Category: Equitablog

Must-Reads: January 11, 2016

Posted on by Brad DeLong

Must-read: Larry Summers: “Heed the Fears of the Financial Markets”

Posted on by Brad DeLong

Must-Read: Larry Summers: Heed the Fears of the Financial Markets: “They understood the gravity of the 2008 crisis well before the Federal Reserve…

…Markets are more volatile than the fundamentals they seek to assess. Economist Paul Samuelson quipped 50 years ago, ‘the stock market has predicted nine of the last five recessions’. Former Treasury secretary Robert Rubin was right when he would regularly reassure anxious politicos in the Clinton White House that ‘markets go up, markets go down’ on days when a market move created either joy or anxiety…. Still, since markets are constantly assessing the future and aggregate the views of a huge number of participants, they often give valuable warning when conditions change…. Policymakers who dismiss market moves as reflecting mere speculation often make a serious mistake. Markets understood the gravity of the 2008 crisis well before the Federal Reserve. They grasped the unsustainability of fixed exchange rates in Britain, the UK, Mexico and Brazil while the authorities were still in denial, and saw slowdown or recession well before forecasters in countless downturns….

Signals should be taken seriously when they are long lasting and coming from many markets, as with current market indications that inflation will not reach target levels within a decade in the US, Europe or Japan…. It is conceivable that Chinese developments reflect market psychology and clumsy policy responses, and that the response of world markets is an example of transient contagion. But I doubt it. Over the past year, about 20 per cent of China’s growth as reported in its official statistics has come from its financial services sector…. This is hardly a case of healthy or sustainable growth…. Traditionally, international developments have had only a limited effect on the US and European economies because they could be offset by monetary policy actions…. Because of China’s scale, its potential volatility and the limited room for conventional monetary manoeuvres, the global risk to domestic economic performance in the US, Europe and many emerging markets is as great as at any time I can remember. Policymakers should hope for the best and plan for the worst.

Must-read: Antonio Fatas: “BIS Redefines Inflation (Again)”

Posted on by Brad DeLong

Must-Read: I agree with Antonio Fatas here. The BIS is using model-building 0% as a discovery mechanism and 100% to advance reasons for policy conclusions that have been set in stone in advance. The problem is that the various BIS models do not appear to codify any form of knowledge–for as their predictions are proved false by time the responses not to adjust the framework to reality but to put forward to a new framework. The latest such:

Antonio Fatas: BIS Redefines Inflation (Again): “An interview with Hyun Song Shin…

…reminds us of the strange and heterodox views that the BIS (and others) have about the behavior of inflation… a very special and radical view on what determines inflation… supported by a unique reading of the data…. Here is a summary of the new BIS theory…. 1. Inflation is a global phenomenon, not a national one. Monetary policy has very little influence on inflation…. 2. The idea that monetary policy affects demand and possibly inflation is a ‘short-term’ story that is too simple…. 3. Deflation is not that bad…. 4. While central banks are powerless at controlling domestic inflation, they are very powerful at distorting interest rates and rates of returns for long periods of time (decades). 5. Central banks have a problem when inflation is the only goal (they end up creating distortions in financial markets). 6. Monetary policy is a cause of all China’s problems (he admits that there are other causes as well).

In summary, central banks are evil. Their only goal is to control inflation, but they cannot really control it, and because of their superpowers to distort all interest rates they only end up causing volatility and crises. And this is coming from an organization whose members are central banks and its mission is ‘to serve central banks’. Surreal.

We see this more and more with economists who try to come over to macro from modern finance. They base themselves not in Mill-Malthus or Wicksell-Keynes or Bagehot-Minsky or Fisher-Friedman, but evolve some approach of their own which usually seems to combine the errors of the early Say and of Hayek to produce sub-Econ-1-level fallacies…

Thinking about wealth taxes

Posted on by Nick Bunker

As you might have heard, Thomas Piketty’s “Capital in the Twenty-First Century” has sparked a bit of conversation about the economics of inequality and growth. The book is part description of hundreds of years of data about the distribution of income and wealth, part theorizing about the roots of these trends, and part prescription for reducing these inequalities. The last part has been perhaps the most controversial, with the French economist calling for a global wealth tax. But as time has passed, economists and other analysts have taken a deeper look into some of the economics of the wealth tax—and some of the results are very interesting.

