Category: Equitablog

Must-read: Tod Kelly: “Broken Elephants, Part I: Donald Trump and the Triumph of the Conservative Media Machine”

Posted on by Brad DeLong

Must-Read: The key question: How is one to attempt to do technocratic politics in the face of a massively dysfunctional Republican primary electorate and legislative right wing?

Tod Kelly: Broken Elephants, Part I: Donald Trump and the Triumph of the Conservative Media Machine: “If the only candidates willing to support rather than disparage their own political party…

…can’t muster a quarter of that party’s potential votes, then that party is broken–period. Not necessarily broken permanently, but broken nonetheless. Arguments to the contrary are some combinations of smoke, mirrors, and wishful thinking.

So how did the country’s most powerful political party transform, in the space of a single decade, from the basis for a presumed ‘permanent majority’ to a state of chaos, its leaders actively conspiring against their own candidates in hopes of said party not permanently imploding? The answer… is that the GOP’s growing reliance on feeding a ratings-driven propaganda machine has led it to this state of disrepair….

Despite the fact that this Presidential campaign has likely already lost the GOP its 2016 White House bid, that defeat will matter little to the principal players…. These calculating rabble-rousers will be lucratively rewarded by the same Media Machine that created them… [and] be more venerated as losers than the past two actual Republican Presidents, and will… hog the Party spotlight…. The GOP’s upcoming 2016 White House loss will not be used as a cautionary tale to future conservative Presidential hopefuls… [but] as a road map…

Intellectual property and the decline of the U.S. labor share

Posted on by Nick Bunker

Recent research about the decline of the labor share has caused economists to reconsider the continued relevance of the “stylized fact” that the labor share is constant. Labor and capital might have split up income at a constant rate for a while, but that’s just not true now.

But what if the fact were never true? A new paper presented at this year’s Allied Social Science Associations meeting claims that the apparent stability in the share of income going to labor never happened. According to the paper, the decline in the U.S. labor share didn’t start in the 1980s or 2000s—it started right after the Second World War.

Why has the labor share declined? The rise of intellectual property, it would seem.

The paper—by Dongya Koh of the University of Arkansas, Raul Santaeulalia-Llopis of the Washington University in St. Louis, and Yu Zheng of the City University of Hong Kong—takes advantage of newly updated GDP data from the U.S. Bureau of Economic Analysis. While the Bureau is constantly releasing new data on economic growth, it also revises previous data. Sometimes those revisions show an increase in total U.S. economic output, and sometimes the revisions show a change in the composition of that output. It’s the latter kind of revision that’s important in this case.

In 2013, the Bureau of Economic Analysis updated its treatment of a variety of issues, including how it treats research and development spending. The BEA previously treated R&D spending as a business expense but, as the BEA realized, it makes more sense to think of spending that could potentially boost a firm’s output as a capital investment. As the authors of the paper show, counting investments in intellectual property as, well, investment significantly increases the amount of investment showing up in the data. According to their calculations, intellectual property products have increased from 8 percent of U.S. investment in 1947 to 26 percent in 2013.

Accounting for this kind of capital investment means that the decline in the U.S. labor share starts much earlier than previously thought. According to the paper, the decline starts in 1947, which would mean the labor share was declining throughout the period it was famously stated to be constant. But not only does the decline start earlier than previously thought—it’s also much larger. It’s actually twice as large. And the increase in intellectual property products explains the entirety of the decline.

Furthermore, the paper’s authors also looked into the elasticity of substitution between capital and labor, a key parameter for understanding the decline of the labor share. The three economists calculate an elasticity greater than one, meaning capital (including intellectual property products) is a substitute for labor. Several other studies that look at the question at a more macro level have also found an elasticity greater than one, while micro-level studies tend to find elasticities below one.

While the overall trend since 1947 is a decline in the U.S. labor share, the data in the paper does show a leveling-off of the share from 1980 to 2000 and then a decline from 2000 onward. The overall trend from 1947 may be downward, but the trends within that trend are also important. The debate about the labor share is still very much alive, as this new contribution shows, and it continues to be a conversation to listen in on.

