Category: Equitablog

Must-Read: Greg Sargent: Freedom Frauds

Posted on by Brad DeLong

Must-Read: Greg Sargent: Freedom Frauds: “David Brooks is getting a lot of positive attention today for this column…

…in which he dissolves into despair and anxiety over what has become of today’s ‘radical’ and ‘ungovernable’ Republican Party…. All of this is well and good as far as it goes. But I think it neglects one of the most plausible explanations for what’s happening: A lot of what we’re seeing today may not be the result of the radicalized faction’s ‘incompetence,’ but rather the result of its fraudulence and hucksterism…. It isn’t that [the Tea Party are] too incompetent to realize that these [shutdown-threatening] tactics [will] fail. Rather… they [keep] alive the charade for far too long that these tactics would ultimately force Democrats to surrender… not… frauds… getting… to continue telling the story they want to tell.

The importance of low U.S. interest rates in the long run

Posted on by Bridget Ansel

Mention U.S. interest rates today, and the focus will almost certainly turn to the short term. The Federal Reserve is having an important debate about when to raise the federal funds rate, the central bank’s key short-term interest rate, from zero percent. The debate is incredibly important as it will help determine our expectations for the pace of U.S. economic growth, how low the nation’s unemployment rate can go, and the strength of U.S. wage growth.

With that said, it’s also helpful to step back and take a look at how the trajectory of long-term interest rates has shifted, why that has happened, and what it means for the U.S. economy.

While short-term interest rates have been incredibly low in recent years, long-term rates have been on the decline for several decades. Many economists have interpreted this as a decline in the “natural rate of interest,” or the long-run interest rate that would have the economy fully utilizing both labor and capital.

A few months ago, the President’s Council of Economic Advisers released a report looking through potential reasons why the long-term rates have declined so much. The council notes that some of the forces currently pushing down long-term rates are fleeting and should dissipate. They include the fiscal and monetary policies taken to fight the Great Recession, and the private-sector pull back on debt in the wake of that sharp 2007-2009 downturn.

But there are also forces that appear to be more permanent—forces that all result in the supply of savings growing faster than the demand for investment. (The interest rate, remember, is the “price” of loanable funds that balances the amount of funds that savers supply and that investors demand.) These forces include declining long-run productivity growth, slower population growth across the globe, and increasing savings rates by developing and now developed countries—the so-called “global savings glut.”

As University of Chicago economist John Cochrane points out, economics has a good grasp on how these different factors can push down long-term interest rates. What the field isn’t good at, however, is understanding just how much each factor contributes to the decline. Cochrane notes that the Council of Economic Advisers report cites many estimates of the different effects, and they can differ by quite a bit. While there’s strong evidence for the importance of these different effects, the precision just isn’t there. There’s a reason why the report notes that the question of why rates are so low is “one of the most difficult questions facing macroeconomists today.”

This question about the long run actually has implications for the short run as well. Vasco Cúrdia of the Federal Reserve Bank of San Francisco took a look at estimates of short-run and long-run natural rates of interest. His model shows that the current short-term rate, while zero, is still above its natural rate, which is closer to negative 2.5 percent. And looking at how the model projected the path of natural rates with previous data, Cúrdia shows that the model has expected the rate to jump up to its long-run level soon. But it hasn’t yet.

Given this uncertainty about the current natural rate, perhaps the central bank could wait to get more certainty about the health of the economy. With the long-term rate much lower, perhaps the climb won’t be that long. Waiting might not mean such a steep hike.

Noted for the Evening of October 14, 2015

Posted on by Brad DeLong

Must- and Should-Reads:

Might Like to Be Aware of:

Conventional, one-dimensional policies will not reverse U.S. income inequality growth

Posted on by Bridget Ansel

A new paper from Brookings highlights why the magnitude of inequality makes even a big move on taxes seem small

A recent paper from The Brookings Institution examines the effect that raising the top marginal U.S. personal income tax rate to 50 percent, and some variations on that theme, would have on income inequality. The authors, economists Bill Gale of Brookings, Melissa Kearney of the University of Maryland, and Peter Orszag, a non-resident fellow at Brookings and a vice chairman at Citigroup Inc., conclude that the effect on inequality would be “exceedingly modest.” They end their paper by suggesting that such results mean that we need to look outside tax policy if we want to address inequality. I take a different lesson from their analysis. What I see is that if one really wants to reverse the rise in inequality then the economic interventions will have to be very large, whether the lever is taxes or any other area.