A session at the Allied Social Science Associations meeting in San Francisco last week dug into the topic of wealth taxation, with two of the papers citing Piketty’s proposal. One paper, by Emmanuel Farhi of Harvard University and Iván Werning of the Massachusetts Institute of Technology, focuses on the forces Piketty cites in his analysis of wealth taxation: r and g, with r being the rate of return on capital and g the growth rate of the overall economy. In Piketty’s famous formulation, if r is greater than g then the economy will trend toward increasing inequality.

Farhi and Werning focus on how the difference between r and g affects the optimal tax on bequests—the passing on of wealth to the next generation. The two economists find that under traditional models, the difference between the rate of return and the growth rate of the economy really didn’t matter much. But then they built a model that allows for political concerns, in the sense that redistribution may be preferable because high levels of inequality could be destabilizing for the political system. Once those considerations are included, the difference between r and g does matter. The higher the difference, the higher the level of optimal tax on bequests.

A second paper at the same session took a different approach to looking at a wealth tax. Fatih Guvenen of the University of Minnesota, Gueorgui Kambourov and Burhan Kuruscu of the University of Toronto, and Daphne Chen of Florida State University look at the efficiency effects of taxation. The economists compare a tax directly on wealth to a tax on capital income (the income derived from wealth) and find that shifting to a wealth tax would improve the efficiency of the economy.

To understand their result, consider two similarly wealthy individuals. One received his wealth through inheritance and really isn’t doing much with it while the other received her wealth through entrepreneurial means. Since the entrepreneurial wealth holder is using capital more efficiently, the return on capital is going to be higher. In a system where capital income is taxed, she’ll be taxed more than the guy just sitting on his wealth.

A wealth tax, however, would shift the tax burden more onto the less active wealth holder. This, in turn, would give him a lower rate of return, and capital would shift to the more active individual. In other words, the redistribution would be a reallocation to more productive means. As the authors point out, however, this would also mean an increase in wealth inequality.

For anyone who wondered if the economics profession would engage with the ideas Piketty proposed in his book, this session was good proof that it has and will likely continue doing so.

Photo of Thomas Piketty in Sweden, June 30, 2014. (AP Photo/Janerik Henriksson)

Weekend reading: New jobs numbers, #ASSA2016, and more

Posted on by Nick Bunker

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 staffers were in San Francisco earlier this week for the annual meeting of the American Economic Association and related associations. The conference featured three days of presentations and panels on topics that cover the wide range of economics research. Check out some of the papers our staff found interesting over the course of the conference.

One of the papers presented at the conference makes a bold claim: The share of income going to labor in the United States has been on the decline since the end of World War II. Not only does the decline start much earlier than previously thought, but the decline can be placed entirely at the feet of intellectual property.

The U.S. jobs report released this morning was definitely positive, with strong job growth and increasing labor force participation. But the continued slow growth in the share of workers ages 25 to 54 with a job is a concerning trend. Ben Zipperer shows just how weak growth in the prime-age employment-to-population ratio has been during this recovery.

Links from around the web

The Allied Social Science Associations conference has hundreds of sessions over the course of three days, so finding one dominant topic can be tough. But there certainly were a few topics that kept popping up across presentations. As Nelson Schwartz reports, one of those topics was economic inequality. [ny times]

Speaking of inequality, a new dataset about the rise of income inequality was unveiled at the conference. The data—constructed by Thomas Piketty, Emmanuel Saez, and Gabriel Zucman—tries to merge data on micro household income and macro national-level data. Jim Tankersley reports on their findings. [wonkblog]

