Must-Read: : What’s Left After Higher Education Is Dismantled: “There’s no set of institutions capable of or interested in…
…providing quality, affordable higher education for a large population outside public schools. We must remember this as state legislatures continue to dismantle, defund and privatize public higher education, because as that project succeeds no one else will step into the void and provide the education that will disappear…
Must-Read: : Rescuing the Free-Trade Deals: “Perhaps success can be achieved if the TPP’s advocates can acknowledge that rather than being a model…
…this debate should lead to careful reflection on… trade agreements in America’s international economic strategy…. First, the era of agreements that achieve freer trade in the classic sense is essentially over…. What we call trade agreements are in fact agreements on the protection of investments and the achievement of regulatory harmonization…. There may well be substantial gains to be had from such agreements, but this needs to be considered on the merits area by area. A reflexive presumption in favor of free trade should not be used to justify further agreements…. Second, there needs to be a balancing of the political costs of legislating trade agreements against those of other forms of internationalism. If a small fraction of the U.S. political capital that has been devoted to the Trans-Pacific Partnership had instead gone to support reform of the International Monetary Fund and adequate funding for international financial institutions and the United Nations, these objectives could have been attained–and with greater benefits….
Third, there needs to be careful consideration going forward of the ramifications of trade agreements that include some countries while excluding others…. Fourth… a generation ago… trade agreements that encouraged the adoption of market institutions in developing economies and enhanced those countries’ access to the industrial economies were crucial to creating a truly global economy. Today, we have such an economy…. Our challenge now is less to increase globalization than to make the globalization we have work for our citizens…. Trade diplomacy… must be only one component of a broader approach that has as primary stakeholders not just global companies but also those concerned with economic equity, protection of the environment, opportunities for workers to migrate and financial stability…
Must- and Should-Reads:
Over at Equitable Growth—The Equitablog
Might Like to Be Aware of:
Must-Read: The extremely sharp Paul Romer sends us to the very patient and clever Dietz Vollrath. I am broadly with Paul Romer here: papers that do not clearly and succinctly explain (1) what they are doing, (2) why they are doing it, and (3) why the result is of interest to those of us who want to understand the world are wasting electrons, wasting photons, and wasting attention:
: What Assumptions Matter for Growth Theory?: “Somewhere along I-40 and I-81 I was able to get a little clarity…
…Non-rival inputs are things like ideas that can be used by many firms or people at once without limiting the use by others. Think of blueprints. Rival inputs are things that can only be used by one person or firm at a time. Think of nails. The income earned by both rival and non-rival inputs has to add up to total output…. Here are three statements that could be true. (1) Output is constant returns to scale in rival inputs. (2) Non-rival inputs receive some portion of output. (3) Rival inputs receive output equal to their marginal product. Pick two. Romer’s argument is that (1) and (2) are true. (1) he asserts through replication arguments…. (2) he takes as an empirical fact. Therefore, (3) cannot be true. If the owners of non-rival inputs are compensated in any way, then it is necessarily true that rival inputs earn less than their marginal product….
McGrattan and Prescott abandoned (1)…. Boldrin and Levine dropped (2)…. Romer’s issue with these papers is that (1) and (2) are clearly true, so writing down a model that abandons one of these assumptions gives you a model that makes no sense…. From Romer’s perspective, abandoning (1) makes no sense due to replication…. [And] abandoning (2) also does not make sense… [because] some… non-rival ideas are remunerated in some way…. The ‘mathiness’ comes from authors trying to elide the fact that they are abandoning (1) or (2). McGrattan and Prescott have this stuff about location…. Lucas… is abandoning (2), and asserts that this is something we know as a result of prior work. It’s not…. The issue with Boldrin and Levine is… that they dismiss the whole idea of non-rival ideas and abandon (2)….
What does all this have to do with Euler’s Theorem? This theorem is the reason (1), (2), and (3) cannot all be true at once…
: Brad Delong on the TPP: “In this short preview of my interview with economist Brad Delong…
…we discuss the economic and social impact of the trade deals currently being negotiated by the US Trade Representative, including the Trans Pacific Partnership (TPP), Trade Promotion Authority and related bills under consideration in Congress this month. The full interview will be available next week…
http://traffic.libsyn.com/windcastle/Brad_Delong_Excerpt_on_Trade.mp3
Scott Gosnell: Let me ask about the Trans-Pacific Partnership and other trade deal that are going on right now. What do you think of them?
