Category: Equitablog

Must-Read: Hilary W. Hoynes and Ankur J. Patel: Effective Policy for Reducing Inequality? The Earned Income Tax Credit and the Distribution of Income

Posted on by Brad DeLong

Must-Read: Hilary W. Hoynes and Ankur J. Patel: Effective Policy for Reducing Inequality? The Earned Income Tax Credit and the Distribution of Income: “We provide the first comprehensive estimates of this central safety net policy…

…on the full distribution of after-tax and transfer income. We use a quasi-experiment approach, using variation in generosity due to policy expansions across tax years and family sizes. Our results show that a policy-induced $1000 increase in the EITC leads to a 7.3 percentage point increase in employment and a 9.4 percentage point reduction in the share of families with after-tax and transfer income below 100% poverty. Event study estimates show no evidence of differential pre-trends, providing strong evidence in support of our research design. We find that the income increasing effects of the EITC are concentrated between 75% and 150% of income-to-poverty with little effect at the lowest income levels (50% poverty and below) and at levels of 250% of poverty and higher. By capturing the indirect effects of the credit on earnings, our results show that static calculations of the anti-poverty effects of the EITC (such as those released based on the Supplemental Poverty Measure, Short 2014) may be underestimated by as much as 50 percent.

Reforms to “just-in-time” scheduling practices now before Congress

Posted on by Casey Schoeneberger

Legislative reforms to “just-in-time” workplace scheduling practices in the U.S. retail and other services industries are back before Congress. The Schedules That Work Act proposes a set of reforms that would give workers in these industries more predictable and stable schedules, targeting in particular the growth in just-in-time scheduling software that links an employee’s hours to the level of customer demand.

Just-in-time scheduling software is designed to manage labor costs, basing the number of employees working on the ebb and flow of customers. At first glance, determining the “optimal” number of staff that should be present at any given time behind a retail counter or in a restaurant makes plenty of business sense, yet some research shows that these scheduling practices may negatively affect employees and employers alike.

First the employees. These scheduling practices wreak havoc on workers, who are typically given their schedule only days, or even mere hours, ahead of time. Some stores give their employees “on-call” shifts, and are only brought in to work if things are busy enough. During slow times, employees can be sent home early without pay. The stress from scheduling fluctuations take a major toll on workers’ mental health, as they are not only uncertain about whether their hours will be sufficient to make ends meet but also unable to get a second job, pursue an education necessary for upward mobility, or even go to the doctor. These schedules also force working families to constantly rearrange last-minute childcare among family and friends and lose pay if they are unable to do so.

Such employee instability may be bad for business, too. Research by the University of Chicago’s Susan Lambert finds that unpredictable schedules can harm employers due to increased employee turnover and lower worker productivity. That means employers must spend resources to hire and train new workers in a vicious cycle that turns off customers and may put downward pressure on profits.

The broader economic ramifications are equally troubling. The Urban Institute’s Maria Enchautegui finds that parents with non-standardized schedules are more stressed and spend less time with their children compared to  standard-schedule workers, with detrimental long-term individual and societal consequences. And in the short term, many employees caught up in “just-in-time” schedules end up working part-time involuntarily, because irregular schedules at one workplace make it impossible to commit to a second job. This loss of potential earnings deprives the economy of disposable income for consumer spending that fuels economic growth.

Some companies recognize the harmful effects of just-in-time scheduling on their employees, their customers, and their own bottom lines. Starbucks Corp. altered its policies following an article in The New York Times detailing the impact of its scheduling practices on an employee and her son. Wal-Mart Stores, Inc. introduced a new system that gives employees more control over their schedule. And Gap Inc. is working with University of California-Hasting’s College of the Law professor Joan Williams (who is also an Equitable Growth grantee) to measure how more stable scheduling practices affect both employee productivity and well-being as well as the clothing retailer’s profits at select stores.

If enacted, The Schedules That Work Act would give workers the right to ask and receive a more predictable schedule without being penalized; receive at least four hours pay if they arrive at work only to be sent home; require employers to notify their workers of any scheduling changes at least two weeks in advance; and require employers to provide an extra hour of pay if they make schedule changes less than 24 hours before a shift. The bill also includes an anti-retaliation section to protect workers asking for scheduling changes.  Vermont and San Francisco have already adopted laws that give workers the right to request more flexible schedules.

Much of the conversation surrounding low-wage workers focuses on the wages themselves. But policymakers and companies alike also need to understand the consequences of business practices such as just-in-time scheduling, which may affect not only the well-being of many workers, but also businesses, consumers, and the economy as a whole.

 

Things to Read on the Evening of July 15, 2015

Posted on by Brad DeLong

Noted for Your Evening Procrastination for July 16, 2015##

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Must- and Should-Reads:

Might Like to Be Aware of:

Must-Read: Nick Bunker: Should Average Investors Be Chasing Unicorns?

Posted on by Brad DeLong

Must-Read: Nick Bunker: Should Average Investors Be Chasing Unicorns?: “Accredited individual investors today are analogous to “angel” investors…

But… these wealthy individuals need advice on investing in individual young firms, [so] then what can we expect among a much larger pool of newly minted, inexperienced investors? An effort to democratize returns might instead spread the experience of investing in a busted enterprise. After all, according to one estimate 75 percent of venture capital-backed firms end up failing. Given the sobering trends in retirement savings in the United States, perhaps opening up more avenues to lose savings isn’t a good idea.

Must-Read: Elizabeth Jacobs: The Declining Labor Force Participation Rate: Causes, Consequences, and the Path Forward

Posted on by Brad DeLong

Must-Read: Elizabeth Jacobs: The Declining Labor Force Participation Rate: Causes, Consequences, and the Path Forward: “It is important to avoid being distracted by policies that have little to do with the trends in the labor force participation rate…

…Social Security Disability Insurance, or SSDI, for example, has been cited as a program that reduces the participation rate by discouraging work…. But studies suggest that the increase in the number of Americans receiving SSDI may be a simple matter of demographics…. Controlling for the aging of the population the rate for men has been on the decline for the last 20 years. At the same time, the age-adjusted rate for women has increased, but to a level similar to the age-adjusted rate for men…. Similarly, the Affordable Care Act has been cited as a program that could reduce the labor force participation rate and depress overall labor supply… [but] those effects generally reflect a positive outcome for workers.

Policy Paralysis and/or Secular Stagnation?

Posted on by Brad DeLong

Some Talking Points from Fall 2014:

I never turned this into a proper piece…

At some deep level, the overwhelming problem is that Eurocrat elites–and, to a remarkably and unhealthy degree, American elites and not just republican legislators–believe that:

  1. Something called “structural reform” is essential for future economic prosperity.
  2. “Structural reform” cannot be accomplished during a time of prosperity and full employment, but requires deep and visible pain to get politicians to do what must be done.
  3. The remarkable failure of austerity to produce either a successful structural rebalancing or political pressures that lead to meaningful “structural reform” since 2007 means only that austerity has not been austere enough.

We are indeed trapped in the sewer of Romulus…

  1. “Secular stagnation” is a misleading phrase. It was coined by Alvin Hanson in the 1930s to describe a fear that an exhaustion of technological opportunities in a world monetary system that still possessed a nominal anchor to gold would generate a sub-zero full-employment Wicksellian natural rate of interest. But we don’t have an exhaustion of technological opportunities. We don’t have a monetary system with a nominal anchor to gold.

  2. What we do have are rates of inflation in developed market economies that expose us to severe downside macroeconomic risks, and a lack of risk tolerance and risk-bearing capacity even here in the United States that keeps even the lowest of attainable safe interest rates from producing high enough equity and capital valuations to make it profitable to boost investment enough to push the developed market economies to anything like full employment.

  3. There have not yet been any convincing stories of how a trend growth drop would have emerged in the absence of the investment shortfall, the labor skills atrophy, and the other channels of “hysteresis” that have been in operation since 2008.