Photo of classroom by Derek Bruff, flickr, cc

Must-read: Douglas Staiger, James H. Stock, and Mark W. Watson (1997): “The NAIRU, Unemployment and Monetary Policy”

Posted on by Brad DeLong

Douglas Staiger, James H. Stock, and Mark W. Watson (1997): The NAIRU, Unemployment and Monetary Policy: “This paper examines the precision of conventional estimates of the NAIRU…

…and the role of the NAIRU and unemployment in forecasting inflation. The authors find that, although there is a clear empirical Phillips relation, the NAIRU is imprecisely estimated, forecasts of inflation are insensitive to the NAIRU, and there are other leading indicators of inflation that are at least as good as unemployment. This suggests deemphasizing the NAIRU in public discourse about monetary policy and instead drawing on a richer variety of leading indicators of inflation.

Must-read: Paul Krugman (2014): “Why Weren’t Alarm Bells Ringing?”

Posted on by Brad DeLong

Paul Krugman (2014): Why Weren’t Alarm Bells Ringing?: “Almost nobody predicted the immense economic crisis…

…If someone claims that he did, ask how many other crises he predicted that didn’t end up happening. Stopped clocks are right twice a day, and chronic doomsayers sometimes find themselves living through doomsday. But while prediction is hard, especially about the future, this doesn’t let our economic policy elite off the hook. On the eve of crisis in 2007 the officials, analysts, and pundits who shape economic policy were deeply, wrongly complacent. They didn’t see 2008 coming; but what is more important is the fact that they even didn’t believe in the possibility of such a catastrophe. As Martin Wolf says in The Shifts and the Shocks, academics and policymakers displayed ‘ignorance and arrogance’ in the runup to crisis, and ‘the crisis became so severe largely because so many people thought it impossible.’…

Focusing, as Martin Wolf does, on the measurable factors—the ‘shifts’—that increased our vulnerability to crisis is incomplete…. Intellectual shifts—the way economists and policymakers unlearned the hard-won lessons of the Great Depression, the return to pre-Keynesian fallacies and prejudices—arguably played an equally large part in the tragedy of the past six years. Say’s Law… liquidationism… conventional economic analysis fell short…. But when policymakers rejected orthodox economics, what they did by and large was to reject it in favor of doctrines like ‘expansionary austerity’—the unsupported claim that slashing government spending actually creates jobs—that made the situation worse rather than better. And this makes me a bit skeptical about Wolf’s proposals to avert ‘the fire next time.’ The Shifts and the Shocks… Wolf’s substantive proposals… are all worthy and laudable. But the gods themselves contend in vain against stupidity. What are the odds that financial reformers can do better?

Must-read: Lorcan Roche Kelly: “Today”

Posted on by Brad DeLong

Must-Read: It is likely to be an exciting day at the dog track!

Lorcan Roche Kelly: Today: “Chinese stocks close just 29 minutes after open…

…after the CSI 300 Index fell more than 7 percent. The selloff was sparked after the central bank cuts its yuan reference rate by the most since August…. The Stoxx Europe 600 Index slid as much as 3.6 percent, the most since August, before trading 3.2 percent lower at 10:40 a.m. in London. Germany’s DAX Index is trading below 10,000 for the first time since October…. Contracts on the Standard & Poor’s 500 Index slid 2.2 percent to 1,938 as of 10:50 a.m. in London. U.S. markets closed lower yesterday following the release of the Fed minutes from the December meeting which provided little clarity…. U.S. oil futures in New York slid to the lowest in 12 years with West Texas Intermediate dropping as much as 5.5 percent before trading down 2.5 percent at $33.12 a barrel at 11:13 a.m….

When and why might a “confidence” shock be contractionary? Karl Smith’s approach can bring insights

Posted on by Brad DeLong

When and why does the Confidence Fairy appear? The very sharp-witted Karl Smith has long had a genuinely-different way of looking at the national income identity. I think his approach can shed much light on this question. And it can also shed light on the closely related question of when and whether governments seeking full employment should greatly concern themselves with “confidence”.

Start with the household side of the circular flow of national income: national income Y is received by households, which use it to fund consumption spending C, savings S, and to pay taxes T:

(1) Y = C + S + T

Continue with the expenditure side: Aggregate spending Y–the same as national income–is divided into spending on consumption, investment, government purchases, and net exports:

(2) Y = C + I + G + NX

Substitute the right-hand side of the first for the left-hand side of the second, and subtract taxes T from both sides:

(3) S = I + (G-T) + NX

Now what do investment spending I, the government deficit G-T, and net exports NX have in common? They all require financing. Banks and shareholders must be willing to lend money to and allow firms to retain earnings to fund investment. The government must borrow to cover its deficit. Exporters must find financiers willing to lend their foreign customers dollars in order for them to buy net exports. Add all these three up and call them the amount of lending BL, “BL” for “bank lending”:

(4) BL = I + (G-T) + NX

So we then have:

(5) S = BL(i,π,ρ)

Here i is the nominal cost of funds to the banking sector–the thing the Federal Reserve controls. Here π is the expected inflation rate. And here ρ is an index of the effext of risk on bank lending, and is determined by the balance between the perceived riskiness of the loans made and the risk tolerance of the financial-intermediating banking sector.

Now equation (5) must be true: it is an identity. The level of national product and national income Y will rise to make it true. If something raises BL–either lower i, higher π, or lower ρ–for a given Y, then Y will rise so that S can rise to match BL. If something lowers S for a given BL, then Y will rise so that S can recover and continue to match BL.

This framework hides things that are obvious in the usual presentation, and brings to the forefront things that are usually hidden. As Karl writes:

[If] the government is… a good credit risk… a rise in government borrowing suddenly makes overall lending safer, and so the BL curve moves out.

Thus fiscal policy is indeed expansionary. But in Karl Smith’s framework fiscal policy is expansionary because lenders have more confidence in the government’s debts than in private-sector debts, and so funding government debt does not use up any scarce risk-bearing capacity. And, if we move into an open-economy framework, capital flight–a loss of confidence that diminishes net exports–is expansionary as long as banks have more confidence in the loans to foreigners they are making to fund net exports than in their average loan.

We can then see how fiscal policy might not be expansionary:

Governments which may directly default (rather than inflate) lose traction…. It is not at all clear that Greece can move the BL curve…

because it is not the case that additional debt borrowed by the government of Greece will raise the average quality of liabilities owed to the banking system.

And we can see how capital outflows–a loss of confidence–might not be expansionary: it is not that loans to foreigners will reduce the quality of liabilities owed to the banking system, for the exchange rage will move to make the loans to foreigners high-quality, it is the capital outflow carries with it a reduction in financial-intermediary risk-bearing capacity.

And we can see where the result of Blanchard et al. that capital inflows can be expansionary comes from: when they bring additional risk-bearing capacity into the economy and so raise financial-intermediary risk tolerance, they lower ρ, even with a constant quality of liabilities owed to the banking system.

Karl Smith’s approach requires that all factors affecting national income determination work through their effects on:

  • the desired savings rate,
  • the nominal opportunity cost of funds to the banking sector,
  • expected inflation,
  • the risk-tolerance of financial intermediaries, and, last,
  • the perceived quality of the liabilities owed to the banking sector.

This is a valid framework. And it is one in which concerns about “confidence” are brought to the forefront and highlighted in ways that they are not in the standard modes of presentation.

Must-reads: January 5, 2016

Posted on by Brad DeLong

#ASSA2016: Day 3 roundup

Posted on by David Hudson

The annual meeting of the Allied Social Science Associations concludes today in San Francisco. The conference features hundreds of sessions covering a wide variety of economics research. Interesting papers are all over the place, so below are some of the papers that caught the eyes of Equitable Growth staffers during the final day of the conference.

“Distributional National Accounts: Methods and Estimates for the United States, 1913-2013”

Abstract: This paper combines tax, survey, and national accounts data to build new series on the distribution of national income in the United States since 1913. In contrast to previous attempts, our “Distributional National Accounts” estimates capture 100% of national income recorded in the national accounts. This allows us to provide decompositions of growth by income groups consistent with total economic growth used in macroeconomic analysis. We compute both pre-tax and post-tax per adult incomes. We find an overall U-shape for pre-tax top income shares over the century 1913-2012, although less marked than the Piketty-Saez series. Growth for the bottom 90% incomes has been slower than for upper income groups since the 1970s. However, in contrast to survey and individual tax data, we find substantial increase in average real pre-tax incomes for the bottom 90% since the 1970s.