Brad DeLong: The actual deal seems to have a set of important tariff reductions and export-import restraint reductions. That is worth $4 trillion to the people of the Pacific basin over its expected lifetime. But it is also worth -$1 trillion to people–like the people of Bangladesh–who are left out, who are excluded from things like the textile market access provisions.
Normally I would say: adding up a +$4 trillion for some people and a -$1 trillion loss for other people–that looks like a winner. Except that the people outside–the people in Bangladesh–are poorer on average than the people inside. Bangladesh is a lot poorer than even Vietnam right now. And so the utilitarian calculus tells us that even the trade part is not nailed down. The longer it goes without pro-TPP people doing the work to nail down the utilitarian calculus of the trade benefits, the more antsy I get.
My first instinct would be to say: $4 trillion – $1 trillion = +$3 trillion. There is a $3 trillion bill lying on the sidewalk in this thing. We should pick it up and utilize it. We can figure out how to redistribute it later. But the important thing is to pick it up.
So my first instinct is to say that I am for the “trade” part–100% in favor. But the fact that the distributional argument has not been made drops me down to 75%.
Then there is the dispute resolution aspect. The dispute resolution aspect worries me a lot. I don’t understand it. The case for it–arguing that this is a good thing–has also not been made. And, as best I can tell, once this dispute resolution framework is set up it is then next to impossible to modify. We may be doing the equivalent of what the European Union did in setting up the European Central Bank: creating institutions without having any reasonable means of changing its modes of operation should they be wrong.
I think Europe has suffered significantly over the past eight years because the European Central Bank is not subject to enough political control. I fear this is what we are getting into with the dispute resolution mechanism. That drops me from +75% down the +25%.
Then there are the intellectual property provisions. I tend to think we should be, on balance, loosening intellectual property protection in the world rather than tightening them. That drops me from +25% to -25%.
So at the moment I am slightly opposed to the Trans-Pacific Partnership. I am in favor of passing fast-track, so Obama can actually finished negotiating it. Then we can look at it. But if what he negotiates turns out to be what I expect he will negotiate, I will wind up being opposed then on the final vote. Unless, that is, someone can convince me that the intellectual property protections are not as bad as I fear, or that setting the dispute resolution mechanisms in stone is not as dumb-ass a move as I fear.
Scott Gosnell: I’ve noticed that the Europeans are now working to take out the dispute resolution. Is that good?
Brad DeLong: The fact the Europeans are invited to share my worries about this makes me even more slightly negative about the thing, as it is portrayed right now.
I generally feel like more trade is a good thing–if you do it right. If you trust your social democracy, the fact that trade may have bad distributional effect is something you really should not worry about that much. You can always fix that.
One wonder here is this: If this thing passes, it is going to pass the House with 170 Republican and 50 Democratic votes. And, if it passes, it passes the Senate with 50 Republican and 10 Democratic. This is a Republican priority. So why isn’t there something attached to the package to make the entire package a distributional win rather than a distribution loss or a distributional zero? If Obama is going to support this, why hasn’t he extracted a price in negotiations–something, you know, like a Food Stamp enhancement, a minimum-wage increase, an extension of the Earned Income Tax Credit to childless workers, something to do with family and medical leave. Any of the huge number of priorities that are not getting passed in the next year and a half with a Republican Congress, unless they are linked to something the Republican Congress really likes.
Here is something the Republican caucus in Congress really likes. Yet there has been no attachment.
This causes me to wonder: Is there minimal understanding of what game they are playing on the part of White House congressional relations, and indeed on the part of Obama’s inner circle and the president himself right now? That there has not been a price extracted for White House agreement?
Scott Gosnell: If you had make a guess, what what do you think that about?
Brad DeLong: I do not know. I don’t really understand the guy.
It does seem that if you are negotiating a bill… That i, President Bill Clinton thought that NAFTA was by and large a good thing. He may have been wrong in there. He may have been right. In retrospect I still think the jury is out–although I’d probably say a slight minus now. But Clinton certainly thought it would be a good thing. It was already negotiated. And so Clinton went off and negotiated labor and environmental side agreements, added them to what Bush had, and submitted the thing as a package.
