Category: Equitablog

I score this for Larry Mishel…

Larry Mishel: Inequality is Central to the Productivity-Pay Gap: “The point is to show that the pay of a typical worker…

…has not grown along with productivity in recent decades, even though it did just that in the early post-war period… a substantial disconnect between workers’ pay and overall productivity… that has not always existed…. [Matthew] Yglesias argues that the major reason for the divergence is the different methods that must be used to adjust each line for inflation. This is flat wrong…. I quantified the factors behind the divergence of median hourly compensation and productivity for the period between 1973 and 2011…. The three wedges that are responsible for the productivity-pay gap are:

1. Changes in labor’s share: an overall shift in how much income in the economy is received as compensation by workers and how much is received by owners of capital;
2. Compensation inequality: growing gaps in wages, benefits, and compensations between the top 1 percent, and high–, middle-, and low–wage workers;
3. “Terms of trade”: the faster growth of the prices of what workers buy relative to the prices of what they produce.

The first two items are dimensions of rising inequality, while the third item is the one highlighted by Yglesias as the “big problem”:

Matthew Yglesias: Hillary Clinton’s Favorite Chart Is Pretty Misleading: “Workers’ pay hasn’t kept up with the growing productivity of the American economy…

…Hillary Clinton has offered up her own version… as part of her campaign’s larger theme that a Clinton administration will bring much-needed higher pay. But while the image is striking and depicts something real and important about the economy, it’s also fairly misleading…. One problem… is that economic productivity simply has nothing to do with ‘working hard.’ A guy who moves furniture for a living works very hard, but he does not generate much economic value per hour…. Highly productive workers are generally productive due to some combination of rare and valuable skills and access to useful technology….

But the bigger problem is that both lines are indexed to inflation–using different inflation indexes. The result is a chart that seems to suggest that further increases in productivity would be useless or unnecessary as a path to higher wages and incomes, when the real truth is the reverse….

The Consumer Price Index… tries to measure the price of what a typical [urban] consumer… buys…. The Implicit Price Deflator… tries to measure the price of everything that is produced…. These are different ideas. American consumers buy airplane tickets, but they generally don’t buy airplanes. Consequently, the price of a Boeing 777 isn’t part of the CPI basket…. When you draw a chart that uses both of these inflation indexes… the divergence between the two ways of looking at inflation is naturally going to drive divergence….

There’s no right way to do it. You can’t feed your kids a commercial jetliner or exports of business software, so saying something like, ‘Real wages have actually gone up a lot as long as you count a bunch of stuff that nobody buys in the price index’ doesn’t make much sense. On the other hand, making business equipment and software is a very legitimate line of work. Saying, ‘The economy really hasn’t grown much if you don’t count America’s most vibrant and innovative industries’ is pretty blinkered. Probably the best way to get an apples-to-apples comparison is to not adjust for inflation at all… nominal GDP versus nominal compensation… look at the ratio:

It shows that… the gap is pretty clearly a direct consequence of… the Great Recession…. The best cure is not a huge structural overhaul… [but] for Janet Yellen and her colleagues at the Federal Reserve to be extremely cautious about raising interest rates. High unemployment makes it easy for employers to skimp on paying their workers, while stretches of full employment push the ratio up. To get back to pre-2000s level, we’ll need more years of recovery…. The popularity of the inflation-mixing chart among liberals is unfortunate, and has prompted public confusion. But the idea of some conservative wonks like James Sherk of the Heritage Foundation to note the issue, debunk the chart, and then move on is also misguided….

Real wages really have risen much too slowly over the past 40 years. But while Clinton’s version of the chart makes it look like rising productivity isn’t part of the solution, looking at the divergent price indexes clarifies that it is crucial. For real wages to rise, we need the things middle-class families spend the bulk of their income on to get cheaper. That means more productivity in the big housing, health, and education sectors–not more pessimism about the potential of productivity.

The open questions Matt raises are: which of these two graphs below would we get if we got a low-unemployment high-pressure economy over the next five years? What is the real trend here?

Matt thinks it is:

Larry thinks it is:

I am, once again, with Larry here. We have deep problems that are the result of the failure to spur a strong recovery. But behind those we have even deeper problems.

Must-Read: The extremely sharp and IMHO under appreciated Tim Duy has a very nice way of putting the Federal Reserve’s current problem: which set of labor market indicators does it believe?

