effort to establish national food stamp eligibility standards. Studies in the late 1970s, after the national eligibility standards and other reforms that Dole had championed took effect, found dramatic reductions in child malnutrition and nutrition-related decreases. The researchers concluded that the impressive progress was due in large part to the federal reforms extending and expanding food stamps…
How minimum-wage increases affect the flow of firms
Discussion of the minimum wage—at least in the empirical literature about it—often focuses on what happens to affected workers. The vast research on minimum-wage hikes mostly focuses on the level of employment, with the occasional paper on worker flows. But workers are just one side of a job. Minimum-wage hikes could influence the dynamics of firms as well.
A new paper presented at last week’s annual Allied Social Science Associations meeting in San Francisco looks at how minimum-wage hikes affect firm dynamics. Interestingly, it finds that the churn of business establishments actually seems to increase after a minimum wage hike—that is, establishments are more likely to enter into and out of existence after the minimum wage is increased.
The paper’s authors—Daniel Aaronson of the Federal Reserve Bank of Chicago, Eric French of University College London, and Isaac Sorkin of the University of Michigan—use a dataset called the Quarterly Census of Employment and Wages. This very detailed dataset from the U.S. Bureau of Labor Statistics lets the economists know an establishment’s employment level as well as its location. The location bit is important as it lets the researchers compare changes in businesses in a county with a minimum-wage hike compared to those in a county that didn’t have an increase. (Note that the study looks at the effects on establishments rather than firms. Establishments are specific business locations which can be part of a firm. Think of specific stores of a chain restaurant.)
The paper’s finding that the churn of establishments increases after a minimum wage hike is especially interesting when compared to the research on labor flows after hikes, which finds reduced labor turnover for affected workers. At the same time, chain restaurants seem to be the ones experiencing the most churn. Full-service restaurants (more traditional, sit-down restaurants) do not seem to respond to minimum wage hikes according to the results. As the authors note, chain restaurants hire more minimum-wage workers so it makes sense that those establishments would be more affected by the minimum-wage hike.
An interesting possibility is that the kind of establishments that flow into the market after the minimum-wage hike is different from those that leave. A result of the authors’ theoretical model is that more capital-intensive establishments enter while more labor-intensive firms exit. Again, this makes sense as the minimum-wage increase is making labor more expensive.
In the short term, however, employment doesn’t seem to change all that much in response to the minimum-wage hike. In the authors’ model, there is eventually a decrease in employment. But that’s an assumption of their model with parameters from the data and not an empirical finding like the earlier results.
While the employment effect of the minimum wage is a highly studied area of empirical research, there are clearly other areas related to minimum-wage hikes that are ripe for investigation. Continued digging into policies related to the low-wage labor market and their consequences will likely produce interesting and important research for quite a while.