Category: Equitablog

Must-Read: The process of creating a market–especially as delicate and complicated a market as a market for debt and equity investments in relatively large-scale enterprises–is not a straightforward process. Here Venture and Voth argue that the spillovers from the creation of the “technology” of a debt marketplace were enormous, as only after the government had dug the channels through which debt would flow for its own war-fighting purposes could first canal companies, then manufacturing companies, and then railroad companies take advantage of them.

Jaume Ventura and Hans-Joachim Voth: Debt miracle: Why the country that borrowed the most industrialised first: “Is debt really that bad?…

…This column looks at the towering debts, rapid tax hikes, and constant state of war that led to Britain’s Industrial Revolution, showing that the devil is in the detail when assessing sovereign debt…. Towering debts, rapidly rising taxes, constant and expensive wars, a debt burden surpassing 200% of GDP. What are the chances that a country with such characteristics would grow rapidly? Almost anyone would probably say ‘none’. And yet, these are exactly the conditions under which the Industrial Revolution took place in Britain….

Until now, scholars mostly thought of the effect of government borrowing on growth as either neutral or negative. One prominent view held that investment in private industry would have been higher had Britain fought and borrowed less (Williamson 1984). Another argument is that private savings decisions undid the potentially negative effects of massive borrowing – because debt eventually has to be repaid, private agents anticipated rising taxes in the future and neutralised the effects of debt accumulation (Barro 1990)…. We argue that Britain’s borrowing binge was actually good for growth (Ventura and Voth 2015)…. Financial intermediation was woefully inadequate–it failed to send the money where it should have gone. As one prominent historian of the British Industrial Revolution argued:

the reservoirs of savings were full enough, but conduits to connect them with the wheels of industry were few and meagre … surprisingly little of [Britain’s] wealth found its way into the new industrial enterprises …. (Postan 1935).

Without effective intermediation, new sectors had to self-finance…. [But] by issuing bonds on a massive scale, the government effectively pioneered a way… to put money in the pockets of entrepreneurs…. Government debt issuance ‘healed’ the negative consequences of financial frictions…. These efficiency-enhancing effects of government debt may be all the more important in developing countries. There, the added benefits of debt that we did not discuss–such as providing a safe store of value, and a certain source of liquidity (Holmstrom and Tirole 1998)–may tilt the overall scoresheet even more in favour of government borrowing…

Must-Read: Really, really bad news for the American economy. Alan Krueger concludes that we are now near “full employment” in a monetary policy-Federal Reserve-inflation sense. The implications? The implications are:

1. that the failure of the government and the Federal Reserve to more aggressively boost recovery has turned what was excess cyclical non-employment into structural non-employment,
2. that essentially none of the drop in production relative to the pre-2008 trend can or will be recouped without noticeably higher inflation.

Alan Krueger: Labor Force Participation:

Via Mark Thoma.

• http://www.irs.princeton.edu/announcements/alan-krueger-delivered-martin-feldstein-lecture-national-bureau-economic-research-0
• https://irs.princeton.edu/media/610

Must-Read: Steven Greenhouse: Jeb Bush ‘Should Be Embarrassed’ by His Overtime Pay Claims: “Jeb Bush… said Barack Obama’s proposal to expand overtime pay…

…would result in “less overtime pay” and “less wages earned”…. Daniel Hamermesh, a University of Texas labor economist, said: “He’s just 100% wrong,” adding that “there will be more overtime pay and more total earnings” and “there’s a huge amount of evidence employers will use more workers”…. Indeed, a Goldman Sachs study estimated that employers would hire 120,000 more workers in response to Obama’s overtime changes. And a similar study commissioned by the National Retail Federation–a fierce opponent of the proposed overtime rules–estimated that as a result of the new salary threshold, employers in the restaurant and retail industries would hire 117,500 new part-time workers… cost the increased US retail and restaurant industries $9.5bn a year, unless those industries made money-saving changes in response…. Jared Bernstein, former chief economist for vice-president Joe Biden and a senior economist with the liberal Center for Budget and Policy Priorities, said… “If employers want to avoid overtime pay, they hire more workers on straight time and that creates new jobs,” Bernstein said. “Even staunch opponents agree with that and disagree with Mr Bush.”…

Ross Eisenbrey, a vice-president of the Economic Policy Institute, a left-of-center research group, said: “Bush should be embarrassed about how misinformed he was.” Eisenbrey said the proposed rules do nothing whatsoever to bar employers from paying bonuses…. Michael Strain, a labor economist at the right-of-center American Enterprise Institute, sympathized with Bush’s sentiments on the overtime rule. “In general what he seems to be saying is that this will place restrictions on firms, how they operate and how they structure their compensation packages,” he said. “In some cases the impact will be positive, and in some cases, negative”…

Worth Attending If in Town: Bernie Sanders: Conference on the Greek Debt Crisis: Rm 902 Hart Senate Office Building. 2:30 PM, Thursday July 30th…

…Participants: U.S. Sen. Bernie Sanders. Joseph Stiglitz, Senior fellow and chief economist at Roosevelt Institute. James Galbraith, University of Texas. Jacob Funk Kirkegaard, Peterson Institute for International Economics. Stephanie Kelton, University of Missouri – Kansas City

Must-Read: Paul Krugman: The Euroskeptic Vindication: “Conventional Hicks/Keynes macroeconomics–whether or not you dress it up in New Keynesian algebra–has performed very well…

…Anti-Keynesians keep making more or less desperate efforts to refute this proposition, usually by taking something I said out of context and pretending that something that happened for one year somewhere or other is contrary to what the Evil One claimed. But the overall shape of events has been very Keynesian, and very much at odds with alternative stories.

