Category: Equitablog

Must-Read: Charlie Stross: A Question About the Future of the World Wide Web

Posted on by Brad DeLong

Must-Read: Charlie Stross: A Question About the Future of the World Wide Web: “The current state of the ad-funded web…

…is a death-spiral…. Casual information consumers won’t pay for access to paywalled sites, and a lot of the struggling/bottom-feeding resources on the web are engaged in a zero-sum game for access to the same eyeballs that are increasingly irritated by the clickbait and attention-grabbing excesses of the worst advertisers…. Is there any way to get to a micro-billing infrastructure from where we are today that doesn’t involve burning down the web and starting again from scratch?

http://www.antipope.org/charlie/blog-static/2015/09/a-question-about-the-future-of.html

Must-Read: Dani Rodrik: Trade within versus Between Nations

Posted on by Brad DeLong

Must-Read: Dani Rodrik: Trade within versus Between Nations: “The proper response to the question ‘is free trade good?’…

…is, as always, ‘it depends.’… Many of the conditions under which free trade between nations is guaranteed to be desirable are unlikely to hold in practice. Market imperfections, returns to scale, macro imbalances, absence of first-best policy instruments are ubiquitous… particularly in the developing world…. This does not guarantee that import restrictions will be necessarily desirable. There are many ways in which governments can screw up…. But it does mean that a knee-jerk free trader response is faith-based…. OK then, what about trade restrictions within nations? If I am a skeptic on free trade between nations, should I not be a skeptic on trade within a nation as well?

No…. The set of circumstances under which free trade within a nation may be undesirable is substantially smaller than the set of circumstances under which free trade between nations is undesirable…. Consider a case where a region loses out from trade within a nation–say because it de-industrializes rapidly and ends up specializing in technologically non-dynamic primary activities…. The workers in that region can migrate…. There is an overarching state that will engage in transfer payments and other policies that aid the lagging region. The region will have political representatives…. A third–particularly important–feature is that a nation shares a common set of regulations (in labor, product, and capital markets). Changes in inter-regional trade patterns are unlikely to be the result of what many people feel are ‘unfair trade practices’ or ‘tilted playing fields.’… The boundaries of a nation are defined by shared sense of collective purpose, as embodied, in part, in that nation’s common laws and regulations and in its instruments of solidarity…. So the national market and the international market are different….

A libertarian might view much of the regulatory apparatus of the nation-state as superfluous at best and detrimental at worst. For me, the apparatus is what makes capitalism feasible and sustainable at the national level–and problematic at the global level.

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

Talk about taxing business and most people will think of the corporate income tax. Most U.S. business income, however, is now earned by pass-through businesses like partnerships. This income is more unequally distributed, less taxed, and harder to track in the data than traditional corporate income.

In the wake of the housing bubble’s burst and the resulting Great Recession, economists and the general public have become more skeptical about the merits of private debt—and for good reason. New research by economists Atif Mian and Emil Verner of Princeton University and Amir Sufi of the University of Chicago shows how high levels of private debt affects economic growth and stability.

Economists continue to debate how much of the U.S. productivity gains have gone to the owners of capital instead of wage earners in recent years. That’s an important debate, but what if the resulting decline in the labor share of income itself affects the rate of measured productivity gains?

The job ladder, or the movement of workers to higher-paying jobs over the course of their career, has long been an important source of wages for workers. But it seems to have broken down since the Great Recession. In fact, as Marshall Steinbaum and Austin Clemens show, the ladder has been broken for the entire 21st century.

Today’s data from the U.S. Bureau of Labor Statistics show that the labor market is far from fully recovered. While the unemployment rate is close to 5 percent, the employment rate for workers 25 to 54 years old is still quite weak. Ben Zipperer shows how historically lackluster the labor market recovery has been by the latter metric.