John Maynard Keynes famously predicted that as economic growth continued, workers would be able to work less and less as richer societies allowed for more leisure time. But that prediction hasn’t come to fruition yet. Why aren’t Americans working less? It could be because of rising income inequality, writes Rebecca Rosen. [the atlantic]

Proponents of a flat income tax sometimes state that a flat tax would not only be simpler, but it could also be tweaked not to disproportionately hurt low-income earners. Such a move, however, would require losing quite a bit of government revenue. Michael Linden shows the inherent trade-off of a flat tax. [medium]

New research on student loan data shows that the borrowers who are most likely to default in the United States are those who borrow the least. Why are these borrowers, and not those with the massive burdens we often hear about, defaulting more? According to University of Michigan economist Susan Dynarski, it’s because of earnings. [brookings]

Friday figure

Figure from “El Niño adds to U.S. job growth in December” by Ben Zipperer

Must-read: Jared Bernstein: “2015 Was Solid Year for Job Growth”

Posted on by Brad DeLong

Must-Read: Jared Bernstein: 2015 Was Solid Year for Job Growth: “Payrolls were up 292,000 in December and the unemployment rate held steady at a low rate of 5%…

…in another in a series of increasingly solid reports on conditions in the US labor market. Upward revisions for the prior two months added 50,000 jobs, leading to an average of 284,000 jobs per month in the last quarter of 2015. In another welcome show of strength, the labor force expanded in December, leading the participation rate to tick up slightly.

December’s data reveals that US employers added a net 2.7 million jobs in 2015 while the unemployment rate fell from 5.6% last December to 5% last month. While the level of payroll gains did not surpass 2014’s addition of 3.1 million, it was otherwise the strongest year of job growth since 1999.

Simply put, for all the turmoil out there in the rest of the world, the US labor market tightened up significantly in 2015…. We are not yet at full employment. But we’re headed there at a solid clip, and that pace accelerated in recent months…

Graph Employment Rate Aged 25 54 All Persons for the United States© FRED St Louis Fed

I must say, when I look at this graph I find it very hard to understand the thought of all the economists who confidently claim to know that the bulk of the decline in the employment-to-adult-population ratio since 2000 is demographic and sociological. 4/5 of the decline in the overall ratio since 2000 is present in the prime-age ratio. More than 5/8 of the decline in the overall ratio since 2007 is present in the prime-age ratio.

It thus looks very much to me like the effects of slack demand–both immediate, and knock-on effects via hysteresis. And what demand has done, demand can undo. Perhaps it cannot be done without breaching the 2%/year inflation target, but:

  • That 2%/year inflation target is supposed to be an average, not a ceiling.
  • Since 2008:1, inflation has averaged not 2%/year but 1.47%/year.
  • There is thus a cumulative inflation deficit of 4.22%-point-years available for catch-up. And
  • The 2%/year inflation target was extremely foolish to adopt–nobody sane in the mid- or late-1990s or in the early- or mid-2000s would have argued for adopting it had they foreseen 2007-9 and what has happened since.
Consumer Price Index for All Urban Consumers All Items FRED St Louis Fed

El Niño adds to U.S. job growth in December

Posted on by David Hudson

Unusually warm weather over much of the United States helped boost employment growth in December as the U.S. economy added 292,000 jobs, according to the Bureau of Labor Statistics. Wages also rose by 2.5 percent compared to a year ago while the unemployment rate stayed the same at 5.0 percent.

Although wages seemed as though they might be beginning to accelerate significantly in recent months, revisions to prior data suggest more modest growth. Both the year-over-year change and the change over the past three months place U.S. annual wage growth at 2.5 percent, well below healthy wage growth targets of 3.5 to 4.0 percent. Because wages were actually flat or falling this month compared to last month, this anomaly may be reversed in future revisions to show somewhat higher wage growth.