“Lifetime Inequality and Income Dynamics”

Abstract: In this paper we use data on the earnings histories of US workers that span their entire working life. These data come from administrative records and therefore does not suffer from problems typical in survey data (survey response error, attrition, top coding, etc.). Our paper makes two contributions. First, we document the evolution of lifetime inequality for 26 cohorts that entered the labor market between 1957 and 1982. We find that (i) inequality in lifetime earnings is much higher than what has been documented in the previous literature based on indirect methods, and (ii) the rise in inequality has been smaller than previously thought. The second contribution of our paper is to focus on top earners in this sample and estimate the dynamics of their earnings over the lifecycle. The resulting stochastic process for top earners should help guide research on the economic behavior of top earners and on top end inequality.

“Sovereign Default, Inequality, and Progressive Taxation”

Abstract: A sovereign’s willingness to repay its foreign debt depends on the cost of raising taxes. The allocation of this tax burden across households is a key factor in this decision. To study the interaction between the incentive to default and the distributional cost of taxes, I extend the canonical Eaton-Gersovitz-Arellano model to include heterogeneous agents, progressive taxation, and elastic labor supply. When the progressivity of the tax schedule is exogenous, progressivity and the incentive to default are inversely related. Less progressive taxes, and hence higher after-tax inequality, encourage default since the cost of raising tax revenue from a larger mass of low-income households outweighs the cost of default in the form of lost insurance opportunities. When tax progressivity is endogenous and chosen optimally, the government internalizes the influence of progressivity on default risk and the cost of borrowing. As such, committing to a more progressive tax system emerges as an effective policy tool to reduce sovereign credit spreads in highly indebted countries.

“College Quality and the Market for Higher Education”

Abstract: We use detailed data on student higher education choices, student loans, college matriculation and graduation as well as data on higher education admissions decisions and tuition to examine the impact of student loan programs the market for higher education in Chile. We show that institutions respond to increased demand from students from lower-income backgrounds very differently. Consistent with models of competition between prestige goods and a competitive fringe, selective institutions choose to increase price and increase selectivity, while less selective institutions hold price constant and expand enrollment substantially. We link these supply-side responses to estimated earnings returns by higher education degree, and discuss the implications for policies aimed at increasing equality of higher education outcomes through expanding student loan subsidies.

“Changing Business Dynamism: Volatility of or Responsiveness to Shocks?”

Abstract: The pace of business dynamism as measured by indicators such as job reallocation has declined in the U.S. in recent decades, but this decline has not been monotonic for all sectors. For the High Tech sector, business dynamism as measured by the pace of job reallocation rose through the 1990s but then declined sharply in the post-2000 period. This is in contrast with the Retail Trade sector, which exhibited a sharp decline in dynamism in the 1990s. In this paper we ask whether the observed patterns in the High Tech sector respond to changes in the volatility of idiosyncratic TFP shocks or rather the response of businesses to those shocks. We focus on the High Tech sector since it is an important sector for innovation and productivity growth. Using plant-level data from the High Tech U.S. manufacturing sector, we document rising dispersion in idiosyncratic TFP shocks across plants and little change in the persistence of such shocks. This suggests the patterns of rising and then declining reallocation are not being driven by changes in the volatility of shocks. Instead, we find changes in the marginal effects of idiosyncratic plant-level productivity shocks on growth and survival that mimic the patterns of reallocation in the High Tech sector. During the 1990s, the responsiveness of growth and survival increased in the High Tech sector for young businesses. In contrast, during the 2000s responsiveness declined because of accelerating decline in the responsiveness of both young and mature businesses. These changes in the responsiveness yield substantial changes in the contribution of reallocation to aggregate (industry-level) productivity growth. During the 1990s, the increased responsiveness yields an increase in the contribution of reallocation to productivity growth of as much as half a log point per year. During the post-2000 period, responsiveness declines in an accelerated fashion implying as much as a two log point per year reduction in the contribution of reallocation to industry-level productivity growth.

“Does Transparency Lead to Pay Compression?”

Abstract: This paper asks whether pay disclosure changes wage setting at the top of the public sector distribution. I examine a 2010 California mandate that required municipal salaries to be posted online. Among top managers, new disclosure led to approximately 7 percent average compensation declines, and a 75 percent increase in their quit rate. The wage cuts were largely nominal. Wage cuts were larger in cities with higher initial compensation, but not in cities where compensation was initially out of line with (measured) fundamentals. The response is more consistent with public aversion to high compensation than the effects of increased accountability.

Check out papers from the first and second days of the conference and come back over the next few weeks as we dig into all this new research.

Must-read: Martin Sandbu: “Free Lunch: On Models and Making Policy”

Posted on by Brad DeLong

Must-Read: Superb from the extremely sharp Martin Sandbu! Only three quibbles:

  1. There are indeed “three great economists” in the mix here, but their names are Summers, Krugman, and Blanchard…
  2. This isn’t really a conversation that would have taken place even in an academic setting. If I have ever been in the same room at the same time with Larry, Paul, and Olivier–let alone all of Olivier’s coauthors, Michael Woodford, Danny Vinit, and Lukasz Rachel and Thomas Smith–I cannot remember it. And discussions and exchanges in scholarly journal articles are formal and rigid in an unhelpful way.
  3. Do note that Keynes was on Summers’s side with respect to the importance of maintaining business confidence: cf.: General Theory, ch. 12, “The State of Long-Term Expectation”

Martin Sandbu: Free Lunch: On Models and Making Policy: “The internet has… open[ed] up to the public…

…discussions… that previously took place mostly in face-to-face gatherings or scholarly journal articles. Neither medium was particularly accessible….

Summers posted a characteristically succinct statement on why he disagreed with the Federal Reserve’s decision to begin tightening… His analysis is well worth reading in full, but the trigger of the ensuing debate was his explanation for why the Fed thinks differently: ‘I suspect it is because of an excessive commitment to existing models and modes of thought. Usually it takes disaster to shatter orthodoxy.’… DeLong expressed doubts that the Fed’s analysis was indeed compatible with existing models; Krugman asserted that conventional models straightforwardly showed the Fed to be in the wrong, and that… policy was driven… by… ‘a conviction that you and your colleagues know more than is in the textbooks’….

Summers then responded… showed a fascinating divergence…. DeLong and Krugman think the Fed erred by ignoring… models…. Summers thinks the Fed erred by ignoring things that such models do not capture…. Summers is also much more comfortable with the notion that policymakers should aim to underpin market confidence. That notion has often been derided by Krugman…. Two quotes rather nicely capture the methodological disagreement here. Summers writes: ‘I think maintaining confidence is an important part of the art of policy…. Paul is certainly correct in his model but I doubt that he is in fact.’ DeLong responds: ‘Larry, however, says: We know things that are not in the model. Those things make Paul’s claim wrong. My problem with Larry is that I am not sure what those things are.’…

What is a policymaker to do if she thinks this is the case in reality, even if no extant model captures it? Surely not wait for 30 years in the hope that new mathematical techniques enable economists to model that reality. In his willingness to listen to those who may have an untheoretical ‘feel’ for the market, and in his intellectual respect for the limits of his own knowledge, Summers comes across as the most Keynesian of these three…

#ASSA2016: Day 2 roundup

Posted on by Nick Bunker

The annual meeting of the Allied Social Science Associations started yesterday in San Francisco. The conference features hundreds of sessions covering a wide variety of economics research. Interesting papers are all over the place, so below are some of the papers that caught the eyes of Equitable Growth staffers during the second day of the conference.  