Of course, since we do not know which to believe, that in itself is an argument for not tightening in order to explore the policy space…

Tim Duy: Flying Mostly Blind Heading Into the September FOMC Meeting: “Through the eyes of Federal Reserve Chair Janet Yellen as she scoped out the economic landscape in 2013…

…With unemployment at the Fed’s estimate of the natural rate, inflationary pressures will soon emerge. To be sure, wage growth remains flat, but even Yellen leans toward writing that off as an expected outcome of low productivity growth…. When combined with stable inflation expectations, policymakers have good reason to be confident that actual inflation will soon reverse course and trend toward the Fed’s target. In such an environment, financial accommodation needs to be withdrawn pre-emptively to avoid overshooting the targets…

But:

Labor markets remain far from healed if viewed through the eyes of Yellen in 2014: Low wage growth is thus consistent with the hypothesis that underemployment indicators are important measures of labor market health. The persistence of weak wage growth should leads to revised estimates of the natural rate of unemployment. After all, targeting 5 percent unemployment when the natural rate is 4 percent means denying jobs to roughly 1.5 million people. That’s no small responsibility…. If you are uncertain of your estimate of the natural rate and inflation is moving away from target, why rush to hike rates?… And market-based measures of inflation expectations do not signal a revival of inflation anytime soon. Recent financial turbulence also calls into doubt the wisdom of raising rates next week….

Ultimately, the Fed will need to choose between one of these two arguments, and by doing so they will define a direction for policy. This will be important new information. Ultimately, we will learn who rules the roost at the FOMC–the Janet Yellen of 2013, or the Janet Yellen of 2014.”

Must-Read: What will people in 3000 remember from the history 1700-2300? I would say:

1. Universal literacy.
2. Artificial birth control.
3. The coming of the Replicator–or close enough–for foodstuffs and for things made out of metal, wood, plastic, and sound.
4. The coming of information technology in whatever its flowering will be.
5. The death of global distance.
6. Plus whatever disasters lurk at the bottom of not the Pandoran but the Promethean Box of 1700-2300.

But I am an optimist…

Charlie Stross: The Present in Deep History: “Assume you are a historian in the 30th century…

…compiling a pop history text about the period 1700-2300AD… a 600 year span—around the duration of the entire mediaeval period. Events a mere 20 years apart, such as the first and second world wars, merge…. Individual people… are a jumbled mass of names with dates attached. [What are] the big issues… big enough to remember half a millennium hence, like the Black Death, the Crusades, or the conquest of the Americas[?]… Anthropogenic climate change is obviously one of the big ones, and I have a number of others in mind; I want to see if I’ve missed anything obvious…. My list of candidates are:

1. The great fossil fuel binge
2. The population/GDP/innovation bubble (fueled by #1)
3. The parasite crash and social rebalancing, including the end of patriarchy (made possible by medical advances facilitated by #2)
4. The end of [vertebrate] meat eating (side-effect of #1 and #2)
5. The collapse of cognitive distance and the perfection of memory (side-effect of #2)

Must- and Should-Reads:

• Robert Waldmann: Paul Romer has 3 Questions
• David Cay Johnston: This Labor Day, it’s time for the U.S. to catch up with the rest of the world
• Must-Read: N. Emrah Aydınonat: Using and Abusing Models in Economics: A Review of Rodrik’s Economics Rules
• John Maynard Keynes (1924): Alfred Marshall
• Doug Henwood: Age of the Unicorn: How the Fed Tried to Fix the Recession, and Created the Tech Bubble
• Edward Nelson: Research: Book in preparation: Milton Friedman and Economic Debate in the United States
• Must-Read: Steve Jobs (2010): Apple and the TV Market
• Joe Stiglitz: Fed Up with the Fed
• Must-Read: Simon Wren-Lewis: Spain, and How the Eurozone Has to Get Real About Countercyclical Policy
• Nick Bunker: Where are U.S. data on the gig economy?

Might Like to Be Aware of:

• Nicholas Bagley: Health Reform and Its Legal Controversies
• Steve M.: “Here’s the problem [with David Brooks]: It was the Republican Party that taught Trump and Carson voters to feel the way they do now…. Republican voters are turning to candidates loosely affiliated with the party because they think those candidates won’t compromise… because they learned that compromise was evil from their party…”
• Joseph Stromberg: The internet is full of distractions. Here are 7 tips to help you focus
• Clickhole: We Put A Falcon And A Rabbit In The Same Room Together: What Happened Will Not Surprise You

The argument that ought to be decisive in convincing the Federal Reserve as currently structured to not tighten but loosen over the next year is that in order to establish credibility that its 2%/year inflation target is an average, and not a ceiling, it needs to overshoot it for a period of time in the near future. The other arguments–that the Federal Reserve should be aiming for 4%/year inflation or 6%/year nominal GDP growth, that it needs to explore the policy space in order to learn more about the current structure of the economy and the location and slope of the Phillips curve (if any), that it needs to act responsibly as the global monetary hegemon rather than irresponsibly as an organization with a narrow focus exclusively on the US internal balance–ought to be decisive too if the Federal Reserve Open Market Committee were properly constituted. But given how the Federal Reserve Open Market Committee is currently constituted, they are not.