  4. The only major supply shock in the past decade has been a positive one: the unexpected emergence of new hydrocarbon-extraction technologies like tracking.

  5. We could have a large adverse hydrocarbon-supply shock from political turmoil at the borders of Muscovy. But we have not yet.

  6. What to expect from interest rates? They will, of course, fluctuate. The modal scenario I see in the United States is one in which the Federal Reserve begins raising interest rates too early–a la Sweden at the start of this decade–and then has to return to the ZLB in a year or two as the economy weakens. The optimistic scenario is that that of the smooth glide-path to the normalized, Goldilocks economy. The pessimistic scenario is another adverse shock hits demand while the Federal Reserve is still too close to the ZLB to effectively respond, and political gridlock gives the United States another lost decade.

  7. What to expect from interest rates? They will, of course, fluctuate. The modal scenario I see in the Eurozone is one of continued waves of crisis as Eurozone breakup fears cause spikes in interest rates in the European periphery, as the ECB then does enough to calm markets but not enough to generate recovery, that Germany makes covert fiscal transfers to keep the pain low enough to keep the Eurozone together–and winds up spending much much more than if it had bit the bullet back in 2000–and that German growth over the medium term remains adequate as the chronic Eurozone crisis keeps German exports competitive. The pessimistic scenario is one of Eurozone breakup–with German interest rates even lower than they are, and peripheral European interest rates high with redoubled risk premium. The optimistic scenario is that somehow, some way, the Confidence Fairy appears and the Eurozone has a smooth glide-path to a normalized, Goldilocks economy.

  8. Back in 1829, the young British economist John Stuart Mill was the first to argue that the market monetary economy there would not be enough spending to employ everyone who could be profitably employed at the wages they demanded if and only if the economy lacked enough cash and cash-like assets to make households, businesses, and savers as a group happy with their holdings of means of payment and potential collateral.

  9. The provision of those cash and cash-like assets has to be the business of the national or currency-area government–if not of a super-continental monetary and financial hegemon–because no private entity has the power to make its liabilities legal tender and thus the ability to guarantee their acceptance in transactions and as collateral.

  10. The ECB is tasked with this Millian objective of providing the eurozone economy with the means of payment and stores of value–cash and potential collateral–that the economy needs. The ECB is failing.

  11. Fourth quarter-to-fourth quarter real GDP growth in the eurozone in 2013 was 0.5%. Fourth quarter-to-fourth quarter real GDP growth in the eurozone in 2013 looks to be 0.4%. December-to-December inflation in the eurozone in 2013 was 0.9%. December-to-December inflation in the eurozone in 2014 looks to be 0.0%. The ECB’s annual inflation target is 1.75%. Given the potential for catchup in the European periphery to higher productivity standards, that can only be attained via nominal eurozone GDP growth of 4%-5%/year. The 1.4% nominal GDP growth we saw in 2013 and the 0.4% nominal GDP growth it appears we will see in 2014 tell us that the ECB has fallen further behind the curve than it was at the end of 2012: 7.2%-points further behind the curve than it was then.

  12. One possibility is that the ECB is failing because it cannot do so, for every time it creates a reserve deposit it does so by withdrawing a high-quality liquid asset from the private market place, and so to first-order leaves the stock of cash plus potential collateral unchanged. Perhaps the ECB cannot carry out its million objective without engaging in what would be regarded as fiscal policy.

  13. Another possibility is the ECB is failing because financial Germany believes that the ECB’s target must be not a 1.75%/year inflation target for the eurozone, but a 1.5%/year or less inflation target for Germany–and that Mario Draghi is not powerful enough to overrule financial Germany in the corridors of power in the ECB and hence cannot do whatever it takes.

  14. In this context, I am reminded of Ludger Schuknecht’s exchange with Martin Wolf back in 2012, in which Schuknecht said, among others things: “Mr Wolf’s solution… is risk transfer via eurobonds… and demand stimulation via cheaper money and less fiscal consolidation in Germany. But the public and markets have been led to believe in short- term measures for far too long….” “expansionary policies and weak fiscal positions… created the current problems…” “fiscal consolidation and structural reforms… have invariably succeeded wherever they have been implemented…” “any decision to disregard the rules or introduce ill -suited tools such as eurobonds could undermine… confidence…” “Germany must not undermine its role as an anchor of stability via inappropriate and ineffective fiscal stimuli…” “German and European interests are indeed very much aligned and they are reflected in the jointly agreed strategy…”: the policies that the eurozone has undertaken over the past 2.5 years were, to his eyes back in 2012, already dangerously radical and already pushing the utmost of the envelope that Germany could allow. Yet now we clearly need more…

When Greece, Her Knee in Suppliance Bent…

Posted on by Brad DeLong
Graph Gross Domestic Product by Expenditure in Constant Prices Total Gross Domestic Product for Iceland© FRED St Louis Fed

The big cost to the Eurozone of Greece’s exit is that then the Eurozone becomes transformed from a currency union into a fixed exchange rate system, and fixed exchange rate systems are unstable. Therefore the economic integration an increased prosperity that was anticipated from the currency union will vanish.

How large this really was is debatable. But the northern Europeans appear to value it a lot. Therefore they should be willing to pay to make Greece’s life happier inside the euro zone then it would be via exit and devaluation.

So far that has simply not happened. There is no dispute that Greece would today be vastly better off if it had done an Iceland back in 2010.

Now comes the IMF research staff to say–not surprisingly to anyone who has been following the news on multipliers–that the Eurozone’s program for Greece will block Greek recovery for, effectively, as long as it is not replaced by something that recognizes the shape of economic reality:

Josh Barro: The I.M.F. Is Telling Europe the Euro Doesn’t Work: “The I.M.F. memo amounts to an admission that the eurozone cannot work in its current form…

…It lays out three options for achieving Greek debt sustainability, all of which are tantamount to a fiscal union, an arrangement through which wealthier countries would make payments to support the Greek economy. Not coincidentally, this is the solution many economists have been telling European officials is the only way to save the euro–and which northern European countries have been resisting because it is so costly…. Of course, the main alternative to a deal is a Greek exit from the euro, which would also be costly to European holders of existing Greek debt, who could expect to be repaid in devalued drachmas, if at all. That is a reason for European governments to be willing to pay the price prescribed by the I.M.F. to make a Greek deal work. But the I.M.F. officials are saying they cannot pretend that a bailout deal will lead to an eventual payment in full from Greece. If Greece stays in the euro, it will need much more financial support from the rest of Europe than was admitted in Monday’s deal, and the I.M.F. is asking European governments to put that admission on paper.

And Paul Krugman:

Paul an: Roach Motel Economics: “The crude Phillips curve I estimated for Greece…

…suggests that it takes about 4 point-years of output gap to reduce prices relative to baseline by 1 percentage point. So suppose that you are 25 percent overvalued, and get no help from higher inflation in the core. Then ‘internal devaluation’ requires sacrificing around 100 percent of a year’s GDP…. Countries as overvalued as much of the European periphery became thanks to the lending boom are supposed to sacrifice a full year’s economic output as part of a process of beating prices and wages down. Now more than ever, the euro looks like a terrible idea.

Must-Read: Paul Krugman: Faithocrats

Posted on by Brad DeLong

Must-ReadPaul Krugman: Faithocrats: “One of the ideas floating around in the aftermath of the sack of Athens…

…has been that of, in effect, deposing Syriza from outside and installing a ‘technocratic’ government…. But let me note, as I have before, that what Europe calls ‘technocrats’ aren’t people who know how the world works; they’re people who subscribe to the approved fantasies, and never change their minds no matter how badly wrong things go. Despite the overwhelming evidence that austerity has exactly the dire effects basic textbook macro says it will, they cling to belief in the confidence fairy. Despite a striking lack of evidence that ‘structural reform’ delivers much of a growth boost, especially in an economy suffering from a huge output gap, they continue to present structural reform…. What Europe usually means by a ‘technocrat’ is a Very Serious Person, someone distinguished by his faith in received orthodoxy no matter the evidence. It’s as Keynes said:

Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.

And it looks as if there’s a lot more failing conventionally in Europe’s future.

Should average investors be chasing unicorns?

Posted on by Nick Bunker

Startup firms reaching “unicorn” status—private companies such as Uber, Dropbox, and Spotify valued at more than $1 billion—and the general fervor about high-tech startups are now fodder for movies, novels, and television shows. Yet as popular as these unicorn stories are, average investors cannot invest in these types of firms before they go public on NASDAQ or other stock markets. At least not yet. A provision of the Jumpstart Our Business Startups Act, passed by Congress three years ago, is working its way through the U.S. Securities and Exchange Commission. The provision would allow a less wealthy class of individual investors to buy equity stakes in private companies. But exactly how useful would this ability be for individuals, private companies, and the economy overall?

Currently, if you want to invest in a private startup company you have to be certified as an “accredited investor” who either earns a certain amount of money ($200,000 as an individual, $300,000 if married) or has a net worth of more than $1 million (not including your home). These investment criteria obviously restrict the pool of potential investors to the very wealthy, which means a company such as, say, Gimlet Media, a startup podcasting firm that announced an opening round of private funding last year, cannot offer the vast majority of its listeners a chance to invest in the new company.

The JOBS Act, specifically Title III of the act, allows for increased access to these firms for average investors by reducing the qualifications for an accredited investor through equity crowdfunding. Basically, it’s Kickstarter for stocks. If the regulation were already in place last year, then more of Gimlet Media’s listeners might have bought a stake in the startup. The proposed rules now under consideration would allow everyday investors to invest in startup equity, but with some still-to-be-determined restrictions on the percentage of their income and net worth that they could invest.

But there are questions about just how useful private stock crowdfunding would be.

First, it’s not clear that companies would jump at the chance to increase the amount of crowdfunding. Many already tap currently accredited investors, as Jeremy Quittner writes at Inc. Private companies might simply stick with investors who are already “accredited” as they tend to have far more money. And the new regulations will probably result in increased filing costs for companies that get funds from unaccredited investors because the private firms will have to increase disclosure and public filings of their financial information.

This last requirement could get very expensive. The SEC estimates the cost attracting unaccredited investors would be quite high, reports Jim Saska at Slate: $39,000 in fees to raise $100,000 or more than $150,000 to raise $1 million. Why would more companies jump into this endeavor for small investments with high costs?

On the investor side, the gains are questionable as well. Accredited individual investors today are analogous to “angel” investors, those wealthy individuals who often provide seed funding for startup firms. The number of angel investors has increased in recent years and new startup firms have had the strange problem of too many angels chasing opportunities to invest in firms. But, as Mike Isaac at The New York Times reports, the current investment process isn’t as clear cut, with one investment firm stepping in to educate these investors about process and give them tips.

If these wealthy individuals need advice on investing in individual young firms, then what can we expect among a much larger pool of newly minted, inexperienced investors? An effort to democratize returns might instead spread the experience of investing in a busted enterprise. After all, according to one estimate 75 percent of venture capital-backed firms end up failing. Given the sobering trends in retirement savings in the United States, perhaps opening up more avenues to lose savings isn’t a good idea.

The broader economic benefits of increased private investing in startups seem small as well. If anything the U.S. economy is awash in capital. The very fact that startups can reach valuations in excess of $1 billion without going public is testament to the ease with which private companies can access capital. The startup rate in the U.S. economy is on the decline, but it’s not clear that a lack of financing has anything to do with this long-term trend. The crowdfunding idea for stock investments in private companies may have been conceived with good intentions, but we all know where a road paved with them can lead.

Things to Read on the Evening of July 14, 2015

Posted on by Brad DeLong

Must- and Should-Reads:

Might Like to Be Aware of: