Category: Equitablog

Must-Read: Òscar Jorda et al.: Leveraged Bubbles

Posted on by Brad DeLong

Must-Read: Òscar Jorda, Moritz Schularick, and Alan M. Taylor: Leveraged Bubbles: “The critical assumption was that central banks would be in a position to manage the macroeconomic fall-out….

They could clean-up after the mess. While the aftermath of the dotcom bubble seemed to offer support for this rosy view of central bank capabilities, the 2008 global financial crisis dealt a severe blow to the assumption that the fall-out of asset price bubbles was always and everywhere a manageable phenomenon. This observation meshes well with the key finding of this paper: not all bubbles are created equal…. When credit growth fuels asset price bubbles, the dangers for the financial sector and the real economy are much more substantial. The damage done to the economy by the bursting of credit-boom bubbles is significant and long-lasting. These findings can inform ongoing efforts to devise better guides to macro-financial policies at a time when policymakers are searching for new approaches in the aftermath of the Great Recession.

Conference nber org confer 2015 EASE15 Jorda Schularick Taylor pdf

Must-Read: Simon Wren-Lewis: Speak for Yourself

Posted on by Brad DeLong

Must-Read: Simon Wren-Lewis: Speak for Yourself, or Why Anti-Keynesian Views Survive: “[Russ Roberts:] ‘The evidence for the Keynesian worldview is very mixed…

…Most economists come down in favor or against it because of their prior ideological beliefs. Krugman is a Keynesian because he wants bigger government. I’m an anti-Keynesian because I want smaller government.’

Statements like this tell us rather a lot about those who make them. As statements about why people hold macroeconomic views they are wide of the mark…. The big/small government idea makes no theoretical sense. Why would wanting a larger state make someone a Keynesian? Many Keynesians, and most New Keynesians, nowadays acknowledge that monetary policy should be used to manage demand when it can. They also know that any fiscal stimulus only works, or at least works best, if it involves temporary increases in government spending. So being a Keynesian is not a very effective way of getting a larger state. It is also obviously false empirically…. Central bank models are typically Keynesian. Does that mean central banks want a larger state? No, it means the evidence suggests Keynesian economics works.

Russ Roberts says more recently:

The evidence is a mess leaving each of us free to cherry-pick what sustains our worldview be it ideological or philosophical or just consistent with our flavor of economics.

Ryan Bourne of the Institute of Economic Affairs goes further:

when the facts change, the Keynesians don’t change their minds.

To illustrate their belief that Keynesians ignore awkward facts both the authors above use the example of US growth following the 2013 sequester. (In my experience anti-Keynesians tend to shy away from data series, and especially econometrics, and prefer evidence of the ‘they said this, and it didn’t happen’ kind–particularly if ‘they’ happens to be Paul Krugman.) The problem is that this episode actually illustrates the opposite: that anti-Keynesians are so keen to grasp anything that appears to conflict with Keynesian ideas that they fail to do simple analysis and ignore others that do….

Why do we have to go over, yet again, that the clear majority of studies show that Obama’s stimulus worked? Why do we have to keep going over why UK growth in 2013 does not prove austerity works? Why do these people never mention the meta studies that confirm basic Keynesian analysis of fiscal policy? Because they want to believe that the ‘evidence is a mess’…. When anti-Keynesians tell you that support or otherwise for Keynesian macroeconomics depends on belief about the size of the state, they are telling something about where their own views come from. When they tell you everyone ignores evidence that conflicts with their views, they are telling you how they treat evidence. And the fact that some on the right take this position tells you why anti-Keynesian views continue to survive despite overwhelming evidence in favour of Keynesian theory.

Must-Read: Glenn Hubbard: Taking Capital’s Gains

Posted on by Brad DeLong

Must-Read: Glenn Hubbard: Taking Capital’s Gains:
Capital’s Ideas and Tax Policy in the Twenty-First Century, 68 National Tax Journal, 409–424 (June 2015): “This essay examines Thomas Piketty’s proposal in Capital in the Twenty-First Century for wealth taxation…

…as a policy tool for addressing rising wealth inequality. In so doing, I also address portions of his other two contributions — a history of inequality and wealth and a forecast for how wealth shares will evolve. While Piketty’s scope impresses, his tax policy conclusions miss the mark. Not only does his core analytical apparatus fail to bolster the case for greater taxation of capital, but familiar contemporary policy discussions of social insurance and consumption taxation better address the concerns he raises.

Things to Read on the Morning of June 17, 2015

Posted on by Brad DeLong

Must- and Should-Reads:

Might Like to Be Aware of:

Must-Read: Martin Wolf: Divorce Greece in Haste, Repent at Leisure

Posted on by Brad DeLong

Must-Read: Martin Wolf: Divorce Greece in Haste, Repent at Leisure: “Some argue… Greece at least would be far better off…

…after a default and exit… a default to its public creditors… a new currency, a big devaluation (accompanied by sound monetary and fiscal policies), maintenance of an open economy, structural reforms and institutional improvements would mark a turn for the better…. [But a] Greece that could manage exit well would have also avoided today’s plight.

Neither side should underestimate the risks. It is also crucial to avoid the contempt so characteristic of the frayed nerves caused by failing negotiations. Fecklessness may be a grievous fault, but grievously have the Greeks answered it. As the Irish economist, Karl Whelan, points out in a blistering response to Mr Giavazzi… from peak to trough, aggregate real gross domestic product fell by 27 per cent…. The unemployment rate reached 28 per cent in 2013…. Europeans are now dealing with Syriza because of this calamity. But they are also dealing with Syriza because of the refusal to write down more of the debt in 2010. This was a huge error, made far worse by the subsequent collapse of the Greek economy. Indeed, the vast bulk of the official loans to Greece were not made for its benefit at all, but for that of its feckless private creditors. Creditors, too, have a duty to take care….

It is tragic that the breakdown might occur now, after so much pain has already been suffered…. The parameters of such a deal are also clear: a small primary surplus in the short run, a decision by the eurozone to pay off the IMF and the ECB, accompanied by long-term debt relief, and a strong commitment to bold structural reforms by the Greek government…. Right now, however, the aim must still be to cool down and secure a deal. Yet, in the current mood of anger and recrimination, reaching one now seems ever more unlikely…. It might be a relief to divorce a difficult partner. But the partner will still exist…. Greece will remain strategically located and even inside the EU. Neither the Greeks nor their partners should imagine a clean break. The relationship will continue. It will just be poisonous…

The Past Two Decades: The Coming of the Information Economy Looks to Have Doubled Our True Rate of Economic Growth

Posted on by Brad DeLong

Over at Bloomberg View, smart young whippersnapper Noah Smith weighs in on the relationship between measured GDP at factor cost and societal well-being–including consumer surplus–in the information age:

Noah Smith: The Internet’s Hidden Wealth: “The stagnationists… claim to have the numbers on their side…

…People spend a relatively small fraction of their income on online services…. For products such as cable Internet and Samsung Galaxy smartphones, a small rise in price results in a big drop in demand. That’s very different from, say, the air, which you would keep breathing in just about the same amount no matter how expensive it got. If people are willing to abandon products just to save a few bucks, the hidden benefit of those products just can’t be that high. But… when we’re asking about the consumer surplus created by the Internet, we should look at the price elasticity of the entire Internet. How much would people collectively pay to avoid being utterly, totally cut off?… It’s obvious that we spend a lot of time online….

Austan Goolsbee and Peter Klenow… 2006… consumer surplus from Internet… in… time and money… 2 percent of… income. But… 2006, when fewer people… online… less time online… before the explosive growth of social media… the widespread adoption of smartphones…. streaming became big…. [Perhaps] our economy hasn’t stagnated nearly as much in the past decade as the headline numbers seem to suggest.

The conventional economic growth accounting tells us that consumption expenditures on telecommunications, information processing, and audiovisual entertainment are 2% and net investment in information processing equipment and software 3% of output. That means that a price fall of 10%/year in that category of high-tech goods contributes 0.2%+0.3%=0.5%/year to economic growth in standards of living.

But information-age services are also time- and attention-intensive. Suppose the coming of the broadband internet since 1995 has doubled the utility that humans get out of the 700 hours a year those of us in the North Atlantic typically spend interacting with our audio-visual technologies. If we are willing to guess that each hour’s activities contribute equally, doubling value for an amount of time equal to 0.35 of time spent working over twenty years boosts societal well-being at an extra rate of 1.75%/year.

This, however, requires that we be or become the type of people whose lives are truly enriched by our kindles and our tablets and our computers and our smartphones–that we value Netflix and Youtube and Google’s window into the online library of humanity and Facebook and the rest as massively superior to the ways we previously learned, gossiped, listened, and watched. But we are such people, or are rapidly becoming such people. You can argue over whether there is ultimate value in such a concentration of effort in more intensively engaging in activities that are basically snooping on and gossiping about our imaginary (and real) friends. But we, at least, like to do this. And information-age technologies enable us to do it very well.

So figure on not 1.75%/year but rather 3.5%/year as the true rate of increase of the American economy’s productivity over the past two decades…

Must-Read: Josh Bivens: A Vital Dashboard Indicator For Monetary Policy: Nominal Wage Targets

Posted on by Brad DeLong

Must-Read: Josh Bivens: A Vital Dashboard Indicator For Monetary Policy: Nominal Wage Targets: “The fact that wage inflation, and not any quantity measure of labor market slack…

…is the most direct intermediating link between interest rate increases and lower price inflation further suggests that policymakers should focus on this link explicitly. If the trend in productivity growth is fairly stable, then fairly precise wage targets can be estimated. Specifically, for a 2 percent price inflation target, 1.5 percent trend productivity growth is consistent with nominal wage growth of 3.5 percent. Since the recovery from the Great Recession began, however, nominal wage growth has stayed well under 2.5 percent and shows few signs of accelerating. Policymakers may even want to allow real… wage growth to exceed productivity growth for an extended, albeit temporary, period to allow normalization of the labor share of income…. A period of real wage growth exceeding productivity growth is actually a normal phase of recovery…

What is predistribution?

Posted on by Nick Bunker

One of the many threads in the debates about rising income inequality is the broad strategy by which policymakers should attempt to reduce inequality. There are two schools of thought in the debate.  The first group consists of people who believe that helping the less well-off through the redistribution of income through taxes and government programs—referred to as tax-and transfer programs in economic policy jargon—is the best path forward. The second camp is comprised of researchers and commentators who instead think the best path forward is to deal with the underlying market forces that cause inequality in the first place. One camp favors redistribution, the other predistribution.

Predistribution is a rather opaque buzzword. So let’s take a deeper look at what it means and why it might matter for our thinking efficiency and reducing income inequality.

The term originated in an essay by Yale University professor Jacob Hacker and has caught on more in the United Kingdom than in the United States. In short, this approach prioritizes policies that more directly intervene in the labor market to reduce income inequality over polices that redistribute incomes after taxes are levied. For policymakers concerned about the incomes of those at the bottom of the income ladder, a predistributionist approach would favor raising wages, perhaps by increasing the minimum wage, over increasing government transfers to those workers in the form of, say, earned income tax credits.

So why might we think that intervening directly in the labor market would be preferable to increasing taxes and transferring some of those proceeds to workers further down the income ladder? First of all, the United States has a much more unequal distribution of market incomes than other advanced economies. In order to achieve a less unequal distribution of income, U.S. policymakers would have to increase post-tax-and-transfer income for those further down the income ladder more than those other advanced countries do. While there is a debate about how costly such an approach might be, the question, then, is which method is the most efficient way to reduce inequality: raising market incomes or raising incomes after taxes and transfers.

For a while, the assumption was that redistribution was less costly than fiddling with the mechanisms of the labor market. But there’s growing evidence that the labor market isn’t perfectly competitive and therefore pre-tax-and-transfer labor market policies wouldn’t be as costly as previously thought. The debates about the minimum wage are, again, a good example. If moderate increases in the minimum wage don’t lead to increases in unemployment then raising the minimum wage doesn’t reduce efficiency as much as previously thought. In fact, the losses in economic efficiency from raising revenues from high-earning workers and then transferring them to low- and moderate-wage earners may be more costly.

Researchers and policymakers should weigh the relative merits of each approach, redistribution and predistribution. Given the new emerging consensus about the labor market, focusing on labor market reforms that help workers earn higher incomes directly might come out as the better option more than previously thought.

Things to Read on the Afternoon of June 15, 2015

Posted on by Brad DeLong

Must- and Should-Reads:

Over at Equitable Growth—The Equitablog

Might Like to Be Aware of: