Category: Equitablog

Must-Read: Nick Rowe: Suppose the Bank of Canada targets 2% inflation…

Posted on by Brad DeLong

Must-Read: More intellectual garbage pickup by the learned Nick Rowe on the stability of expectational equilibria in monetary economics. It’s a dirty job, and I’m glad he’s doing it rather than me. Me? I think this “literature” should never have started, because it requires ignoring that central banks issue not just forward guidance as to interest rates but an entire macroeconomic forecast including money-supply and monetary-base measures. So asking the question of what happens in a model in which the interest rate path is the only piece of information ever revealed by the central bank is rather… stupid…

Nick Rowe: “Suppose the Bank of Canada targets 2% inflation, using a nominal interest rate instrument…

…Suppose the economy is humming along in full rational expectations equilibrium, with inflation at 2%, nominal interest rate at 3%, and nobody expects it to change. Now suppose the Bank of Canada suddenly and unexpectedly raises the interest rate to 4%…. Eventually the Bank of Canada’s memo gets published on the web. Here are four possible memos explaining why the Bank did what it did: 1) “Our new information/model shows demand is going to be much stronger than our old information/model says it was, and we need to raise real interest rates to prevent inflation rising above the 2% target.” 2) “We decided to increase the inflation target from 2% to 3%, figured expected inflation would rise very quickly to the new target, and didn’t want real interest rates to drop.” 3) “We’ve turned Swedish, and decided to raise the overnight rate to reduce asset prices, even if it means inflation drops below the 2% target temporarily.” 4) “The person responsible has been fired, and normal monetary policy will resume shortly.”

We are not going to get the same response across all 4 cases…. In Canada today, memo 1 is most plausible, but we can’t rule out memo 3 (or even memo 4)…. Neo-Fisherians… don’t mention memos at all, but are… assuming… memo 2. [But] what happens if memo 2 is in fact published on the web, but some people don’t get the memo?… And the people who did get the memo know that some fraction of the population won’t have got the memo, and will assume it’s memo 1?… The people who didn’t get the memo are going to cut their own spending (figuring someone else will spend more to make up for it and keep inflation on target). The people who did get the memo are going to figure out that the people who didn’t get the memo are going to cut their spending, and that nobody else will make up for it, so that demand will drop, and so output and inflation will drop. We can’t get the Neo-Fisherian result unless everyone gets the memo, and interprets the Bank of Canada’s action the same way. Ain’t gonna happen…

Must-Read: Sutirtha Bagchia and Jan Svejnarb: Does Wealth Inequality Matter for Growth?

Posted on by Brad DeLong

Must-Read: Unless I misread it, the authors should also include an additional sentence in their abstract: “We failed to find a statistically significant difference between the effect on growth of politically-connected wealth inequality and the effect on growth of politically-unconnected wealth inequality.” That would be a more accurate description of what the data say, I think, and would lead to some differences in interpretation…

Sutirtha Bagchia and Jan Svejnarb: Does wealth inequality matter for growth? The effect of billionaire wealth, income distribution, and poverty: “When we control for the fact that some billionaires…

…acquired wealth through political connections, the relationship between politically connected wealth inequality and economic growth is negative, while politically unconnected wealth inequality, income inequality, and initial poverty have no significant relationship…

Must-Read: Tim Duy: The Fed Is Closer to Hitting Its Inflation Target Than People Think

Posted on by Brad DeLong

Must-Read: Tim Duy: The Fed Is Closer to Hitting Its Inflation Target Than People Think: “I sense there is a growing confidence among policymakers that wage growth will soon accelerate…

…That confidence is likely sufficient enough to move the Fed closer to the first rate hike. Still, hard data is better than anecdotes. Solid evidence of accelerating wage growth in the next two labor reports would go a long way toward convincing FOMC members that they could safely move in September…. While [Yellen] is viewed as supporting only a single hike in 2015, there’s no reason to believe that hike must come in December. Yellen has made two points abundantly clear with respect to policy normalization: She prefers ‘early and gradual’ over ‘late and steep,’ and she anticipates policy will not be on a preset path as it was in the last tightening cycle…. Yellen could move in September and, if justified by the data, deliver only one 25-basis-point rate hike in 2015, while at the same time throwing the Fed hawks a bone.

Rising U.S. compensation inequality and productivity growth

Posted on by Nick Bunker

One of the more contentious debates about the changes in the U.S. economy is the question of whether wages have grown in tandem with productivity growth. The debate hinges on the particular merits of different tweaks to data. But one thing that almost every participant in the debate agrees upon is that analysts should be looking at total compensation—not just wages– when trying to figure out how productivity turns into income gains for workers. Yet, changes in compensation also affect other trends, namely economic inequality, which in turn may well link back to who gets the fruit of productivity growth and rising living standards.