And at this point I think we need to chalk up another success…. American economists warned about exactly the flaws in the euro that are now the source of so much suffering. Beckworth reminds us of a January 2010 article by Jonung and Drea that has become an accidental classic…. They provided an impressive bibliography and literature review of academic euroskepticism–and in so doing provided us with a sort of honor roll, because all the dire warnings from those ugly Americans came to pass within months of their article’s publication.

So why were the ugly Americans right? Because the theory of optimum currency areas turns out to be basically right. And that theory is best seen, I’d argue, as an application of the same Hicks/Keynes style of analysis that has worked so well on interest, inflation, and austerity. All in all, the past 7 years have been a very good time for old-fashioned macroeconomics. But of course nothing will make the Germans, or the U.S. right, concede that Keynesian ideas have worked.

Must-Read: I had always thought that we had a mixed economy and the social safety net in large part to counter and correct the market’s judgment as to who deserved to have resources used for their benefit. And I had always thought that this was an obvious and well-understood part of benefit-cost analysis. Have I in fact been wrong? Is this not well-understood? Do the younger economists–the kids these days!–Really think that the rights function for assessing societal well-being roughly multiplies each person’s utility by their individual income?

Harold Pollack, Bill Gardner, and Timothy Jost: Valuing Medicaid: “Finkelstein and her colleagues placed a very low value…

…$25,000–on a year of additional life for Medicaid beneficiaries. The typical threshold used in health services research is much larger, in recent studies far above $100,000….This assumption powerfully frames… analysis…. If you start out by assuming that Medicaid beneficiaries’ lives are worth very little, you will find that it is not worth spending much money to prolong them. These authors… defined this threshold based on reasonable assumptions about what low-income recipients themselves would have been willing to pay, had they been spending their own money for their Medicaid benefits. Poor people aren’t willing to spend as much as rich people…. Had these authors valued the health of poor patients as highly as health services researchers typically value the health of the average patient, their results would have been quite different…. Although Finkelstein, Hendren, and Luttmer’s baseline assumptions are methodologically defensible, they have radical implications that are rarely so bluntly applied in other domains of health-policy research. Choices about how to financially value the health of poor people relative to the health of others are inevitably both politically and morally freighted. It strains credulity, for example, to imagine American policymakers using this low a value for life when analyzing mammography, prostate cancer treatment, or implantable cardiac defibrillators for seniors…

Must-Read: Ezra Klein: On Paul Krugman’s theory of hipsters: “Krugman suggests that hipsters are signaling a rejection of the workaday bourgeois world by flouting conventional dress codes…

…I think the truth is closer to the opposite: They’re signaling a mastery of the workaday bourgeois world by flouting conventional dress codes. You can find a gentler version of this in Silicon Valley, where hackers proved their skills so valuable that they won the right to dress however they wanted. Eventually, shorts and sandals became something weirdly close to a uniform. To wear a tie to work came to signal that you weren’t good enough at coding, and thus didn’t have the market power and independence to not wear a tie….

I suspect something similar is going on with topknots and tattoos. The trappings of the urban hipster don’t signal the absence of a job but rather the presence of the right kind of job — the kind of job that values your individual, creative talents enough that you can be covered in ink and a lumberjack’s beard and still pull down a comfortable wage. That’s particularly true when you spy the aesthetic in the hipper parts of Brooklyn, which have become wildly expensive places to live. In a city otherwise full of people who became rich at the cost of becoming boring, it makes sense that the residents would develop a way to aggressively signal that they had become rich without becoming boring. Whether the signal is actually true is, of course, a whole different issue.

Must-Read: Jérémie Cohen-Setton, Joshua K. Hausman, and Johannes F. Wieland: Supply-Side Policies in the Depression: Evidence from France: “The effects of supply-side policies in depressed economies… evidence from France in the 1930s…

…In 1936, France departed from the gold standard and implemented large-scale mandatory wage increases and hours restrictions. This quickly ended deflation, but output stagnated. We present time-series and cross-sectional evidence that the supply-side policies, in particular the 40-hour law, contributed to French stagflation. These results are inconsistent both with the standard one- sector new Keynesian model and with a two-sector model calibrated to match our cross-sectional estimates. We propose an alternative, disequilibrium model consistent with expansionary effects of lower real interest rates and contractionary effects of higher real wages. This model and our empirical evidence suggest that without supply-side problems, France would have recovered rapidly after leaving the gold standard.