Category: Equitablog

Must-Read: Steve Teles: The Scourge of Upward Redistribution

Posted on by Brad DeLong

Must-Read: Steve Teles: The Scourge of Upward Redistribution: “Start for simplicity’s sake with… the occupations of the top percentile…

…the huge over-representation of financial-service providers, doctors, dentists, and lawyers, all of which are professions characterized by large-scale market distortions…. Doctors, dentists, and lawyers are all licensed professionals, and licenses are an obvious barrier to entry and competition. In addition, the specific regulatory structures of some of these licensed professions (which are almost always functions of state-level regulations) serve to redistribute income upward…. Medicine displays a similar pattern because the law specifies tasks that only licensed doctors can perform, even though nurses are capable of performing them…. Licensing statutes frequently define “dental practice” or “veterinary practice” very broadly, allowing dentists and veterinarians to swallow up activities that involve none of the risks that justify licensing…. The bottom of the top 1% is full of owner-proprietors who, in a more deregulated market, would be lower-paid employees of larger, more efficient firms. Car dealers, for instance… burial services….

A concentration of high incomes also characterizes the field of government contractors… [in] industries are characterized by dependence on government as a nearly exclusive source of revenue, by extraordinary levels of lobbying, and by asymmetries of power…. Management consulting[‘s] outsized incomes of consultants do not come from their ability to recommend innovative practices to firms… [but] from performing a legally mandated due-diligence ritual…. Rents are pervasive in the fields of finance, entertainment, and technology….

Finally, rents also play a critical role in the increasing concentration of wealth among the already-wealthy few…. Matthew Rognlie… housing-price appreciation. Housing is a highly regulated and subsidized sector… constraints on housing supply relative to demand are especially severe in the areas with the highest concentrations of high earners…. By preventing housing supply from equilibrating with housing demand, insiders in these expensive housing markets… take resources from housing outsiders…

A new insight into economic inequality and governance

Posted on by Bridget Ansel

Inequality can affect how the U.S. economy functions in a variety of ways. High levels of wealth inequality may change how consumers respond to recessions. Unequal household incomes might hinder low-income children’s development of important skills and talents. Or perhaps high inequality might interact with the U.S. political system to distort governance and produce negative outcomes for the U.S. economy.

Political polarization—the growing divide between Republicans and Democrats, conservatives and liberals—has been at the center of many investigations related to rising economic inequality. And a new paper shows that higher levels of income inequality cause more political polarization among state legislators. Economist John Voorheis of the University of Oregon and political scientists Nolan McCarty of Princeton University and Boris Shor of Georgetown University claim to show a causal relationship between income inequality and political polarization at the state level.

Political polarization, of course, is one of the defining characteristics of U.S. politics. Since the mid-1970s, the divide between the Democratic and Republican parties has increased, according to analysis of votes in the U.S. House of Representatives and the Senate. This polarization has been “asymmetric,” in that the parties have not moved the same distance away from each other—Republicans have moved more to the political right than the Democrats have moved to the political left.

Previous work has shown a correlation between rising inequality and increasing polarization at the national level. But it didn’t show a causal relationship. The new paper by Voorheis, McCarty, and Shor uses a so-called instrumental variables technique, a method economists often use to determine causal relationships, to show higher income inequality is causing increased polarization within state legislatures. (Their paper was funded in part by an Equitable Growth grant.)

The authors show that state-level income inequality has a much larger effect on Democratic state legislators, in contrast to what you might expect from the national trend. The causal effect significantly pushed the median member of a state’s Democratic Party to the left ideologically, while the median ideology of state legislatures moved to the right due to a higher share of Republicans in these legislatures. The paper’s authors interpret this finding as showing a retreat of moderate Democrats as Republicans advanced.

Political polarization in and of itself is not necessarily a bad thing. But in conjunction with the U.S. political system and its myriad checks and balances, the result can be gridlock unless one party has large majorities in both chambers of Congress and a president in the Oval Office. Gridlock hinders policymakers’ ability to take action on a variety of issues, both long-term and short-term.

Of course, as should be said with all working papers, these results are preliminary and subject to revision. And this research is the first of its kind. But the results are quite interesting. Inequality might not only be the result of public policy created by the political system, but it may also feed back into the political system that creates policy.

Noted for the Morning of September 20, 2015

Posted on by Brad DeLong

Must- and Should-Reads:

Might Like to Be Aware of:

Must-Read: James Bullard: A Long, Long Way to Go

Posted on by Brad DeLong

Must-Read: The remarkable–and puzzling–thing about James Bullard’s latest talk is that the phrase “employment-to-population” ratio or any of its possible synonyms simply does not appear anywhere:

James Bullard: A Long, Long Way to Go: “The case for normalization is simple…

…The Committee’s goals have essentially been met, but the Committee’s policy settings remain stuck in emergency mode. The Committee wants unemployment at its long-run level and inflation of 2 percent. The Committee is about as close to meeting these objectives as it has ever been in the past 50 years…

The problem is that it is not clear to what degree the unemployment rate and to what degree the prime-aged employment rate is the proper measure of labor-market slack, and the prime-aged employment rate is surely not at its long-run level. At least, we all devoutly hope it is not:

Employment Rate Aged 25 54 Males for the United States© FRED St Louis Fed Graph Employment Rate Aged 25 54 Females for the United States© FRED St Louis Fed Graph Employment Rate Aged 25 54 All Persons for the United States© FRED St Louis Fed

What Do You Think the Chances Are that Jeffrey M. Lacker Is Right in 2015?

Posted on by Brad DeLong

Jeffrey M. Lacker, sole dissenter from the Federal Reserve’s decision last week to keep the interest rates it controls unchanged:

I dissented because I believe that an increase in our interest rate target is needed, given current economic conditions and the medium-term outlook. Household spending, which has grown steadily since the recession, has accelerated in the last couple of years. Labor market conditions have steadily improved as well and have tightened considerably this year. With the federal funds rate near zero and inflation running between 1 and 2 percent, real (inflation-adjusted) short-term interest rates are below negative 1 percent. Such exceptionally low real interest rates are unlikely to be appropriate for an economy with persistently strong consumption growth and tightening labor markets…

This is remarkable. This is remarkable, of course, because I cannot think of a single case since he became Richmond Regional Federal Reserve Bank President in 2004 in which any of Lacker’s dissents from the Federal Reserve have shown positive insight into the actual state of the economy.

Can anybody?

There is something very wrong with somebody whose views of the economy have been inferior to those of his colleagues ever single year since 2004–we are now talking twelve years running–and yet who continue to stubbornly think as he thought back then and dissent in the same way he would have dissented back then. Without ever giving any signs that twelve years of being wrong has induced any humility, or any attempts to mark his beliefs to market, or any rethinking of intellectual positions and ideological commitments at all…

Jeffrey M. Lacker: wrong in 2006: “Lacker’s vote was the solitary dissent in the August, September, October, and December 2006 Federal Open Market Committee (FOMC) meetings…”

Jeffrey M. Lacker: wrong in 2007:

Jeffrey M. Lacker (2007): The Economic Outlook: “As recently as its Aug. 7 meeting…

…the FOMC identified its ‘predominant policy risk’ as ‘the risk that inflation will fail to moderate as expected.’ I believe that this risk remains relevant…. Central banks should be careful to conduct policy during periods of financial market distress in ways that are consistent with their long-run goals, both for price stability and economic growth…. Federal funds rate adjustments in response to changes in the outlook for inflation and growth should continue to endeavor to stabilize inflation expectations…

Jeffrey M. Lacker: wrong in 2008:

Jeffrey M. Lacker (July 2008): The Economic Outlook: “Inflation is unacceptably high…

…Of course, price increases have been concentrated in the food and energy categories…. The risk is that elevated rates of increase in overall prices become embedded in expectations…. The apparent stability of inflation expectations does not justify complacency, however. Those expectations depend critically on confidence…. Maintaining credibility depends on continuing to conduct policy in a way that is consistent with the stability of inflation expectations, and acting forcefully should those expectations erode….

Just as easing policy aggressively in response to emerging downside risks made sense, withdrawing some of that stimulus as those risks diminish makes eminent sense as well…. We need to be attuned to the risk that we emerge from the slowdown with inflation following a higher trend than when we went in. This danger associated with the persistence of elevated inflation warrants an additional measure of vigilance…

Jeffrey M. Lacker: wrong in 2009: “[He] dissented because he preferred to expand the monetary base by purchasing U.S. Treasury securities rather than through targeted credit programs…”

Jeffrey M. Lacker: wrong in 2012: “[He] does not anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate through late 2014…”

Jeffrey M. Lacker: wrong again in 2012: “I don’t think there’s much that monetary policy’s capable of doing…. The real economy is beyond our ability to influence in large measure…”

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

Posted on by Brad DeLong

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?

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

The presidential campaign will be full of policy proposals, particularly those about reforming the tax system. The focus will almost certainly be on the individual side, but keep an eye out for changes to the corporate tax system.

The U.S. Department of Labor is currently contemplating a new rule that would change the regulations surrounding overtime protections. Ben Zipperer comments on the proposed rule.

The U.S. government has a habit of using the tax code extensively as an instrument of social policy. That approach has had some successes, but that’s not the case when it comes to higher education.

On Wednesday, the U.S. Census Bureau released new data on income and poverty during 2014. The Census data are an important resource, but they aren’t a perfect data set. Elisabeth Jacobs puts the new data in context.

The Federal Reserve’s policy-setting committee voted yesterday to keep interest rates near zero. This is a smart move, as a rate hike would have taken away some of the Fed’s credibility.

New research on student debt and data from the U.S. Department of Education turned attention to the troubles facing borrowers who attended for-profit or community colleges. But everything isn’t peachy for graduates of traditional colleges and universities, as Kavya Vaghul shows.

Links from around the web

The labor market recovery has been steady for a while now. 2014 saw many workers return to work and some big drops in the unemployment rate. But as Ben Casselman shows, more jobs hasn’t meant more income for many Americans. [fivethirtyeight]

While economists and analysts try to understand how a tax change will affect the economy and the income distribution, they often model changes without considering the growth effects of the tax changes. Why not? As Josh Barro points out, economists really don’t know how much tax cuts affect economic growth. [the upshot]

The Federal Reserve didn’t raise interest rates yesterday, but it will eventually. And after years of extraordinary monetary policy, the tools by which the Fed will raise rates has changed. Binyamin Appelbaum details the new instruments it will use when higher rates arrive. [ny times]

If a publicly traded company wants to pay out profits to its shareholders, it can pay out dividends or buy back stocks. But while dividends to shareholders are taxed, buybacks are not. Wanling Su, a Visiting Fellow at Yale Law School, argues the IRS made a mistake in making this distinction. [blue sky blog]

The debate about the relationship between productivity and compensation in the U.S. economy continues. Larry Mishel and Josh Bivens show that trends in industry-level productivity and compensation can’t be used to talk about individuals’ productivity. [epi]

Friday figure

091715-youth-earnings

Figure from “The pernicious effects of growing student debt on the economic security of young workers” by Kavya Vaghul.

Must-Read: Tim B. Lee: Carly Fiorina’s Controversial Record as CEO, Explained

Posted on by Brad DeLong

Must-Read: IMHO, Tim B. Lee gets this one very wrong indeed:

Tim B. Lee: Carly Fiorina’s Controversial Record as CEO, Explained: “Fiorina’s biggest and most controversial move–acquiring computing rival Compaq…

…The idea was that the two companies would be able to do the things they already did more effectively if they joined forces. Management consultants who examined the merger for HP found that (as Fiorina loved to put it) HP and Compaq ‘fit together like a zipper’…

Stop right there: when you are reduced to quoting management consultants hired to make the case for the deal the CEO wants to do, you are demonstrating that you have no good arguments.

TBL continues:

Bill Hewlett’s son Walter opposed the deal…. Hewlett’s critique of the deal was simple: Compaq was primarily a PC company, and the PC business was not very profitable. By merging with Compaq and swapping stock between the companies, HP was effectively trading a share of its more profitable businesses–especially its lucrative printer business–for a share in Compaq’s less profitable PC business…

And Hewlett was 100% correct.

So why does TBL write this?:

So who was right? It’s hard to say…. While losses in the PC sector were bad, it’s quite possible that the efficiency gains achieved in other parts of the company more than offset the increased exposure to the PC business.

What efficiency gains? What other parts of the company?

TBL never says.

And he continues:

The real question is whether she can convince voters that she has the best vision for the country’s future.

No, the real question is whether she has and can execute the best vision for the country’s future. The important thing for Vox to be focusing on is policies, not media strategies.

Must-Read: Paul Krugman: Fantasies and Fictions at GOP Debate

Posted on by Brad DeLong

Must-Read: Paul Krugman: Fantasies and Fictions at GOP Debate: “Modern G.O.P. economic discourse is completely dominated by an economic doctrine…

…the sovereign importance of low taxes on the rich–that has failed completely and utterly…. Bill Clinton’s tax hike was followed by a huge economic boom, the George W. Bush tax cuts by a weak recovery that ended in financial collapse. The tax increase of 2013 and the coming of Obamacare in 2014 were associated with the best job growth since the 1990s. Jerry Brown’s tax-raising, environmentally conscious California is growing fast; Sam Brownback’s tax- and spending-slashing Kansas isn’t…. Yet the hold of this failed dogma on Republican politics is stronger than ever, with no skeptics allowed. On Wednesday Jeb Bush claimed, once again, that his voodoo economics would double America’s growth rate, while Marco Rubio insisted that a tax on carbon emissions would ‘destroy the economy’…. If the discussion of economics was alarming, the discussion of foreign policy was practically demented…

Must-Read: Catherine Rampell: The economy was a no-show at GOP debate

Posted on by Brad DeLong

Must-Read: Catherine Rampell: The economy was a no-show at GOP debate: “There’s actually a good reason why Republican candidates might want to avoid…

…talking about the economy…. It’s hard to run against the economy these days…. Despite nearly seven years of stewardship by a supposedly crypto-socialist president, the U.S. economy is looking — dare I say it? — pretty good. For all the alarmist predictions about job-killing Obamacare; job-killing Environmental Protection Agency regulations; job-killing tax hikes; the unaffordable gas prices that would arise from blocking the Keystone XL pipeline; and the runaway hyperinflation crisis that would follow zero interest rates and quantitative easing, the metrics on all these issues are better than almost anyone expected…. The United States looks healthier than just about every other major economy…