Category: Equitablog

Must-Reads Up to the Morning of December 8, 2015

Posted on by Brad DeLong
  • Manuel Funke, Moritz Schularick, and Christoph Trebesch: The Political Aftermath of financial Crises: Going to Extremes: “Far-right parties are the biggest beneficiaries…”
  • Paul Krugman: That 30s Show: “Europe’s underperformance is slowly eroding the legitimacy, not just of the European project, but of the open society itself…” :: As John Maynard Keynes wrote 80 years ago…. “It may be possible by a right analysis of the problem to cure the disease while preserving efficiency and freedom…”
  • Ramez Naam: Why Energy Storage is About to Get Big–and Cheap
  • Lawrence Summers: Central Bankers do Not Have as Many Tools as They Think: “The unresolved question that will hang over the economy is how policy can delay and ultimately contain the next recession. It demands urgent attention” :: A government that does not only fail to work to generate high-pressure now, but also lacks a plan for fighting the next recession…
  • Jason Furman on residential housing supply, NIMBYism, and economic growth
  • Martin Longman: We’ve Grown Apart: “There are some ways in which MSNBC and Fox News are mirror images of each other… devoted to making the other party look bad. But Fox News is also committed to making blacks look bad…’ :: [Perhaps] this is a good sign… that racial prejudice is no longer assumed and presumed…

Must-Read: Manuel Funke, Moritz Schularick, and Christoph Trebesch: The Political Aftermath of financial Crises: Going to Extremes

Posted on by Brad DeLong

Must-Read: Manuel Funke, Moritz Schularick, and Christoph Trebesch: The Political Aftermath of financial Crises: Going to Extremes: “Far-right parties are the biggest beneficiaries…

…of financial crises, while the fractionalisation of parliaments complicates post-crisis governance. These effects are not observed following normal recessions or severe non-financial macroeconomic shocks.

The consequences of unskewed U.S. business growth

Posted on by Bridget Ansel
Photo by iofoto, veer.com

Over the past couple of years, economists, analysts, and policymakers have started paying more attention to declining business dynamism—the rate at which new American businesses are started—in the United States. This decline has come among a variety of other downturns in the creation, destruction, and growth of American businesses.

The consequences of these trends can be pretty unsettling for anyone concerned about the growth of the U.S. economy—and we now have new concerns to add to that list. Recent research shows that the fastest-growing firms that were at the root of U.S. job creation in recent decades have slowed down since 2000. And this trend is very much present in the high-tech, “Silicon Valley” industries that are often heralded as the future of the U.S. economy.

This new research comes from a National Bureau of Economics Research working paper released yesterday by economists Ryan A. Decker of the Federal Reserve Board, John Haltiwanger of the University of Maryland, and Ron S. Jarmin and Javier Miranda of the U.S. Census Bureau. The paper covers a wide ground, but its main contribution is focusing on the changing distribution of growth among U.S. businesses. Decker and his co-authors examine how the growth rate of the firm at the 90th percentile of job growth has changed over time compared to the growth rate of the median firm (in the exact middle of the distribution) and the firm at the 10th percentile.

For several decades, the distribution of firm growth was positively skewed—the gap between the growth rates for the 90th percentile and the median was larger than the gap between the median and the 10th percentile. In other words, the firms leading in job growth were far ahead of the pack. But according to Decker and his team, in 1999, the 90th percentile to 50th percentile gap was 16 percent larger than the 50th to 10th gap. By 2007, the last year before the Great Recession, this gap was only 4 percent. And by 2011, the last year under study, essentially all the skewness was gone.

Furthermore, the decline in the gap between the 90th percentile and the median was due to a large decline in the speed at which firms at the 90th percentile grew. The “gazelle” firms don’t run as quickly as they once did. The decline is partly due to a declining number of startups, but it’s also because the young firms that do exist aren’t growing as fast as previous startups did. We have fewer startups, and those that exist grow slower. The result is that, since 2000, the U.S. economy is getting fewer jobs from startups and fast-growing new firms.

It’s possible that this trend could exist only in one sector or one group of them. But Decker and his co-authors show that the trend is prevalent in many firms, including the kind of high-tech firms that exist in the vaunted Silicon Valley. At the same time, the rate of growth for leading firms among those that are publicly listed has also been on the decline. This has happened as the number of public firms has been on the decline in the United States.

The ramifications of these trends are fairly significant. Young, fast-growing firms have long been a source of job growth and productivity growth in the United States—and slower job growth is clearly something the United States could do without. The declining growth rate of leading firms might also explain, in part, the collapse of the job ladder. If there are fewer jobs at faster-growing firms that need to hire workers, that would reduce the amount of job-to-job transitions. And other research has shown how a greater share of older firms in the economy could help explain the jobless recoveries of the 21st century.

The declining dynamism of U.S. firms was apparent before the release of this new paper, but now its severity is even starker. The root of this trend and others related to it, however, is not well understood. Getting to the core of this slowdown will take time, effort, and research.

Must-Read: Paul Krugman: That 30s Show

Posted on by Brad DeLong

Must-Read: As John Maynard Keynes wrote 80 years ago:

It is certain that the world will not much longer tolerate the unemployment which, apart from brief intervals of excitement, is associated… with present-day capitalistic individualism. But it may be possible by a right analysis of the problem to cure the disease while preserving efficiency and freedom…

But not with European orthodox policymakers and establishment elites who appear clueless with respect to what the real stakes are here:

Paul Krugman: That 30s Show: “A few years ago de Bromhead, Eichengreen, and O’Rourke looked…

…at the determinants of right-wing extremism in the 1930s. They found…

what mattered was not the current growth of the economy but cumulative growth or, more to the point, the depth of the cumulative recession. One year of contraction was not enough to significantly boost extremism, in other words, but a depression that persisted for years was.

How’s Europe doing?… And now the [French] National Front has scored a first-place finish in regional elections…. Economics isn’t the only factor; immigration, refugees, and terrorism play into the mix. But Europe’s underperformance is slowly eroding the legitimacy, not just of the European project, but of the open society itself…

Alan de Bromhead, Barry Eichengreen, and Kevin Hjortshøj O’Rourke (2012): Right-Wing Political Extremism in the Great Depression: “The enduring global crisis is giving rise to fears that economic hard times will feed political extremism…

…as it did in the 1930s…. The danger… is greatest in countries with relatively recent histories of democracy, with existing right-wing extremist parties, and with electoral systems that create low hurdles to parliamentary representation of new parties. But above all, it is greatest where depressed economic conditions are allowed to persist.

Must-Read: Larry Summers: Central Bankers Do Not Have as Many Tools as They Think

Posted on by Brad DeLong

Must-Read: As John Maynard Keynes famously wrote, a government dedicated to producing a high-pressure economy is needed to enable entrepreneurship, enterprise, and growth. A government that does not only fail to work to generate high-pressure now, but also lacks a plan for fighting the next recession, is a government that drives the Confidence Fairy far away indeed:

Lawrence Summers: Central Bankers do Not Have as Many Tools as They Think: “It is agreed that the ‘neutral’ interest rate…

…has declined substantially and is likely to be lower in the future than in the past throughout the industrial world because of a growing relative abundance of savings relative to investment…. Neutral real interest rates may well rise over the next few years…. This is what many expect…. [But a] number of considerations make me doubt the US economy’s capacity to absorb significant increases in real rates over the next few years… leav[ing] me far from confident that there is substantial scope for tightening in the US and there is probably even less scope in other parts of the industrialised world. The fact that central banks in countries, including Europe, Sweden and Israel, where rates were zero found themselves reversing course after raising rates adds to the cause for concern.

But there is a more profound worry…. Once a recovery is mature the odds of it ending within two years are about half…. When recession comes it is necessary to cut rates more than 300 basis points. I agree with the market that the odds are the Fed will not be able to raise rates 100 basis points a year without threatening to undermine recovery…. [Thus] the chances are very high that recession will come before there is room to cut rates enough to offset it. The knowledge that this is the case must surely reduce confidence….

The unresolved question that will hang over the economy is how policy can delay and ultimately contain the next recession. It demands urgent attention from fiscal as well as monetary policymakers.

The Keynes quote, from the General Theory:

If effective demand is deficient… the individual enterpriser who seeks to bring… resources into action is operating with the odds loaded against him. The game of hazard which he plays is furnished with many zeros…. Hitherto the increment to the world’s wealth has fallen short of the aggregate of positive individual savings; and the different eras been made up by the losses of those whose courage and initiative have not been supplemented by exceptional skill or unusual goo fortune. But if effective demand is adequate, average skill and average good fortune will be enough….

It is certain that the world will not much longer tolerate the unemployment which, apart from brief intervals of excitement, is associated… with present-day capitalistic individualism. But it may be possible by a right analysis of the problem to cure the disease while preserving efficiency and freedom…

Marginal Notes on Janet Yellen’s Footnote 14

Posted on by Brad DeLong

The answer to the last point Janet Yellen makes in her famous Footnote 14 is:

  • If is indeed the case that targeting an inflation rate of 4%/year “stretch[es] the meaning of ‘stable prices’ in the Federal Reserve Act”, then targeting an inflation rate of 2%/year does not stretch the meaning of but rather eliminates the “maximum employment” objective in the Federal Reserve Act. Congress has left the Federal Reserve freedom to deal as best as it can with an imperfect world in which all of the statutory objectives cannot be achieved perfectly. It is the Fed’s choice how to balance.

The answers to her other points are:

  • If it is indeed that case that “changing the FOMC’s long-run inflation objective would risk calling into question the FOMC’s commitment to stabilizing inflation at any level…” failing to change does not risk but does call into question the FOMC’s commitment to maximum employment and to financial stability as well.

  • If it is indeed that case that “it is not obvious that a modestly higher target rate of inflation would have greatly increased the Federal Reserve’s ability to support real activity…” it is still the case that a higher inflation target allows the Federal Reserve to achieve the same degree of monetary ease measured in terms of real interest rates without putting nearly as much adverse and unfortunate pressure on the commercial banking system’s finances. A Federal Reserve that seeks–as it should–to both use monetary policy to support increased real activity as well as avoid putting undue destructive pressure on the commercial banking sector should welcome the additional sea room provided by a higher inflation target, even if the benefits from lower real interest rates in terms of supporting real activity are only modest.

  • If it is indeed the case that the Federal Reserve is confident that it can “use large-scale asset purchases and other unconventional tools to mitigate the costs arising from the ELB constraint…” the Federal Reserve is unique in being the only organization of economists that possesses such confidence.

  • And, last, it is indeed the case that the “earlier analyses of ELB costs” that underpinned the decision to adopt 2%/year as an inflation target “significantly underestimated the likelihood of severe recessions and slow recoveries of the sort recently experienced…” A policy choice substantially based on the wrong assumptions is highly likely to be exchanged at some point for one based on the right assumptions. And the sooner the shift is made, the better–both in terms of avoiding the costs of having bad policy, and avoiding the costs of uncertainty and lack of credibility generated by claiming a credible commitment to permanently pursue a not-very-credible policy.

Janet Yellen: Footnote 14: “Blanchard, Dell’Ariccia and Mauro (2010), among others…

…have recently suggested that central banks should consider raising their inflation targets, on the grounds that conditions since the financial crisis have demonstrated that monetary policy is more constrained by the effective lower bound (ELB) on nominal interest rates than was originally estimated. Ball (2013), for example, has proposed 4 percent as a more appropriate target for the FOMC. While it is certainly true that earlier analyses of ELB costs significantly underestimated the likelihood of severe recessions and slow recoveries of the sort recently experienced in the United States and elsewhere (see Chung and others, 2012), it is also the case that these analyses did not take into account central banks’ ability to use large-scale asset purchases and other unconventional tools to mitigate the costs arising from the ELB constraint.

In addition, it is not obvious that a modestly higher target rate of inflation would have greatly increased the Federal Reserve’s ability to support real activity in the special conditions that prevailed in the wake of the financial crisis, when some of the channels through which lower interest rates stimulate aggregate spending, such as housing construction, were probably attenuated. Beyond these tactical considerations, however, changing the FOMC’s long-run inflation objective would risk calling into question the FOMC’s commitment to stabilizing inflation at any level because it might lead people to suspect that the target could be changed opportunistically in the future. If so, then the key benefits of stable inflation expectations discussed below–an increased ability of monetary policy to fight economic downturns without sacrificing price stability–might be lost.

Moreover, if the purpose of a higher inflation target is to increase the ability of central banks to deal with the severe recessions that follow financial crises, then a better strategic approach might be to rely on more vigorous supervisory and macroprudential policies to reduce the likelihood of such events. Finally, targeting inflation in the vicinity of 4 percent or higher would stretch the meaning of ‘stable prices’ in the Federal Reserve Act…

Must-Read: Jason Furman: on Residential Housing Supply, NIMBYism, and Economic Growth

Posted on by Brad DeLong

Must-Read: Jason Furman on residential housing supply, NIMBYism, and economic growth:

Nick Timiraos: Why White House Economists Worry About Land-Use Regulations: “White House economic advisers have produced a steady diet of white papers this year…

…Their latest target: land-use restrictions. Housing is growing less affordable because there’s more demand for rental and, increasingly, owner-occupied housing, but little new supply…. [Some] cities make things worse with zoning and other land-use restrictions that discourage production, said Jason Furman…. Peter Ganong and Daniel Shoag… examines the slowdown in income convergence… more common in states during the 1960s and 1970s regardless of constraints on housing supply. By the 1990s, states with more constrained housing supplies saw far less income convergence than those with less constrained housing supplies…. Only high-income workers can afford to relocate to those high-productivity cities that have tighter land-use regulations…

Must-Read: Paul Krugman: The Not-So-Bad Economy

Posted on by Brad DeLong

**Must-Read: Mark Thoma sends us to Paul Krugman on the Fed’s forthcoming likely policy mistake with respect to this month’s interest-rate liftoff. My take: there is one chance in two that in June of 2018 the Federal Reserve will be wishing it had not raised interest rates in December 2015–it is, of course, unable to effectively catch up in policy terms:

Paul Krugman: The Not-So-Bad Economy: “I believe that the Fed is making a mistake…

…But the fact that hiking rates is even halfway defensible is a sign that the U.S. economy isn’t doing too badly. So what did we do right?… The Fed and the White House have mostly worried about the right things. (Congress, not so much.) Their actions fell far short of what should have been done…. But at least they avoided taking destructive steps to fight phantoms…. Meanwhile, on the other side of the Atlantic, the European Central Bank gave in to inflation panic, raising interest rates twice in 2011–and in so doing helped push the euro area into a double-dip recession….

Unfortunately, the U.S. ended up doing a fair bit of austerity too, partly driven by conservative state governments, partly imposed by Republicans in Congress via blackmail over the federal debt ceiling. But the Obama administration at least tried to limit the damage.
The result of these not-so-bad policies is today’s not-so-bad economy…. Things could be worse.

And they may indeed get worse, which is why the Fed’s likely rate hike will be a mistake…. I’m not sure why this [asymmetric risks] argument, which a number of economists are making, isn’t getting much traction at the Fed. I suspect, however, that officials have been worn down by incessant criticism of their policies, and want to throw the critics a bone. But those critics have been wrong every step of the way. Why start taking them seriously now?