Why didn’t Obama name a Mitt Romney to be Special Trade Representative for negotiating the Trans-Pacific Partnership, let Romney negotiate it, and then gone to Boehner and McConnell and say: “Look. Here here’s what your guy as STR has negotiated. I’m worried about the distributional consequences. What will you give me in return for my signature to ease those worries?” Yet that’s not what he did at all.
Can somebody please tell me what is going on? What happened with the Obama administration and its making the case for the TPP?
I am what Paul Krugman calls “Davos Man” to a substantial degree–a card-carrying neoliberal, a believer in globalization and free trade, someone who has seen more than enough of the stupidities of places like Berkeley and so doesn’t mind hippy-punching now and then. As a believer in free-trade, in the importance of harmonizing global economic regulation, and in getting intellectual and general property rights right, I ought to be a very strong technocratic advocate for the TPP. Yet I found myself having major questions about it:
If the Obama administration ever produced serious answers to these technocratic questions on the technocratic level, I missed them. Did I miss them? Why did I miss them? And if I didn’t, why didn’t they provide them?
Plus there is the big negotiating question: This is, primarily, a Republican priority. Why would a Democratic president put himself in the position of begging for Democratic legislative votes for a Republican priority, rather than demanding Republican policy concessions on issues of importance to Democrats in return for his signature?
Or, in short, as I have often asked of Barack Obama and his administration: Doesn’t anybody in there know how to play this game? Or, perhaps, just what game do those in there think they are playing?
: There Are More Reasons to Oppose TPP than Just Jobs: “Rather than reforming and curtailing America’s onerous intellectual property laws…
…TPP seeks to expand and internationalize them…. Rather than creating more real protections for workers abroad, the TPP has limited enforcements capabilities… even as it allows for a system of international corporate courts to dissuade and even retroactively overrule domestic regulations concern jobs, health and the environment. Opposing TPP is actually a fairly easy call…
: Decline and Fall of the Davos Democrats: “OK, I didn’t see that coming…
…I don’t think it’s right to call this a case of Washington ‘dysfunction’. Dysfunction is when we get outcomes nobody wants, or fail to do things everyone wants done, because there doesn’t seem to be any way to package the politics…. Calling this ‘dysfunction’ presumes that this [TPP] deal is a good idea…. If you talk to administration officials… they offer a fairly sophisticated defense of this deal. It’s about geopolitics, they say–America has to be in the game here lest others (obviously including China) supplant our influence; meanwhile, they argue that the troubling aspects of the deal aren’t as troubling as they sound (they make a decent case on dispute settlement, less so on intellectual property). And they argue that the deal would actually improve labor protections in poor countries….
But the overall selling of TPP, to some extent by the administration and much more so by its business allies, has been… lectures from Those Who Know How the Global Economy Works–the kind of people who go to Davos and participate in earnest panels on the skills gap and the case for putting Alan Simpson in charge of everything–to the ignorant hippies who don’t…. But now Davos Democrats are known as the people who told us to trust unregulated finance and fear invisible bond vigilantes…. TPP’s Democratic supporters thought they could dictate to their party like it’s 1999. They can’t.
J. Bradford DeLong :: University of California at Berkeley
At FOLD: https://readfold.com/read/delong/discussion-of-matthew-rognlie-e43Cyu5q
Let me begin by thanking Matt Rognlie for doing some very serious and thoughtful digging into this set of factor-payments data. That digging leaves me in an ideal position for a discussant: There are interesting and important numbers. These numbers have not been put together in this way before. The author is wise enough not to believe he has nailed what the numbers mean to the floor. Thus I am in an excellent position to, if not add intellectual value, at least to claim a lavish intellectual-rent share of Matt Rognlie’s product.
I was weaned on the education-deficit explanation of recent trends in US inequality, perhaps best set out by the very sharp Claudia Goldin and Larry Katz (2009) in The Race Between Education and Technology. In their view, the bulk of U.S. inequality trends since the 1980s were driven by education’s losing this race. In the era that had begun in 1636 the United States-to-be had made increasing the educational level of the population a priority. But that era came to an end in the 1970s, while skill-biased technological change continues. That meant that the return to education-based skills began to rise. And it was that rise that was the principal driver of rising income inequality.