Widely spread across different industries, employment growth in December also appeared to respond in part to the unexpected warm temperatures. The Northeast, Midwest, and South all saw exceptionally warm weather last month, with 29 states experiencing their warmest average temperature on record. Partly as a result, the construction industry gained 45,000 jobs and restaurants grew by 36,900 workers. Reported employment for these sectors may be depressed in subsequent months if the good weather simply pulled forward hiring plans. Retail, however, only added 4,300 jobs—perhaps more hurt by the warm winter weather, which depresses sales as customers avoid purchasing winter apparel. The manufacturing sector also only grew by 8,000 jobs last month, negatively affected by the relatively strong dollar, which makes U.S. exports more expensive.

Recent job gains have had a small positive impact on the prime-age workforce, or those between 25 and 54 years old. The employed share of the nation’s prime-age population is now at 77.4 percent, unchanged from last month and up only about 0.3 percentage points compared to a year ago. Compared to other business cycles, the labor market recovery for prime-age workers has been particularly weak. At the historical pace of recovery in all but the past two business cycles, prime-age employment would have recovered by now to its pre-recession levels. Today’s prime-age employment rate, however, is about 2.3 percentage points below its value of 79.7 percent just before the official onset of the Great Recession of 2007–2009. (See Figure 1.)

Figure 1

The past two years have been the only years since 2005 when the U.S. economy’s monthly job growth exceeded 200,000 jobs on average, but employment growth was somewhat slower in 2015 compared to 2014. After nearly hitting the 200,000-a-month mark in 2013, employment growth accelerated in 2014 to add nearly 260,000 jobs each month. During 2015, however, the monthly pace of job creation slowed to about 221,000. The slowdown is apparent even when we focus on the most recent quarter and include the strong job gains of October and December. The average monthly employment growth over the quarter was about 284,000, yet over the last three months of 2014, gains averaged about 324,000.

The Federal Reserve’s recent interest rate hike will additionally dampen employment growth and make it more difficult for workers to secure economically meaningful wage gains, but these effects will likely occur with a significant lag. In the near term, next month’s employment report will reflect some of the initial impact of state and city minimum wage changes that occurred in January. Fourteen states and several cities and localities raised their minimum wages around the first of this month. Consequently, we should expect to see some stronger-than-usual wage growth in the leisure and hospitality sector, and also possibly in retail establishments, since these two industries intensively employ low-wage workers.

Photo of “Now Hiring” sign by Tess Aquarium, flickr, cc

Must-read: Paul Krugman: “Summarizing the Trialogue”

Posted on by Brad DeLong

Must-Read: Paul Krugman: Summarizing the Trialogue: “Martin Sandbu has a summary…

…Brad DeLong has excerpts for those without FT Premium access. I have some quibbles, basically amounting to ‘But I’m right in the end!’ But never mind. One important meta-thing… is that discussions like this are… only a possibility thanks to the internet. Getting three well-known policy-oriented economists in the same room with time for a substantive discussion is, as Brad notes, very hard. And to-and-fro discussions in the journals are (a) relatively stiff and formal, (b) v-e-r-y s-l-o-w compared with what just went down…. The web has recreated in a virtual way the kind of coffee house discussions out of which the modern scientific journals emerged, without the necessity of all of us being in London, and drinking incredibly terrible coffee.

Must-reads: January 7, 2016

Posted on by Brad DeLong

Must-read: Max Ehrenfreund and Carolyn Y. Johnson: “One of the Biggest Fears about Obamacare Never Happened”

Posted on by Brad DeLong

Must-Read: Max Ehrenfreund and Carolyn Y. Johnson: One of the Biggest Fears about Obamacare Never Happened: “Opponents warned that the law would discourage large numbers… from working…

…force millions into part-time jobs and make it more difficult to find work. Three new studies released this week suggest that, so far, it hasn’t happened…. If the law has had any effect on the labor market, it’s been a small one. ‘There were a lot of stories about employers, with anecdotes about employers shifting jobs to part-time,’ said Larry Levitt, an economist at the Kaiser Family Foundation not involved in the new research. ‘You can’t deny those stories–they’re real. They’re just not generalizable. It’s not what is mostly happening’…