Gale, Kearney, and Orszag don’t publish the change in the effective rate on the top 1 percent of their simulated tax change, but it is certainly in the single digits. In other words, it reduces the after-tax income for this top group by a few percent. Given that the gap in average income between the best-off 1 percent and the middle 20 percent has risen by over 300 percent since 1979, it isn’t surprising that taking 4 or 5 percent of the top group’s income through a tax hike isn’t going to put much of a dent in inequality. Gale, Kearney and Orszag characterize their modeled tax increase as “significant.” But that begs the question: “significant relative to what?”

The problem here isn’t necessarily the size of the dent, it’s the size of what they’re trying to put a dent in. Income inequality has gotten to the point where getting back to the distribution of income that existed in 1979 would require transferring more than $1 trillion from the top income groups to the rest of the income spectrum (a fact the authors allude to in a follow-up piece). To accomplish this just through the tax system would be a significant undertaking. The effective rate on the top 1 percent would need to rise by 40 percentage points—a cool tripling of their income tax burden—with all that revenue redistributed to the bottom 95 percent. Even getting back to the 1989 income distribution would require a 25 point increase in the top 1 percent effective rate. Getting to 1999 would require a 13-percentage point increase.

It’s easy to dismiss these tax increases as unrealistic. But using any other single policy faces the same hurdle. It may be more difficult to calculate what would be needed in terms of improved education, or building infrastructure, or profit sharing incentives, or Wall Street regulation, or job training, or apprenticeship programs to substantially reverse the rise in inequality over recent decades. But if the brute force method of redistributing through the tax system would require gargantuan change, then none of these other more indirect methods are likely to achieve results any easier.

Of course, there may be non-tax approaches that re-jigger the U.S. economy in a way to target the benefits of growth differently that would build on themselves over time more so than just after-tax redistribution—any of the list above might qualify. But given the magnitude of the undertaking, it’s hard to see how that could be successful with anything but a set of interventions that are, in total, very dramatic.

Bottom line? I’ve long thought that the solutions being offered to address income inequality in the United States are not at the scale needed to actually reverse the trends of recent decades. This little exercise convinces me of it.

—Michael Ettlinger is the director of the University of New Hampshire’s Carsey School of Public Policy and previously a senior director at The Pew Charitable Trusts and vice president of economic policy at the Center for American Progress.

A note on methodology

My calculations estimate what would be required to redistribute the 2007 distribution of income to match that of 1979, 1989 and 1999. I used the 2007 distribution because the Congressional Budget Office data only go to 2011, when the very top income earners were still suffering from the impact of the Great Recession. The Dow didn’t return to its pre-recession levels until 2013 and is now 20 percent higher. Also, other preliminary analyses have us approaching 2007 levels of inequality as of 2014. So 2007 is a good proxy for now. It’s worth noting that even as of 2011, the gap between the top 1 percent and the middle 20 percent of income earners had tripled since 1979, an effective tax rate increase of 26 percent on the top 1 percent would be required to get back to the 1979 distribution, which would result in $500 billion being redistributed.

 

 

The measured Angus Deaton wins the Nobel Prize

Posted on by Nick Bunker
Photo of Angus Deaton by Mel Evans for AP

Many pixels have been spilled in recent days explaining and analyzing the research of Princeton University economist Angus Deaton, the news Nobel laureate in economics. In giving him the award, the Nobel prize committee cited Deaton for “his analysis of consumption, poverty, and welfare.” But many of the articles published over the past several days have missed out on how his research on consumption has deep and important lessons for how we understand economics. While Deaton’s work in the area of consumption is fairly technical, he provides insight into how our assumption that consumers are all alike can cloud our judgment, for we fail to account for important trends such as high income and wealth inequality.