But the need to establish credibility that the target is 2%/year rather than ≤2%/year really ought to be decisive.

We have Tim Mullaney and Matt O’Brien making other very cogent arguments. Mullaney says–I believe correctly–that the Fed’s models are predicting a rise in inflation that is more likely than not to once again evaporate:

Tim Mullaney: 4 reasons we know we’re not ready for the Fed to raise rates: “Many investors would like a clearer standard for when the economy is ready for rate hikes…

…Here are four bars it should have to clear. And it hasn’t cleared any yet: [1] 250,000 jobs a month, pretty consistently…. The jobs report misses that test. It’s been generating more like 212,000 this year…. [2] Above-trend economic growth, pretty consistently…. If third-quarter tracking estimates hold up, the first nine months of this year are at about 2.2%…. Central banks should feed economies until they break through the trend, and pull money out as above-trend growth moves us toward inflation…. [3] Real full employment: To hear business-as-usual pundits tell it, we’re at full employment. But we’re not….

[4] Signs of capacity or cost pressures: The reason the Fed raises rates isn’t to reimpose Protestant virtue lost when money is cheap and investment gets as licentious as a cheerleader. It’s to prevent inflation. And while Fed Vice Chair Stanley Fischer argued last week you don’t always see inflation coming before it’s too late, it’s not too late. Begin with the still-slack labor market, and especially the 2.2% increase in average hourly wages over the last year. Then add weak capacity utilization and business investment…. Inflation is several steps away–labor markets must tighten more, wages have to rise, and business has to fail to offset the higher pay by accelerating productivity. There’s a reason the Fed staff’s leaked projections in July saw sub-2% inflation until 2020…

And O’Brien that outside observers have given up saying that the Fed must start to type because inflation is just around the corner, and started saying that the Fed must tighten just because:

Matt O’Brien: “People used to say the Federal Reserve had to raise rates to fight nonexistent inflation…

…Then they said the Federal Reserve had to raise rates to fight nonexistent bubbles. And now they say the Federal Reserve has to raise rates for nonexistent reasons. Just, you know, to show that it can. This is not progress….

The Fed, after all, doesn’t want to wait until the economy is obviously overheating to start raising rates, but rather right before it does so. The only problem with that is there aren’t any signs the economy is anything other than properly heated right now. Workers still aren’t getting bigger raises, just 2 percent a year compared to the 3.5 to 4 percent they normally would, and inflation is still dead at just 0.3 percent. That picture doesn’t change even if you strip out volatile food and energy prices, with so-called core inflation at only 1.2 percent, and not even trending up….

But some people are tired of this debate. The Fed hinted it might raise rates now, and, by golly, that’s what they want it to do, whether or not the data actually support that. ‘What are you worrying about, September or December,’ former Fed governor Laurence Meyer wondered, when ‘it doesn’t matter’ and the Fed should ‘just pull the trigger.’ Economist Tyler Cowen said he ‘would consider a ‘dare’ quarter point increase just to show the world that zero short rates are not considered necessary for prosperity and stability.’ And New York Times columnist William Cohan implored the Fed to ‘show some spine’ and start hiking despite the sell-off.

These are psychological arguments, not economic ones.

As Larry Summers says, if the federal funds rate were 4% right now few would be thinking of raising it. You do have to strongly believe in “normalization”. If you were a Bernanke, and believed that the policy deviations in emerging markets that created the global savings glut are on the way out, there might be a case. Or if you were a Rogoff, and believe that the deleveraging cycle was almost completed, there might be a case. But Carmen Reinhart is saying “wait”. And I really did not think that Janet or Stan thought like Ken or Ben.

Must-Read: Has Simon Wren-Lewis just become a Lernerian–a devotee of and an evangelist for MMT? It looks to me as though that is the case! Mirabile visu:

Simon Wren-Lewis: Spain, and How the Eurozone Has to Get Real About Countercyclical Policy: “The current recovery… is export led, which is exactly what you would expect…

…The Eurozone does have a natural correction mechanism when a country becomes hopelessly uncompetitive as a result of a temporary domestic boom (whatever its cause). The mechanism is a recession and what economists call ‘internal devaluation’: falling wages and prices. The problem with this correction mechanism is that, on its own, it is slow and painful, particularly when Eurozone inflation is so low. So the key question is what could Spain have done to avoid having such a painful period of correction…. As Matthew Klein points out, Spain already had some sensible macroprudential monetary policies, and it seems likely that more of the same would not have been enough. Which brings us of course to fiscal policy…. Many commentators… say, correctly, that Spain’s problem was never a profligate government…. [But for] an individual country in a currency union the deficit is not the appropriate metric to judge short term fiscal policy…. The appropriate metric is national inflation relative to the Eurozone average…. So forget the actual budget deficit or any cyclically corrected version, fiscal policy was just not tight enough.

I have been told so many times that for Spain to have a tighter fiscal policy before the crisis was ‘politically impossible’. If that really is true, then Spain has little to complain about when it comes to the subsequent recession…. It seems more than likely that the existing monetary but not fiscal/political union is here to stay for some time. Many in Europe’s political elite plan to move quickly to greater union (see Andrew Watt here), but there are serious obstacles in their path. The current system can be made to work better, and strong countercyclical fiscal policy is an obvious part of that…. Just how many years and recessions does it take before what is obvious textbook macroeconomics can become politically acceptable?

Must-Read: The standard story of Christensenian disruption is that there is a niche large enough to allow for economies of scale and for learning by doing but too small for incumbents to focus on serving–and then the disruptive technology eats the rest of the industry alive as it rides down the learning curve while incumbents cannot find a way to compete because cannibalizing their existing markets is not something their organizations can actually plan and do. The problem with the TV is that there does not seem to be any such niche as long as cable providers bundle the set-top box. Therefore either the FTC has to intervene and force unbundling, or Apple has to hope there are enough fanboys who will buy anything it makes to get them over the hump. It will be interesting to watch:

Steve Jobs (2010): Apple and the TV Market: “The television industry… has a subsidized… model…

…that gives everybody a set-top box for… $10 a month… [so] nobody is willing to buy a set top box. Ask TiVo, ask ReplayTV, you know. Ask Roku, ask Vudu, ask us, ask Google in a few months…. Sony has tried as well, Panasonic has tried, a lot of people have tried and they’ve all failed…. You can say ‘well, gosh… I’ll just add another little box with another one!’… [and] end up with a table full of remotes, cluster full of boxes, bunch of different UIs…. The only way that’s ever going to change is if you… redesign [the set-top box] from scratch with a consistent UI… and get it to the consumer in a way that they’re willing to pay for it. And right now there is now way to do that…

Must-Read: One of the things that has slipped through the cracks this late summer is my sitting down to read the extremely sharp Dani Rodrik’ Economics Rules. Here are selections from what my Visualization of the Cosmic All suggests is a good review:

N. Emrah Aydınonat: Using and Abusing Models in Economics: A Review of Rodrik’s Economics Rules: “Rodrik… argues that both unrealistic assumptions and mathematics are useful in economic modelling…

…makes the case for economics as a social science… does not have fundamental laws, and economists should not behave as if they have discovered the fundamental laws…. Models clarify hypotheses, enable accumulation of knowledge, imply an empirical method, and help economists generate knowledge based on shared professional standards…. Rodrik… explain[s] the general principles of model selection… verify[ing] (i) critical assumptions… (ii) mechanisms… (iii) direct implications… and (iv) incidental implications…. General economic theories are frameworks for organizing our thoughts, ‘rather than stand-alone explanatory frameworks’… specific to particular cases… a modest science….

Chapter 5: When Economists Go Wrong…. Mistaking a model (more appropriately, economists’ preferred models at the time) for the model is the most important reason why economists go astray. In the case of the financial crisis, the preferred models were models that support the efficient market hypothesis. In the case of Washington Consensus, the preferred models were the models that assume that the main drivers of growth were saving and access to investable funds. So how did economists get it so wrong in both of these cases? Not because they did not have appropriate models (they did), rather they became overconfident concerning some models, and ignored others. They have confused a model, with the model….

Rodrik argues that economics is not the problem, economists are… idealization, abstraction, utilization of unrealistic assumptions, methodological individualism are not problems as long as one appreciates the diversity of economic models and accepts the fact that each economic model is an attempt to understand some real world relationships in isolation. Market favoritism is not a problem of economics… [but] rather a problem created by some overconfident economists…. Economics is more pluralist than it appears…

And here is a quote from John Maynard Keynes’s obituary for Alfred Marshall that strikes me as in the same intellectual space as what my Visualization of the Cosmic All leads me to suspect Dani’s book is:

John Maynard Keynes (1924): Alfred Marshall: “The study of economics does not seem to require…

…any specialised gifts of an unusually high order. Is it not, intellectually regarded, a very easy subject compared with the higher branches of philosophy and pure science? Yet good, or even competent, economists are the rarest of birds. An easy subject, at which very few excel! The paradox finds its explanation, perhaps, in that the master-economist must possess a rare combination of gifts. He must reach a high standard in several different directions and must combine talents not often found together. He must be mathematician, historian, statesman, philosopher—in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician…