Category: Equitablog

Must-Read: Matthew Rognlie: What Lower Bound? Monetary Policy with Negative Interest Rates

Posted on by Brad DeLong

Must-Read: Matthew Rognlie: What Lower Bound? Monetary Policy with Negative Interest Rates: “Recently, several central banks have set interest rates as low as -0.75%… suggesting that, in practice…

…money demand remains finite even at negative nominal rates. I study optimal monetary policy in this new environment, exploring the central trade-off: negative rates help stabilize aggregate demand, but at the cost of an inefficient subsidy to paper currency. Near 0%, the first side of this tradeoff dominates, and negative rates are generically optimal whenever output averages below its efficient level. In a benchmark scenario, breaking the ZLB with negative rates is sufficient to undo most welfare losses relative to the first best. More generally, the gains from negative rates depend inversely on the level and elasticity of currency demand. Credible commitment by the central bank is essential to implementing optimal policy, which backloads the most negative rates. My results imply that the option to set negative nominal rates lowers the optimal long-run inflation target, and that abolishing paper currency is only optimal when currency demand is highly elastic.

Counterfactuals, quality, and the effects of prekindergarten

Posted on by Bridget Ansel
Photo of preschoolers, veer.com

Universal prekindergarten has become an increasingly popular policy proposal in recent years, thanks to widespread research on its long-term benefits. Many researchers—University of Chicago economist and Nobel laureate James Heckman, most prominently—have highlighted the positive gains later in life for children who attend high-quality prekindergarten programs. But a number of research papers published over the past several months have raised concerns about the effectiveness of these programs. A recent literature review of prekindergarten studies shows how important context is for understanding the effectiveness of these programs, and how the lessons from these studies can help policymakers improve early childhood education.

The literature review—by University of Chicago economists Sneha Elango, Jorge Luis Garcia, James Heckman, and Andrés Hojman—looks at a wide number of studies that examine the effects of early childhood education such as prekindergarten and child care. The economists also make one key distinction: Some programs are means tested, only serving children whose parents make less than a certain income. Other programs are universal, open to children of parents of any income. The effects of the different kinds of programs vary, as do the lessons we can draw from evaluations of them.

When it comes to means-tested programs, considering the counterfactual is king. Take, for example, Head Start—the federal government’s means-tested prekindergarten program, which has developed a reputation as an ineffective program due to the results of the Head Start Impact Study. This study by the U.S. Department of Health and Human Services examined how Head Start affected children participating in the program.

In the eyes of the University of Chicago economists, however, this evaluation suffered from its failure to correctly consider the counterfactual. Many children in the control group—those who didn’t get into Head Start—went to other early childhood education programs. When the effects of Head Start are compared relative to staying at home, the effects are quite significant. Compared to the experience of attending another program, however, the effect isn’t that large.

A similar consideration has to be made when interpreting the results of Tennessee’s voluntary prekindergarten program, from the previously cited research report by economists Mark Lipsey, Dale Farran, and Kerry Hofer of the Peabody Research Institute. Like Head Start, the Tennessee program was means tested, and the analysis found the results to be lackluster. So these evaluations say less about the absolute effectiveness of prekindergarten programs and more about the relative value compared to other programs.

The importance of relative value and the quality of the programs comes very much into play when discussing universal prekindergarten programs. Take a recent study looking at the effects of a universal program in Quebec. The analysis found increased rates of criminality and lower health for children with more access to child care programs.

Elango and her co-authors point out, however, that the program originally served only low-income children before expanding to become universal. But the child care being subsidized appears to have been below the quality of care children with higher-income parents would have received at home. Again, considering the counterfactual—the quality of the care given—imparts an important lesson.

The problem to tackle, then, is to figure out how to improve prekindergarten and early childhood education and daycare, and scale up the lessons gleaned from those programs. Previous research shows that the variation in Head Start center methods can help us figure out which aspects of the program are helpful. The benefits of a universal high-quality prekindergarten are immense, as Washington College economist Robert Lynch and Equitable Growth’s Kavya Vaghul outlined last week. Now, it’s just a matter of going out and ensuring those gains can be got.