Prior to Deaton’s work on consumption, the economic theory of consumer behavior rested on very restrictive assumptions. Using models known as “demand systems,” economists tried to understand how demand for different consumer goods and services would change as their prices fluctuated and incomes changed. The problem with these models was that empirical tests seemed to reject their assumptions. Deaton, along with his co-author John Muellbauer, developed a  more general model, called the Almost Ideal Demand System, that was easy to estimate with data and provided a platform for better understanding which assumptions about consumer behavior actually match with the data.

But Deaton’s work on understanding the relationship between income and demand didn’t stop there. The relationship between aggregate income and aggregate consumption still didn’t fit the models that economists such as Milton Friedman and Franco Modigliani had built to understand consumption. These older models assumed a “representative agent,” or a single consumer in the economy that was essentially an average of all consumers. But it looked like this representative approach didn’t actually work when trying to move up to the aggregate. Deaton’s analysis showed that even when consumers were rational, as the models assumed, aggregate consumption may have different properties than individual consumption does. As Duke University economist Duncan Thomas said to the New York Times’s Binyamin Appelbaum, “What [Deaton]’s shown is that you do learn a great deal more by looking at the behavior that underlies the aggregates.”

The issue, however, with paying attention to the micro level data on individuals instead of the aggregates is the need to focus on procuring better data on individuals and households. And Deaton has focused exactly on those issues. In particular he has looked at the usefulness of household surveys for understanding the state of poverty and consumption in developing economies. As the popular summary of his work by the Nobel committee notes, Deaton has shown ways of collecting household data that are less difficult to gather and just as good as more laborious methods.

In total, Deaton’s noted work looks at how understanding the micro data can help us better understand the larger macroeconomic phenomena of the world. Just assuming that individuals will act like the aggregate and ignoring inequality isn’t going to work to understand the larger issues that need more uncovering.

Must-Read: Noah Smith: It Isn’t Just Asian Immigrants Who Thrive in the U.S.

Posted on by Brad DeLong

Must-Read: Noah Smith: It Isn’t Just Asian Immigrants Who Thrive in the U.S.: “Nicholas Kristof… ask[s] the ‘awkward question’ of why Asian-Americans have been so economically successful….

…The focus on East Asians, and ‘Confucian’ culture, seems misplaced…. More than 43 percent of African immigrants hold a bachelor’s degree or higher…. That education translates into higher household income. Nigerian-Americans, for instance, have a median household income well above the American average, and above… those of Dutch or Korean descent. This isn’t the power of Confucius. It’s the magic of high-skilled immigration…. Every society has its own version of what Kristof calls Confucian values. They are universal. And skilled immigration brings the families with those values to the U.S….

This isn’t to ignore the contribution of low-skilled immigrants, who work hard, pay taxes and commit relatively few crimes, despite what some conservative politicians now claim… [who] have enriched the U.S. enormously…. Nor should the U.S. worry about inflicting harm on the source countries…. Skilled people [who] move to the U.S…. end up helping their ancestral nations…. Instead of singing the praises of Confucian culture, the U.S. should be harnessing the power of its immigration system…. An economy with more smart, dedicated, ambitious people–no matter where they come from–is good for everyone, but especially for the working class.

The Extremely-Sharp Tim Duy Sees the Fed Moving Away from Contractionary Policy

Posted on by Brad DeLong
FRED Graph FRED St Louis Fed

The extremely-sharp Tim Duy sees a much bigger potential impact than I do from Fed Governor Lael Brainard’s recent speech telegraphing future dissents on her part if the Federal Reserve raises interest rates in the current situation. Briefly, this: The failure to raise interest rates over the next nine months will call forth dissents from those whose analytical perspectives have been wrong pretty much all the time since 2007. Raising interest rates will call forth dissents from those whose analytical perspectives have been pretty much right all the time since 2007. Moreover, it is straightforward to undo the damage from being behind the curve in raising interest rates. It is impossible to undo the damage from being ahead of the curve in raising interest rates.

It would be one thing to raise interest rates if it were the unanimous consensus of the committee that it was time to do so. It is quite another, in a world of uncertainty and the need for prudent risk management. It’s quite another to risk making unrecoverable errors by endorsing those whose positions have been wrong in the past over the objections of those whose positions have been right.