Links from around the web

Economics has become increasingly empirical and has gone through what some people call a “credibility revolution.” But there is still some reason to be concerned about taking this triumphalism too far, as economics isn’t exactly a lab science. Noah Smith discusses some of the tensions of “theory vs. data.” [noahpinion]

The rise of “sharing economy” companies like Uber and Airbnb has raised concerns about the future of the labor market and the relationship between employer and employees. Steve Randy Waldman suggests that changing the requirements for 1099 status might be an interesting way to address the potential problem. [interfluidity]

Policymakers are considering repealing the “Cadillac tax”—a tax on expensive health insurance plans that was part of the Affordable Care Act. Catherine Rampell argues that the tax, by urging companies to find more affordable insurance plans, might actually help boost cash wages for workers. [wa post]

The United Kingdom, like the United States, has experienced a slowdown in productivity growth in recent years. This slowdown is almost always interpreted as a problem with the supply side of the economy, but Jeremy Smith argues the U.K. slowdown is mainly about demand. [prime economics]

MIT economist Amy Finkelstein has done pioneering research on insurance markets and health economics and won the John Bates Clark Medal, given to the leading American economist under 40, in 2012. Douglas Clement interviews her about her research. [minneapolis fed]

Friday figure

Figure from “What happened to the job ladder in the 21st century?” by Marshall Steinbaum and Austin Clemens.

Must-Read: Brink Lindsey: Reviving Economic Growth: Policy Proposals from 51 Leading Experts

Posted on by Brad DeLong

Must-Read: Brink Lindsey, ed.: Reviving Economic Growth: Policy Proposals from 51 Leading Experts: “If you could wave a magic wand and make one or two policy or institutional changes…

…to brighten the U.S. economy’s long-term growth prospects, what would you change and why? That was the question asked to the 51 contributors to this volume. These essays originally appeared in conjunction with a conference on the future of U.S. economic growth held at the Cato Institute in December 20014. Brink Lindsey, Vice President for Research at the Cato Institute and editor of this volume, is pleased to share this insightful and provocative collection with a new audience.

The motivation for asking that question should be clear enough to anyone who has been following the dreary economic news of the past few years. Since the Great Recession of 2008–2009, the U.S. economy has experienced the most stubbornly disappointing expansion since World War II. Reviving Economic Growth offers a wide-ranging exploration of policy options from an eclectic group of contributors. Think of this collection as a brainstorming session, not a blueprint for political action. By bringing together thinkers one doesn’t often see in the same publication, the editor’s hope is to encourage fresh thinking about the daunting challenges facing the U.S. economy—and, with luck, to uncover surprising areas of agreement that can pave the way to constructive change.

Must-Read: Felix Salmon: Annals of Dubious Research, 401(k) Loan-Default Edition

Posted on by Brad DeLong

Must-Read: I have a huge amount of respect for the analytical abilities of Bob Litan and Felix Salmon–and for Elizabeth Warren, Jane Dokko, and Gary Burtless:

Felix Salmon (2012): Annals of Dubious Research, 401(k) Loan-Default Edition: “Remember that this is a paper written by the CFO of Custodia Financial…

…someone who clearly has a dog in this…. Smart’s interest [is] to make the loan-default total look as big as possible, since the bigger the problem, the more likely it is that Congress will agree to implement Custodia’s preferred solution. But when Litan and Singer looked at Smart’s paper, they weren’t happy going with his $6 billion figure. Indeed, as we’ve seen, their paper comes up with a number six times larger. So if even the CFO of Custodia only managed to estimate defaults at $6 billion, how on earth do Litan and Singer get to $37 billion?… They double the total amount of 401(k) loans outstanding, from $52 billion to $104 billion. Then, they massively hike the default rate on those loans, from 9.6% to 17.9%. And finally, they add in another $12 billion or so to account for the taxes and penalties that borrowers have to pay when they default on their loans. It’s possible to quibble with each of those changes–and I’ll do just that…. But it’s impossible to see Litan and Singer compounding all of them, in this manner, without coming to the conclusion that they were systematically trying to come up with the biggest and scariest number they could possibly find. It’s true that whenever they mention their $37 billion figure, it’s generally qualified with a “could be as high as” or similar. But they knew what they were doing, and they did it very well.

When the Chicago Tribune and the LA Times say in their headlines that 401(k) loan defaults have reached $37 billion a year, they’re printing exactly what Custodia and Litan and Singer wanted them to print. The Litan-Singer paper doesn’t exactly say that defaults have reached that figure. But if you put out a press release saying that “the leakage of funds in 401(k) plans due to involuntary loan defaults may be as high as $37 billion per year”, and you don’t explain anywhere in the press release that “leakage of funds” means something significantly different to–and significantly higher than–the total amount defaulted on, then it’s entirely predictable that journalists will misunderstand what you’re saying and apply the $37 billion number to total defaults, even though they shouldn’t.