Over the past 40 years or so, employers have increasingly compensated workers not just in the form of wages and salary, but also other benefits such as health insurance or retirement plans. Looking at wage and salary compensation alone doesn’t give the total picture of how much workers are getting paid if, for example, employer-subsidized health insurance costs aren’t factored into the mix.

Wages were a larger share of total compensation back in 1970s than they are today, but the present-day gap between wages and compensation also varies across the income ladder. A recently released paper by Kristen Monaco and Brooks Pierce, research economists at the U.S. Bureau of Labor Statistics, looks at the changes in inflation-adjusted wages and compensation from 2007 to 2014 using data from the National Compensation Survey. Looking just at wages, they find a checkmark-shaped pattern in wage growth. Wage growth was weakest for workers near the middle of the income spectrum (the median fell by 4 percent), slightly higher for those at the bottom, and highest for those at the top.

When Monaco and Pierce then looked at total compensation growth, they again find the checkmark shape. But placing the two curves over each other reveals an interesting trend. Growth in total compensation for lower-paid workers was slower than wage growth in that same spot on the wage spectrum. The exact opposite happens for highly-compensation workers: Compensation growth is faster than wage growth. But wage growth and compensation growth don’t vary that much for those in the middle.

What this means is that compensation inequality grew more than wage inequality did between 2007 and 2014. This study only looks at trends since the Great Recession’s onset, but there’s evidence that compensation inequality has grown faster than wage inequality since the 1980s as well.

Now let’s turn to the relationship between total labor compensation and productivity. Recent analysis on this question by Harvard University economist Robert Lawrence for the Peterson Institute for International Economics tracks average productivity to average compensation instead of average wages. If the question you want to answer is ultimately how well labor as a whole is being compensated for its productivity, this data choice is the right way to go. Lawrence finds evidence of a break between productivity and average labor compensation around 2000, just as he did in a recent National Bureau of Economic Research working paper. This break means that labor as a whole is receiving a declining share of income, with the gains from productivity go to the owners of capital instead.

But what if we want to think about how productivity growth results in rising standards of living for workers on different rungs of the economic ladder? Then we need to look at what’s happening to the distribution of compensation. It may have been that compensation for labor as a whole tracked productivity until 2000, but it’s not clear how well productivity growth was translating into growth and higher living standards for all workers.

Must-Read: Henry Farrell: A Brief Theory of Very Serious People

Posted on by Brad DeLong

Must-Read: Henry Farrell: A Brief Theory of Very Serious People: “Tyler Cowen argues that the concept of ‘Very Serious People’ refers to people who…

…realize that common sense morality must, to a considerable extent, rule politics….

I think that’s wrong…. Unless my memory is badly mistaken (it might be), Duncan Black arrived at the concept… during the intra-US Iraq War debates… [being] very, very unhappy with how debate on the Iraq War was conducted. Those who advocated the pro-invasion case were treated as serious thinkers, of enormous gravitas, who were taking the tough decisions necessary to protect America’s national security. Those who disagreed were treated as flakes, fifth columnists, Commies and sneaking regarders. As we know, despite the agreement of the Very Serious People that the Iraq war was a grave and urgent necessity, it turned out to be a colossal clusterfuck. As we also know, many of the People who were Very Serious about Iraq still continue to be Very Serious about a multitude of other topics on our television screens and in our op-ed pages.

Being a Very Serious Person is about occupying a structural position that tends to reinforce, rather than counter, one’s innate biases and prejudices…. We all err…. VSPs face less incentive either to second guess their errors as they are making them, or to think through their errors after they have made them, because collective structures reinforce their tendency to think that they are right in the first instance, and their tendency to think that they ought to have been right (if it weren’t for those inconvenient facts/specific and contingent circumstances that meant that things didn’t go quite as predicted just this once) in the second…. When certain people’s perspectives are privileged, the value of democracy is weakened…. Centrist opinionators… whose opinions are… most likely to be reinforced… are especially likely to be prone to VSP syndrome…. The problem… [is] vicious feedback loops of self-satisfied yet consequential ignorance (as in the Iraq war).

Things to Read on the Morning of July 25, 2015

Posted on by Brad DeLong

Must- and Should-Reads:

Must-Read: Paul Krugman: The Essential Obstfeld

Posted on by Brad DeLong

Must-Read: Paul Krugman: The Essential Obstfeld: “Olivier Blanchard, who has to have been one of the most influential chief economists ever at the IMF, is retiring. Maury Obstfeld will be his replacement…

…One New Keynesian MIT PhD I know very well replaced with another New Keynesian MIT PhD with whom I co-authored a text now in 10th edition…. Maury’s contributions to economics… two papers in particular that are very relevant. First is his work on self-fulfilling currency crises… that crises could come out of a clear blue sky–that countries could face a speculative attack that would force them off a peg that would otherwise have been indefinitely sustainable…. I was at first very skeptical of this argument. But… I was wrong and Maury was right…. The Obstfeld approach seems highly relevant to the troubles of eurozone countries, and also helps explain why Mario Draghi’s ‘whatever it takes’ worked so well. Second was his work with Ken Rogoff… bringing New Keynesian modeling to floating exchange rates… considered the effects of fiscal as well as monetary policy. As a result, those of us who were well versed in open-economy macroeconomics were fully prepared when issues of fiscal stimulus arose, and didn’t fall into the traps of incomprehension we saw from so many domestic-economy macro types. There is, of course, much more…

Christine Lagarde: Press Release: Appoints Maurice Obstfeld as Economic Counsellor and Director of the IMF’s Research Department: “I am thrilled to have Maurice join us at the Fund…

…His outstanding academic credentials and extensive international experience make him exceptionally well placed to provide intellectual leadership to the IMF at this important juncture. He is known around the globe for his work on international economics and is considered one of the most influential macroeconomists in the world…

Maurice Obstfeld: Models of currency crises with self-fulfilling features: “The discomfort a government suffers from speculation against its currency…

…determines the strategic incentives of speculators and the scope for multiple currency-market equilibria. After describing an illustrative model in which high unemployment may cause an exchange-rate crisis with self-fulfilling features, the paper reviews some other self-reinforcing mechanisms. Recent econometric evidence seems consistent with the practical importance of these mechanisms.

Maurice Obstfeld and Kenneth Rogoff: Exchange Rate Dynamics Redux: “Until now, thinking on open economy macroeconomics…

…has been largely schizophrenic. When it comes to analyzing exchange rate dynamics, an empirically-minded economist abandons modern current account models which, while theoretically coherent, fail to address the awkward reality of sticky nominal prices. In this paper we develop an analytically tractable two-country model that marries a full account of dynamics to a supply framework based on monopolistic competition and sticky prices. It offers simple and intuitive predictions about exchange rates and current accounts that sometimes differ sharply from those of either modern flexible-price intertemporal models, or traditional sticky-price Keynesian models. The model also leads to a novel perspective on the international welfare spillovers of monetary and fiscal policies.

Must-Read: Ezra Klein: “It will be normal…

Posted on by Brad DeLong

Must-Read: Ezra Klein: “It will be normal… to be publishing to some combination of their own websites…

…a separate mobile app, Facebook Instant Articles, Apple News, Snapchat, RSS, Facebook Video, Twitter Video, YouTube, Flipboard, and at least one or two… yet to be named. The biggest publishers will be publishing to all of these simultaneously…. Reporters will write their articles, and their content management system will smoothly hand them to Facebook, Snapchat, or Apple News… how RSS feeds work [already]. But there will be more of them, and they will matter much more…. The off-platform audience will be huge. The publishers of tomorrow will become like the wire services of today, pushing their content across a large number of platforms they don’t control and didn’t design.

The upside… the potential audience… is vast, and it is diverse. The possible downside is innovation…. Stories the Associated Press sends to its customers can’t be as innovative…. Our core mission is to explain the news to people perplexed by it, so… I’m enthusiastic about the coming off-platform world. A longtime problem for the news business is that the people who use our product most often need it least…. My biggest frustration with the new media… is how much we’re like the old media…. We’re not fully realizing the potential of this new technology.

But there is so much potential! Length no longer matters…. It’s no longer necessary to write a new article every time there’s a small change to a story. Digital stories can be interactive…. We’re getting products like Vox’s card stacks–topic guides that can be embedded anywhere on the web, and updated continually…. Look at the Upshot’s social mobility feature…. But even now, the rules around off-platform distribution constrain innovation in quiet ways…

Must-Read: Nick Bunker’s Weekend Reading

Posted on by Brad DeLong

Must-Read: Nick Bunker: Weekend Reading:

Weekend reading Washington Center for Equitable Growth

Source: https://equitablegrowth.org/research/declining-labor-force-participation-rate-causes-consequences-path-forward/

Must-Read: David Beckworth: The Big Lesson of the Eurozone Crisis

Posted on by Brad DeLong

David Beckworth: The Big Lesson of the Eurozone Crisis: “Paul Krugman notes that Eurozone crisis is a vindication of that optimum currency area (OCA) theory…

The crisis also sheds light on the specialization versus endogeneity debate…. The endogenous view of the OCA criteria fed right into what Lars Christensen calls the fatal conceit of Eurozone planners. It provided an ex-ante justification for believing all would work out well in this grand monetary experiment. The specialization view, on the other hand, was par for course with the tendency among American economists to be pessimistic about its success. We all know now which view was right…. At a minimum the periphery economies failed to further diversify after joining the Eurozone. So the great hope of Eurozone countries like Greece endogenously conforming to OCA criteria never happened. If anything, joining the Eurozone pushed Greece and the periphery further away from the OCA boundary. So probably the biggest lesson of the Eurozone crisis is to take the OCA criteria seriously before joining a currency union.