Must-Read: AEI/Brookings Working Group on Poverty and Opportunity: Opportunity, Responsibility, and Security: A Consensus Plan for Reducing Poverty and Restoring The American Dream

Posted on by Brad DeLong

Must-Read: The “Report” of the AEI/Brookings Working Group on Poverty and Opportunity does not have a chair or a lead author–just fifteen names listed in alphabetical order: Lawrence Aber (Brookings), Sheldon Danziger (Russell Sage), Robert Doar (AEI), David T. Ellwood (Harvard), Judith M. Gueron (MDRC), Jonathan Haidt (New York University), Ron Haskins (Brookings), Harry J. Holzer (Georgetown), Kay Hymowitz (Manhattan Institute), Lawrence Mead (New York University), Ronald Mincy (Columbia), Richard V. Reeves (Brookings), Michael R. Strain (American Enterprise Institute), Jane Waldfogel (Columbia).

I have read through the report.

My first reaction is that Brookings (and Russell Sage, NYU, Georgetown, Columbia, and MRDC) would have done much, much better from an intellectual-technocratic point of view to partner for their working group not with AEI but with something like Demos or Roosevelt.

I really don’t see what any of the AEI/Manhattan people brought to the table that was useful–i.e., both true and relevant to policy. But the Report would, I think have been much strengthened by stronger and more thoughtful engagement with things like:

The only justification I can think of for the form this has taken is that partnering with AEI is bringing substantial political benefits–i.e., explicit endorsement of the Report by current Republican office-holders with the power to move things through the House and the Senate, to be followed by commitments and action on their part to actually move policies based on the report through the Congress. And I see none of that here.

Thus I find myself, at first reading, relatively disappointed with:

AEI/Brookings Working Group on Poverty and Opportunity: Opportunity, Responsibility, and Security: A Consensus Plan for Reducing Poverty and Restoring The American Dream

Must-reads: December 5, 2015

Posted on by Brad DeLong

Must-Read: Paul Krugman: Anchors Aweigh

Posted on by Brad DeLong

Must-Read: The answer, presumably, is the same as it was in the 1960s and 1970s: that “too big” a deviation from the anchored level of inflation for “too long” will de-anchor inflation, for weasel parameters “too big” and “too long”.

It has always seemed to me that if inflation expectations are “well anchored”, then monetary policy is obviously too tight. There are very powerful upsides from a higher-pressure economy. There are no downsides unless inflation expectations are barely-anchored–in which case a higher-pressure economy runs the risk of de-anchoring them, with associated costs. But with well-anchored inflation expectations there is a substantial amount of slack somewhere in the policy-optimization problem. And no professional economist should be happy or comfortable with such an outcome.

Paul Krugman: Anchors Away: “Since 2008… demand-side events have been very much what people using IS-LM would have predicted (and did)…

…But on the supply side, not so much…. Model-oriented public officials and research staff at policy institutions… [now] say… they work with… ‘anchored’ expectations… [which] don’t change their expectations in the face of recent experience… like the old, pre-NAIRU Phillips curves people estimated in the 1960s. And… such curves fit pretty well on data since 1990….

Where does anchoring come from and how far can it be trusted? Is it the consequence of central bank credibility, or is it just the consequence of low inflation?… Second… the anchored-expectations hypothesis tells a very different story about capacity and policy…. Let me illustrate this point with the case of the euro area…. Euro core inflation is currently about 1 percent; the slope of the Phillips relationship is around 0.25; so getting back to 2 should require a 4 percentage point fall in unemployment. That’s a lot! How much output growth would this involve?… This naive calculation puts the euro area output gap at 8 percent, which is huge. Should we take this seriously? If not, why not?

Anchors Away Slightly Wonkish The New York Times

http://krugman.blogs.nytimes.com/2015/12/04/anchors-away-slightly-wonkish/

Weekend reading

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

Quite a few researchers have had their eyes on the decline in the U.S. labor force participation rate since 2000. A number of factors seem responsible for the decline, but a new report from the Organisation for Economic Co-operation and Development highlights one policy that could help reverse the trend: paid leave. Bridget Ansel looks at the promise of the policy.

With research showing the low level of intergenerational mobility in the United States, policymakers and researchers are looking for ways to boost mobility for children from low-income backgrounds. Seems as though simple cash transfers to parents may help, Bridget Ansel reports.

The explosion in student debt in the United States over the past decade has been widely reported and has spurred research into the consequences of this phenomenon. Marshall Steinbaum and Kavya Vaghul share their analysis of a new dataset on the geography of student debt.

Universal prekindergarten has become an increasingly popular policy proposal for dealing with low levels of economic mobility, slowing economic growth, and high levels of inequality. In a new report, Robert Lynch and Kavya Vaghul calculate the costs and benefits of a nationwide high-quality universal prekindergarten program.

As for those costs and benefits, Austin Clemens, Robert Lynch, and Kavya Vaghul created interactive maps and graphs to show the state-by-state effects of a universal pre-K program.

The global corporate income tax system has a problem with “stateless income” and profit shifting across borders. The Group of 20 and the Organisation for Economic Co-operation and Development recently released new proposals for combating this problem. They are good first steps to bring more corporate profits into the light, but they may not be enough.

Inequality is not a monolithic concept. While the inequality of wages among U.S. workers has increased, another form of inequality—the share of income going to labor instead of capital—has declined. Which trend has contributed more to rising household income inequality? Looks like wage inequality. But who knows about the future.

Wage and earnings growth in the United States has been far from strong since the Great Recession. But how much do these trends differ by what kind of job a worker has? Austin Clemens built a few interactive graphs to let you see the trends for yourself.

The U.S. unemployment rate has been on the decline for several years now, but the employment rate has been essentially stagnant. Some analysts argue that the aging of the workforce can explain most of this decline, but Ben Zipperer shows that the decline is due primarily to non-demographic reasons.

Links from around the web

For many years, the predominant explanation for the rise in income inequality in the United States was a hypothesis called “skill-biased technological change.” In essence, increasing demand for skills supposedly pushed up the wages of skilled workers. Paul Krugman argues, however, that this is no longer a good explanation and that the focus should shift to changes in market power. [nybooks]

Increased intergenerational transmission of wealth through inheritance is one of the concerns about rising wealth inequality in the United States. But we can’t look at that concern in isolation—wealth inequality and inheritance in the United States can’t be separated from race, says Mel Jones. [the atlantic]

Economists always assumed that nominal interest rates could only go as low as zero percent. But the last few years have shown that if there is a lower bound for interest rates, it isn’t at zero. Neil Irwin looks at what negative interest rates being the new normal means for the economy. [the upshot]

No one will deny that it’s difficult to project what will happen to the economy, or even parts of it. But when predictions go south, they can provide good learning opportunities. Betting that demographics would predict housing prices, for example, ended up being a bad idea, as Matthew C. Klein shows. [ft alphaville]

Productivity usually results in economies increasing the amount of capital per worker. But in the United States, capital per worker seems to have declined from 2011 to 2013. Dietz Vollrath digs into the data to try to understand why capital investment per capita declined. [growth economics]

Friday figure

Figure from “An introduction to the geography of student debt” by Marshall Steinbaum and Kavya Vaghul.

What’s aging got to do with the U.S. labor market recovery?

Posted on by Bridget Ansel

The U.S. economy added 211,000 jobs in November, according to employment data released today by the U.S. Bureau of Labor Statistics. The employed share of the nation’s population in their prime working years (ages 25 to 54) jumped to 77.4 percent but still remains below healthy levels. One oft-cited explanation for the low overall employment rate—the aging of the U.S. population—does not satisfactorily explain the slow labor market recovery.

Hourly wages for private-sector workers in the United States grew by 2.3 percent at an annual rate last month—well below a goal of at least 3.5 percent, which is consistent with long-term productivity growth and inflation targets. As has been true every month this year, production and non-supervisory workers saw smaller pay increases, at an annual rate of 2.0 percent, suggesting rising wage inequality. Wages grew somewhat faster in retail industries (2.7 percent) and the leisure and hospitality sector (2.6 percent), which includes restaurants. Retail-sector and restaurant wage increases this year are primarily a consequence of minimum wage increases, political pressure, and an improving labor market.

Wage increases in restaurants have been running faster than price increases in that sector, as some commentators have noted. But even if pay raises for restaurant workers are fully passed onto consumers, we should still expect the price inflation resulting from these wage changes to be smaller than underlying pay increases because labor is not the only cost of business. In restaurants, labor makes up roughly one-third of total business costs, so a 10.0 percent increase in wages would only result in a 3.3 percent increase in prices. The final price increase could be closer to just 1.0 percent if the 10.0 percent wage increase was only for minimum-wage workers, since less than 30 percent of workers in the restaurant industry earn near the minimum wage.

Turning to employment, establishment survey data from the Bureau of Labor Statistics showed that, with the addition of 211,000 jobs in November, the U.S. economy has added an average of about 218,000 jobs over the past three months. Monthly job growth this year has averaged about 210,000, slower than the average of 260,000 last year. Most of the job growth last month occurred in construction (46,000) restaurants (33,000), and health care and social assistance (32,000). The overall unemployment rate remained at 5.0 percent, after falling by 0.7 percentage points so far this year. In a notable change last month, the employed share of the prime-age population (ages 25 to 54) rose 0.2 percentage points to 77.4 percent, but this is the first time the rate has moved above its value of 77.3 percent in February. In the absence of much higher employment rates for the prime-age population, we are unlikely to see sustained, broad-based wage growth.

Some argue that the failure of employment rates to return to their pre-recession levels despite the long-term drop in the unemployment rate is due to demographic changes, not the weakness of the recovery. As Baby Boomers age and retire, they are naturally less likely to be employed, pushing down the overall employment rate. But demographic changes are not a plausible explanation for the weak employment recovery following the Great Recession. Although the aging of the U.S. workforce does mechanically lower the overall employment rate, demographic changes play a relatively inconsequential role for the employment of prime-age individuals—a group that has also seen only a partial rebound in employment during the recovery. (See Figure 1.)

Figure 1

A simple way to determine how much demographic changes have lowered employment is to assume the U.S. population today has the same age, sex, and racial structure as it did in 2000, and to use each of these groups’ current employment rates. The overall employment-to-population ratio for those aged 16 and older fell from its high point of 64.5 percent in 2000 to 59.2 percent last year. Had demographics not changed since 2000, the rate would have fallen to 61.3 percent, so demographic changes account for about 40.1 percent of the fall in the overall employment rate.

Just as for the overall workforce, the unemployment rate for prime-age workers also fell sharply during the recovery. In late 2009, the unemployment rate for prime-age workers hit 9.0 percent but has since decreased by more than half to 4.3 percent as of last month. Even with this fall in unemployment, however, the employed share of prime-age workers (77.4 percent) is currently still below its trough of 78.6 percent after the 2001 recession.

Yet demographic changes have little to do with the fall in the employed share of the prime-age population. Aging is the most important demographic change for employment, and employment rates do not vary as much by age group for those in their prime working years. In fact, the prime-age employment rate in 2014 would have been less than 0.7 percentage points higher in the absence of changes in the population structure despite falling by nearly 4.8 percentage points since 2000. This means only 13.6 percent of the fall in the prime-age employment rate since 2000 is due to demographic changes.

Prime-age workers stopped participating in the labor force during a weak labor market, indicating that there is plenty of room for the labor market to improve before truly tightening.

Must-Read: Robert Lynch and Kavya Vaghul: Benefits and Costs of Investing in Early Childhood Education

Posted on by Brad DeLong

Must-Read: Robert Lynch and Kavya Vaghul: Benefits and Costs of Investing in Early Childhood Education: “A case for public investment in either a targeted or a universal prekindergarten program…

…can be made with the best policy depending in part on whether a higher value is placed on the ratio of benefits to costs (which are higher for a targeted program) or the total net benefits (which are higher for a universal program)…. If public funds are limited, a targeted program may be more attractive…. If a larger priority is placed on narrowing the achievement gap between children from low-income and upper-income families than on promoting economic growth, then the targeted program may be more effective…. A universal prekindergarten program… is likely to generate greater future economic growth…. In addition, children who are not eligible for a targeted program can benefit from high-quality pre-K, and targeted programs frequently fail to reach many of the children they are designed to serve…

Must-Read: Camilla Toulmin: Time [for Bjorn Lomborg] to Walk Away from Once Credible Theories Now Shown to Be Untrue

Posted on by Brad DeLong

Camilla Toulmin: Time [for Bjorn Lomborg] to Walk Away from Once Credible Theories Now Shown to Be Untrue: “Sir, Bjorn Lomborg’s analysis of emission-cutting pledges made by rich and poor countries…

…before the current UN climate summit in Paris has been comprehensively discredited, yet he continues to flog a dead horse and the Financial Times, surprisingly, continues to print articles based on it…. The Paris pledges show they have the potential to keep the global temperature rise over the coming century to about 2.7C, rather than the 4-5C that would result from unconstrained fossil fuel burning. Yes, implementing the pledges will cost money; but again, properly conducted economic analyses suggest the costs of not doing this would be far higher, even in strictly economic terms…. I can tell Dr Lomborg that he does not speak for the majority in the developing world. Many developing countries are already building a low-carbon economy. They plan to skip the carbon-intense phase from which more developed nations are endeavouring to escape. Every developing country is present at the Paris talks and most are actively working towards an ambitious agreement, because they see it as squarely in their national interest. Through history, occasions arise when once-credible theories are shown to be untrue. It is not easy for proponents to admit as much. Dr Lomborg has had a good run with his theory that tackling climate change would harm developing countries. But it is now time for him to walk away and admit that he was wrong, because reality has now demonstrably left him behind.