But let’s backtrack a bit here. First of all, how on earth did Litan and Singer decide that the total amount of 401(k) loans outstanding was $104 billion, when the Department of Labor’s own statistics show the total to be just half that figure?…

Robert Litan and Hal Singer: Good Intentions Gone Wrong: The Yet‐To‐Be‐ Recognized Costs of the Department Of Labor’s Proposed Fiduciary Rule: “The Department of Labor (DOL) fiduciary rule has been justified based on economic analyses by the DOL and the Council of Economic Advisers (CEA) that are flawed…

…and filled with internal contradictions. These flaws come mostly from “cherry picking” and misreading the relevant economic literature, and from ignoring significant costs to millions of small savers that the rule would impose…. The DOL’s Regulatory Impact Analysis (RIA) thus concludes erroneously that the net benefit of the rule would be roughly $4 billion per year (the CEA, making related errors, pegs the benefit at $17 billion). A conservative assessment of the rule’s actual economic impact–taking into account the categories of harm noted above that are ignored by DOL and CEA–finds that the cost of depriving clients of human advice during a future market correction (just one of the costs not considered by DOL) could be as much as $80 billion, or twice the claimed ten‐year benefits that DOL claims for the rule….

Depriving clients of human advice during a future market correction could be as much as $80 billion…. The decision to stay invested (or not) during times of market stress swamps the impact of all other investment factors affecting long‐term retirement savings, including modest differences in advisory fees or investment strategies. “Robo‐advice”… cannot effectively perform this critical role. (An email or text message in the fall of 2008, for example, would not have sufficed to keep millions of panicked savers from selling, with devastating consequences for their nest eggs)….

The DOL… wagers the welfare of millions of Americans on the mistaken notion that ending commission‐based compensation is better for small savers than assuring them continued access to human financial advice through an affordable and time‐tested model…. A less costly alternative that would meet the DOL’s objectives would be to require enhanced but simple disclosures relating to brokers’ compensation from companies sponsoring investment products they sell…

Elizabeth Warren: Letter to Strobe Talbott: ”I am concerned about financial conflicts of interest…

…in a recent study authored by one of your nonresident Senior Fellows, Dr. Robert L. Litan…. Other Brookings-affiliated researchers raised concerns… that appeared to be directed at Dr. Litan’s work…. Dr. Litan’s study… contained a broad but vague disclosure, stating that “funding for this study was provided by the Capital Group”…. I asked Dr. Litan additional questions for the record…. The Capital Group commissioned… the study… paid $85,000… no other entity provided financial support…. Lita asserted that “the conclusions are our own”. However, he also noted that “The Capital Group provided us with feedback and some editorial comments”…. This statement appears to be inconsistent with Dr. Litan’s testimony before the Senate that “Dr. Singer and I are solely responsible for the analysis”….

These disclosures are highly problematic…. They raise significant questions about the impartiality of the study and its conclusions, and about why a Brookings-affiliated expert is allowed to use that affiliation to lend credibility to work that is both highly financially compensated and editorially compromised by an industry player seeking a specific conclusion, and has been implicitly criticized by the Institution’s own in-house scholars as bought and paid for research lacking in merit…

Jane Dokko: Caveat emptor: Watch where research on the fiduciary rule comes from | Brookings Institution: “To no surprise, those benefiting from current practices…

…have paid for research to try to discredit the proposed rule. Such research claims that people don’t lose as much money from biased advice as careful, independent research has shown. Research not funded by special interest groups concludes that when they are paid to recommend certain financial products over others, advisors tilt their recommendations so that they receive higher pay. In other words, advisors respond to financial incentives just like the rest of us. Such biased advice hurts savers by lowering returns and by increasing fees. Independent research must generally undergo an anonymous review process before publication. Studies funded by special interests need not face such scrutiny. When it is to their advantage, they may use analytic techniques that would not be accepted in academic research, draw inaccurate inferences, use inappropriate data, or selectively report the results. In addition to denying the harm of biased advice, critics of the regulation pivot and allege that the Department of Labor has not crafted the right solution to a problem whose existence they initially denied…

Gary Burtless: Financial Advice for Retirement Savers: Paying for Advice without a Conflict of Interest: “The proposed DOL rule would change the legal standard that applies to most financial advisors….

…Presently, most advisors are subject to a ‘suitability’ standard in giving advice to their clients. This requires advisors to understand their clients’ financial situation and to recommend investments that are suitable for that situation. The DOL proposes to subject advisors to a tougher ‘fiduciary standard’… [which] requires advisors to put their clients’ financial interests first…. As noted by the Council of Economic Advisors in a report describing the effects of advisers’ conflicts of interest, there is abundant evidence that some conflicted advisors recommend investments that are remunerative to the advisor but that reduce the expected return obtained by clients. The research showing the adverse effects of conflicts of interest on advisors’ recommendations and retirement savers’ decisions is extensive and persuasive.

A counter-argument to imposing a fiduciary standard on all advisors is that the commission system, which creates adverse incentives for advisors, is necessary in order to pay for financial advice to retirement savers… [that] even conflicted advice is better than no advice at all. This claim does not seem terribly compelling. There are alternative ways to compensate financial advisors that do not create an obvious conflict…. For a large percentage of the workers who have accumulated little savings, the best financial advice is often the simplest: Save as much as you can afford, and invest the bulk of your retirement savings in a low-cost target-date retirement fund that is appropriate given your age and tolerance for risk. It should not require a hefty commission to offer this advice.

Must-Read: Jared Bernstein: September Jobs

Posted on by Brad DeLong

Must-Read: Jared Bernstein talks about the firm establishment survey, but there is also information in this month’s employment release from the household survey. The employment-to-population ratio is now back to 59.2%–a level it reached last October. No progress in raising the anemic and disappointing share of Americans with jobs in 11 months:

Civilian Employment Population Ratio FRED St Louis Fed

Now some of this is demography: the aging of the very-large baby-boom generation into retirement. But not much of it is demography: since 2000, the total employment-to-population rate has fallen at a faster pace than the prime-aged rate, but that faster pace is only 0.07%/year faster:

Graph Employment Rate Aged 25 54 All Persons for the United States© FRED St Louis Fed
Jared Bernstein: September Jobs: “Someone asked me the other day what the Fed would have to see…

…in this jobs report to make their mind up one way or the other about a rate hike in either their October or December meeting. The answer is: no one report could have that effect. If the report was a large outlier… it would be considered… um… a large outlier. If it was somewhat off trend, like today’s report, it would raise eyebrows…. If… suspicion is reinforced by the next two jobs reports, the Fed will very likely incorporate that into their evaluation at their December meeting and hold their target rate near zero…. ‘High-frequency’ data is but a dot on a painting by Georges Seurat. It’s not enough by itself to paint a picture of what’s going on in the job market, but if you combine it with a bunch of other dots, you may be onto something.

Where is the U.S. labor market recovery for prime-age workers?

Posted on by David Hudson

The weak employment and earnings growth—reported today by the U.S. Bureau of Labor Statistics—shows that the labor market is still recovering from the shocks of the Great Recession. After six full years of consecutive monthly employment growth beginning in October 2010, when the labor market stopped contracting, employment rates for prime-age workers ages 25 to 54 are still low, and wage growth is not fast enough to reverse worsening income inequality.

Nominal wages grew 2.2 percent compared to a year ago, before adjusting for inflation, and at the same rate over the past three months. Although monthly data can be noisy, the lack of clear signs that wage growth is accelerating bolsters the case for the Federal Reserve to continue to wait to raise its benchmark interest rate. An additional recent concern is that wage growth for production and nonsupervisory workers—those who generally make up the bottom 80 percent of the labor market—has begun to see slower wage growth, at a rate of 1.9 percent compared to last year.

If overall nominal wage gains do not exceed annual increases of 3.5 percent then income inequality will tend to rise. Below this rate, real (inflation-adjusted) wage growth is likely to fall behind long-run productivity growth of about 1.5 percent, assuming the Federal Reserve’s inflation target of 2.0 percent. The current slow rates of nominal wage growth help to guarantee that national income will continue to shift away from labor and toward the owners of capital.

The establishment survey data also show that the economy added 142,000 jobs in September, with gains of about 36,400 in health care industries. After revisions to prior months’ data, further reducing estimates of employment growth in August, the economy has added jobs over the past three months at a slow monthly pace of 167,000. With this job growth, the economy increased the size of the employed workforce by only 1.2 percent last month at an annual rate, and by 1.9 percent compared to a year ago. These rates of job gains compare poorly to the faster growth one would expect a vigorous recovery to deliver. Just three years after the 1990-1991 recession, for example, annual employment growth exceeded 3 percent for more than one year straight.

Indeed, compared to prior business cycles, the labor market recovery has been especially weak when judged by the performance of employment rates for those in their prime working years, ages 25 to 54. From 1953 to 1990, the U.S. economy experienced seven business cycles, where the employment-to-population ratio for prime-age workers fell during a recession but then recovered to the level experienced just prior to the recession in less than three years on average. (See Figure 1.)

Figure 1

U.S. employment has not recovered for prime-age workers

After the recession beginning in 1990, the labor market for prime-age workers recovered more slowly, taking about five years to reach its prior employment rate. During the past two business cycles, the prime-age employment rate never fully recovered. The shift toward longer and incomplete labor market recoveries is inconsistent with the Federal Reserve’s mandate to promote full employment and coincides with the reluctance of using fiscal policy to reverse economic contractions.

Current employment rates for the prime working-age population are insufficient for ensuring satisfactory wage growth, even after six years of recovering from the Great Recession. Without a tight labor market, employees have lower bargaining power and employers have less incentive to raise wages in order to retain and recruit workers. Over the past 25 years, wages for production and nonsupervisory workers reliably grew at healthy rates of 3.5 to 4.5 percent only when the employed share of the prime-age population exceeded 79 percent. The current prime-age employment rate of 77.2 percent, which has stayed roughly the same over the entire course of this year, will continue to make it difficult for workers to obtain sustained, economically meaningful wage gains.

Must-Read: Charles Evans: Thoughts on Leadership and Monetary Policy

Posted on by Brad DeLong

Must-Read: Three people so far have told me that Chicago Fed President Charlie Evans’s “Leadership” speech is superb, and the kind of speech that the Fed Chair really ought to be giving these days–what with 10-year Treasury rates kissing 2%/year and the 10-year inflation breakeven below 1.5%/year:

Graph 10 Year Treasury Constant Maturity Rate FRED St Louis Fed

Charles Evans: Thoughts on Leadership and Monetary Policy: “Sometime during the gradual policy normalization process…

…inflation begins to rise too quickly. Well, we have the experience and the appropriate tools to deal with such an outcome. Given how slowly underlying inflation would likely move up from the current low levels, we probably could keep inflation in check with only moderate increases in interest rates relative to current forecasts. And given how gradual the projected rate increases are in the latest SEP, the concerns being voiced about the risks of rapid increases in policy rates if inflation were to pick up seem overblown.

Furthermore, as I just outlined, there is no problem in moderately overshooting 2 percent. After several years of inflation being too low, a modest overshoot simply would be a natural manifestation of the Federal Reserve’s symmetric inflation target. Moreover, such an outcome is not likely to raise the public’s long-term inflation expectations either — just look at how little these expectations appear to have moved with persistently low inflation readings over the past several years. So, I see the costs of dealing with the emergence of unexpected inflation pressures as being manageable.

All told, I think the best policy is to take a very gradual approach to normalization. This would balance both the various risks to my projections for the economy’s most likely path and the costs that would be involved in mitigating those risks.”

Things to Read on the Afternoon of October 1, 2015

Posted on by Brad DeLong

Must- and Should-Reads:

Might Like to Be Aware of:

Must-Read: Atif R. Mian, Amir Sufi, and Emil Verner: Household Debt and Business Cycles Worldwide

Posted on by Brad DeLong

Must-Read: Atif R. Mian, Amir Sufi, and Emil Verner: Household Debt and Business Cycles Worldwide: “A rise in the household debt to GDP ratio predicts lower output growth…

…and higher unemployment over the medium-run, contrary to standard macroeconomic models. GDP forecasts by the IMF and OECD underestimate the importance of a rise in household debt to GDP, giving the change in household debt to GDP ratio of a count… A rise in household debt to GDP is associated contemporaneously with a rising consumption share of output, a worsening of the current account balance, and a rise in the share of consumption goods within imports. This is followed by strong external adjustment when the economy slows as the current account reverses…. The pre-2000 predicted relationship between global household debt changes and subsequent global growth matches closely the actual decline in global growth after 2007 given the large increase in household debt during the early to mid-2000s.