Tim Duy: Brainard Drops A Policy Bomb: “Lael Brainard dropped a policy bomb…

…a direct challenge to Chair Janet Yellen and Vice Chair Stanley Fischer. Is was, as they say, a BFD. That, at least, is my opinion…. [She] stands in sharp contrast with Yellen and Fischer. Their efforts have been spent on explaining why rates need to rise soon. Hers… on why they do not…. Brainard asserts….

I do not view the improvement in the labor market as a sufficient statistic for judging the outlook for inflation. A variety of econometric estimates would suggest that the classic Phillips curve influence of resource utilization on inflation is, at best, very weak….

Recall that Yellen, in her most recent speech, made the Phillips Curve the primary basis for her case that rates will soon need to rise…. While Yellen sees the risks weighted toward rebounding inflation, Brainard sees the opposite. Moreover, policymakers have been twiddling their thumbs as the world economy turns against them:

Over the past 15 months, U.S. monetary policy deliberations have been taking place against a backdrop of progressively gloomier projections of global demand. The International Monetary Fund (IMF) has marked down 2015 emerging market and world growth repeatedly since April 2014.

While all of you have been arguing about when to raise rates, the case for raising rates has been falling apart!… [Brainard] calls for different risk management:

These risks matter more than usual because the ability to provide additional accommodation if downside risks materialize is, in practice, more constrained than the ability to remove accommodation more rapidly if upside risks materialize….

The Fed can’t cut rates quickly, but they can raise rates quickly…. Suppose that the Fed needs raise rates at twice the pace they currently anticipate.  What does that mean? 25bp at every meeting instead of every other meeting? Is that really an ‘abrupt tightening?’ Not sure that Yellen has a very strong argument here. Or one that would withstand repeated attacks from her peers…. I think Yellen wants to raise interest rates. I think Fischer wants to raise rates.  I think both believe the downward pressure on inflation due to labor market slack is minimal, and the Phillips Curve will soon assert itself. I think both do not find the risks as asymmetric as does Brainard…. I think that Brainard knows this. I think that this speech is a very deliberate action by Brainard to let Yellen and Fischer know that she will not got quietly into the night…. And now that Brainard has laid down the gauntlet, it will look very, very bad for Yellen and Fischer if their plans go sideways….

Brad DeLong suggested the Fed commit to one of two policy messages:

I must say that they are not doing too well at the clear-communication part. I want to see one of following things in Fed statements:

  1. We will begin raising interest rates in December at a pace of basis points per quarter, unless economic growth and inflation fall substantially short of our current forecast expectations.

  2. We will delay raising interest rates until we are confident that it will not be appropriate to return them to the zero lower bound after liftoff.

If we had one of these, we would know where we stand.

But Stan Fischer’s speech provides us with neither.

I think that Fischer wants the first option, but knows Brainard’s views, and hence knows that December is not a sure thing if Brainard can build momentum for her position. Hence the muddled message. Brainard could be the force that drives the Fed toward option number two… closer to that of Evans and… Kocherlakota…. This is the most exciting speech I have read in forever…

As a matter of economic reality, Brainard is correct: The lesson of Staiger, Stock, and Watson (1997) is that the Phillips Curve is much too imprecisely-estimated to weigh as more than a feather in the scales to reduce uncertainty about the state of the economy two years from now. The risks are asymmetric: The option to change course and quickly neutralize the effects of your past year’s policies is a very valuable one. Raising interest rates and starting a tightening cycle throws away that option. You can always raise interest rates quickly and further and undo the effects of being behind the curve in withdrawing monetary stimulus. You cannot lower interest rates below zero and undo the effects of premature tightening away from the zero lower bound.

As I have repeatedly said, the mystery is why the lessons of SSW and the asymmetry of the risks have not been the decisive arguments among the serious members of the FOMC all along.

Minimum wage workers and the collapse of the job ladder

Posted on by Casey Schoeneberger

FiveThirtyEight’s Ben Casselman recently explained that it’s becoming harder and harder for U.S. minimum-wage workers to move up the wage ladder. According to his analysis, during the mid-1990s, only one in five minimum-wage workers was still earning their state’s minimum wage a year later. But in 2014, the most recent year for which data are available, that number jumped up to one in three. Casselman also finds an increase in the proportion of workers who stay in minimum-wage jobs for three years.

Casselman’s results seem to indicate that raising the minimum wage might not be susceptible to some of the criticisms that opponents throw its way. Minimum-wage workers, for example, are often characterized as teenagers who will soon jump to higher-paying jobs. Casselman finds, however, that minimum wage workers are increasingly older—almost a quarter of U.S. minimum-wage workers in 2014 were 40 or older. Minimum-wage workers are also often mischaracterized as less-educated immigrants, although Casselman finds that minimum-wage workers today are more educated than in previous decades.

The facts about minimum-wage workers are important for thinking about the merits of increasing the federal minimum wage, but they are also emblematic of broader trends in the U.S. labor market. As Casselman points out, the job ladder—or the ability of workers at low-paying jobs to move up to higher-paying jobs—continues to collapse, the evidence stretching back to well before the Great Recession. Economists John Haltiwanger of the University of Maryland and Henry R. Hyatt and Erika McEntarfer of the U.S. Census Bureau show that the flows between jobs are still below their levels from the year 2000. Casselman’s data shows that movement away from minimum-wage jobs peaked in 1998, about the same time.

Equitable Growth’s Marshall Steinbaum and Austin Clemens recently showed other ways that the job ladder has failed during the 21st century. Young workers, for example, are increasingly working in low-paying industries. The percentage of workers between the ages of 19 and 34 hired into low-paying industries has been on the increase while the share of these workers hired into high-paying industries has declined.

An earlier analysis by Steinbaum and Clemens showed that this trend was particularly pronounced for new college-educated workers. This “cruel game of musical chairs” means that more-educated workers are increasingly taking jobs that would have gone to workers with a high school education. This cascade down the job ladder means that workers who before would have had, to borrow an example from Casselman, factory line jobs instead take minimum-wage jobs. And the workers who would have previously had those minimum-wage jobs are then pushed out of the labor force altogether.

It’s also worth noting that the share of prime-age workers (ages 25 to 54) that have a job is well below its level during the 1990s. That’s another sign of employment being constrained by the number of jobs, which breaks the job ladder.

So while Casselman’s interesting new analysis might be interpreted as a story just about the minimum wage, it’s really a piece about larger, structural changes in the labor market. These larger changes may indicate that an increase in the minimum wage will help these workers, but policymakers need to think also about the larger problems in the labor market that have led to a job ladder with too many broken rungs.

Noted for the Late Afternoon of October 12, 2015

Posted on by Brad DeLong

Must- and Should-Reads:

Might Like to Be Aware of:

Watching Star Trek Is Doing the Dreamwork of Planning for Our Own Future, and Izabella Kaminska Is ON IT!!!!

Posted on by Brad DeLong

In the utopian post-scarcity future, the extremely-sharp Izabella Kaminska will transcribe and curate my random blatherings into sharp, concisive, and useful diamond-like weblog posts–and will do so for free!

That future is here, albeit unevenly distributed–and a lot of it is distributed to me:

Felix Salmon: What is post scarcity?

Me: Well 400 years ago, in almost all human societies, being rich relative to your neighbours mattered a lot. If you were poor, especially poor and female, chances were you weren’t getting the calories you needed to reliably ovulate, and chances were your children weren’t getting the nutrients that they needed for their immune systems to be protected against the common cold. 400 years ago the great bulk of humanity lived lives that were nasty, brutish, short and they were hungry pretty much all the time. And when they weren’t hungry they were wet, because the roof leaked, and when they weren’t wet they were probably cold because damp proofing hadn’t been invented.

Now we, here, in the prosperous middle class in the North Atlantic are moving into another society. Gene Roddenberry tried to paint our future by saying: “Wait a minute! What’s going to happen in three centuries? In three centuries we are going to have replicators. Anything material, gastronomic that we want indeed anything experiential with the holo-deck we we want we are going to have. What kinds of people will we be then and how will we live?

And indeed, we are quite ahead on that transition already.

Whenever I go say, to the middle of the country, I find myself terrified: I’m rarely the fattest person in the room. That means right now in the United States what used to be the principle occupation of the human race–farming–we are down to 1 per cent of our labour force growing essential nutrients because time spent growing four-inch eggplants which are harvested isn’t really food. It’s art. And we have about three times as many people in our medical and health-support professions working to try and offset the effects of excessive calories.

We are now rapidly approaching a post scarcity economy not just for food, but–if you go and look at containers coming in from China–with respect to things physically-made [via manufacturing processes] as well.

And that’s one of the things Star Trek is about….

Those who are not maladjusted people [unhappy with life inside the Federation] become Star Trek officers. [They face challenges at the fringe of the society.] [And they] compete for status.

Perhaps–if you really want to be looking at what their lives [inside the utopian post-scarcity Federation] are like, we [you] should be looking at Regency Romances. [The Regency aristocracy is a historical] previous culture of [material] abundance where people [neverthless] find very important and interesting things for themselves to do. Even though [Note that] there is no serious [material] conflict in a Regency Romance world. If you want to, you can say there are three [standard] spheres of regional [narrative] conflict: fear of violent death, scarcity of resources, and who is going to sleep with whom. But what you’ll find In a society of abundance, like in a Regency novel about the aristocracy, is that who is going to sleep with whom becomes the focus of the plot. [And there is a] The secondary focus: [that] being a demonstration of human excellence, via proper appreciation of fashion….

Annalee Newitz: But don’t you think it’s possible, Brad, that what most ordinary people are doing is living on Bajor. [That] after having been screwed over by the Kardashians[a], and now the Federation is there screwing them over [again]–[that] maybe that’s more what [the whole] society is like?

Me: No, [I do not think so. Add in Bajor, and what we have] that’s [is] no longer [Roddenberry’s dream of] a society of abundance. That’s [Instead, Federation-Bajor is a metaphor for] the world we have today. We have the upper middle class of America. In But of [our] 7.2bn [people living] lives [toay], 2bn of them lead lives which are frankly indistinguishable from those of our pre-industrial ancestors. The other 4.5bn live lives that look to us like the standard of life people had in the 1970s and 1950s, 1920s and 1880s. And with their TVs and smartphones they can see us [700 mn of the Lucky Tenth]. I got off the plane today from Lima, Peru. A wonderful city, a wonderful culture, lots and lots of people–all of them working at least as hard as anyone in New York. Only about 1/8th as rich. We may be approaching material abundance in terms of manufactured goods, and calories and nutrients, etc. They are certainly still very far from that.

Backing up, Izabella:

As any good Trekkie will tell you, the economics of the 24th century are somewhat different. Why? Because the acquisition of wealth is no longer the driving force in people’s lives. They — Ferengi excluded — work to better themselves and the rest of humanity.

Except, the bummer is, that’s probably a major over-simplification.

A post-scarcity economy — a.k.a. the economic reality of an abundant system — may not necessarily lead to a utopian world. At least if we go by the meritocratic example of the fictional Star Trek society.

In other words, here’s a post about how I attended a New York Comic Con panel on the economics of abundance — featuring Paul Krugman and Brad Delong, Annalee Newitz (i09), Chris Black (Enterprise writer), Felix Salmon and Manu Saadia, author of the new book Trekonomics — and learnt that even if we did have it all one day, chances are, highly-popular cosplaying events would still be capped by the natural limits of space-time.

Thus, while the acquisition of wealth might not drive people, the acquisition of access rights to highly prestigious events (a comic-con ticket commodity forward curve of its own, if you will) will continue to do so. And if not that, the more basic acquisition of connections to people who “know the right people who know the secret passwords that can sweet-talk you through the gate-keepers”. Plus ca change.

Yes. Sometimes it’s very good indeed to be an FT Alphaville reporter…

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[a] I know it’s “Cardassians”. But “Kardashians” for “Cardassians” is just too delicious for me to even dream of correcting it…