“Tax Evasion and Inequality”

Abstract: This paper proposes a method that combines macro and micro data to quantify and detect capital tax evasion in population-wide administrative data. At the macro level, we draw on official central bank data and recent leaks from a large Swiss bank to provide country-by-country estimates of the wealth hidden in offshore tax havens. We then attempt to allocate this wealth across individuals. We rely on samples of individuals who disclose previously hidden assets (e.g., in the context of a tax amnesty) and attempt to learn from the cross-border bank transfers made by the disclosers in order to detect the tax evaders who do not disclose themselves. We apply our method to a country with high-quality micro-data, Norway. We find that hidden wealth is extremely concentrated: more than half belongs to the top 0.01% richest households, and taking it into account erases half of the secular decline in wealth inequality seen when using tax data. Our results highlight the need to move beyond tax data to capture the true inequality of income and wealth, even in countries where tax compliance is thought to be high. Our method could be applied to improve tax collection and inequality statistics in a large number of countries where tax amnesty and bank transfer data are available to governments.

“Do Noncompetes Chill Employee Mobility?”

Abstract: We examine the nature of the relationship between noncompetition agreements and employee mobility. A noncompetition agreement (also known as a covenant not to compete, or simply as a noncompete) restricts the ability of an employee to work for a competitor (or start a competing business) after termination. These agreements are a remarkably common feature of the U.S. labor market across all industries, occupations, and income levels (Starr et al. 2015). Recent academic work and interest from policy makers has raised questions about the effects these agreements might have on an employee’s freedom to seek employment elsewhere. In this paper, we outline a basic model of employee mobility, and consider the potential consequences of noncompetes for the entire process of mobility. With this framework, and using data from the 2014 Noncompete Survey, we study how noncompetes are related to differences in search behavior, recruitment, job offers, and firm counteroffering behavior (separately studying technology and low-wage employees). We find that individuals with noncompetes are recruited and receive offers at relatively higher rates, and yet noncompetes are also associated with longer employment tenures. We consider some of the possible stories that would make sense of the patterns we identify.

“Use It or Lose It: Efficiency Gains from Wealth Taxation”

Abstract: This paper studies the quantitative implications of wealth taxation (as opposed to capital income taxation) in an incomplete markets model with return rate heterogeneity across individuals. The rate of return heterogeneity arises from the fact that some individuals have better entrepreneurial skills than others, allowing them to obtain a higher return on their wealth. With such heterogeneity, capital income and wealth taxes have different efficiency and distributional implications. Under capital income taxation, entrepreneurs who are more productive and, as a result, generate more income pay higher taxes. Under wealth taxation, on the other hand, entrepreneurs who have similar wealth levels pay similar taxes regardless of their productivity. Thus, in this environment, the tax burden would shift from productive entrepreneurs to unproductive ones if capital income tax were replaced with wealth tax. This reallocation increases aggregate productivity. Second, and at the same time, it increases wealth inequality in the population. To provide a quantitative assessment of these different effects, we build and simulate an overlapping generations model with individual-specific returns on capital income and idiosyncratic shocks to labor income. Our results indicate that switching from capital income tax to wealth tax can generate large welfare gains through better allocation of capital. We study optimal taxation by allowing exemptions and progressivity.

“Union Power and Inequality”

Abstract: We look at the role of labor market institutions in explaining the increase in both gross and net income inequality in advanced economies since the early 1980s. Our main finding is a surprisingly strong relation between the decline in union density and the rise in top decile income shares. The relation appears largely causal and suggests that unionization matters for income distribution through a multiplicity of channels. Our results also suggest that a reduction in the minimum wage relative to the median raises inequality.

“‘Twice as Hard for Half as Much’: Wealth Privilege and the Racial Wealth Gap”

Abstract: The racial wealth gap is a stark and pervasive piece of the American landscape. Unlike the frequently cited disparities in educational attainment, occupational status, and household income, the racial wealth gap looms wider as it has resisted any mitigation over the past 50 years. Despite this record, the primary economic model on wealth accumulation – the Life Cycle Hypothesis – has nothing to say on the subject. In this paper, I offer an alternative model, what I call the Wealth Privilege model. This model simply examines the primary pathways that households accumulate wealth: household saving, asset appreciation, and family gifts and inheritances. For those with means, each pathway operates as a virtuous cycle enabling families to build wealth with increasing ease. For those with little wealth, they experience the same pathways as vicious cycles that limit their capacity to accumulate wealth. These disparate experiences give rise to the growing concentration of wealth.

Check out yesterday’s papers here, and come back tomorrow for the final installment.