But, recently, reality does not seem to agree with what had once seemed to me to be a satisfactory explanation. First, to get large swings in the income distribution out of small changes in the relative supply of educated workers requires relatively low substitutability between college-taught skills and other factors of production. As inequality has risen, the required substitutability to fit the data has dropped to what now feels to me an unreasonably low magnitude. Second, while it is true that we have seen higher experience-skill premiums and sharply higher education-skill premiums, the real action in inequality appears now to be unduly concentrated in the upper tail. The distribution of the rise in inequality does not seem to match the distribution of technology-complementary skills at all.
Looking simply at my own family history, my Grandfather Bill reached not just the 1% or the 0.1% but the 0.01% back in the late 1960s in the days before the rise in inequality by selling his construction company to a conglomerate back in 1968. A good many of those of us who are his grandchildren have been very successful–consider my cousin Phil Lord’s LEGO movie, and the other franchises for which he gets “director” but not, or not yet, “producer” and “created by” credits. But even should any of us be as lucky as my Grandfather Bill was in terms of our peak income and wealth as a multiple of median earnings, we would still be a multiple of his rank further down in the percentile income distribution.
Today, you need roughly 3.5 times the wealth now in the U.S. and 8 times the wealth worldwide to achieve the same percentile rank in the distribution (see Atkinson, Piketty and Saez (2011), Piketty (2014), Saez and Zucman (2014)). I find it simply impossible to conceptualize such an extreme concentration as in any way a return to a factor of production obtained as the product of “hours spent studying” times “brainpower”, even when you also multiply by a factor “luck” and a factor “winner-take-all-economy”.
So what, then, is going on and driving the sharp rise in inequality, if not some interaction between our education policy on the one hand and the continued progress of technology on the other? Thomas Piketty (2014) has a guess. Piketty guesses that the real explanation is that 1914-1980 is the anomaly. Without great political disturbances, wealth accumulates, concentrates, and dominates. The inequality trends we have seen over the past generation are simply a return to the normal pattern of income distribution in an industrialized market economy in which productivity growth is not unusually fast and political, depression, and military shocks not unusually large and prevalent.
What about what John Maynard Keynes (1936) called the “euthanasia of the rentier”? Eighty years ago, Keynes guessed that, as accumulation proceeded and the capital-output ratio rose, the relative rate of profit would decline, and would decline by more. Thus more and more concentrated wealth meant a smaller and smaller share of income received by pure rentiers–as opposed to entrepreneurs and risk-bearers? Keynes strongly believed that the returns to investment at the margin were likely to drop rapidly enough to make this “euthanization of the rentier” the most likely possibility. Matt Rognlie agrees. And, indeed, it is difficult to see how, if investment takes the form of the accumulation of useful physical capital, it could be otherwise.
In an anticipatory response to this part of the Rognlie critique, Thomas Piketty (2014) points to a remarkable constancy in the rate of profit. His data show it as stuck between 4% and 5% per year across centuries with very different capital-output ratios. Piketty, however, appears agnostic as to whether the cause is easy capital-labor substitution, rent-seeking via control of the government the rich, or social structures that set 4-5%/year as the “fair” rate of profit. That this question is left hanging by Piketty (2014) is the reason why it is truly excellent that Matt Rognlie has written this paper, and so brought well-ordered and insightfully-organized data to these questions.
Rognlie focuses on the net rather than the gross capital share. That focus on the net capital share is surely right. I never understood why, in the Solow model, gross savings was supposed to be a function of gross output anyway.
There are the standard big worries over the data.[1] But let me skip over those: I cannot resolve them here, and it will take a great deal of additional thought and work before we can even begin to think of resolving them.
Let me focus, instead, on the big news. As Matt stressed, the big news in the post-World War II net capital share is the surge in housing: from 3% to 8% of private domestic value added. How much of this is a real increase in housing intensity? How much reflects congestion driven by exhaustion of the low-hanging superhighways? How much is rent-extraction via NIMBYism? How much trust do we give to these “imputed rent” imputations anyway? And what that does this mean, anyway?
There has always been a problem with using our GDP estimates as social accounts. In GDP, we measure each unit’s contribution to production at the final unit’s marginal cost and each unit’s contribution to societal well-being at the final unit’s money-metric marginal utility. In the presence of anything like near-satiation in consumption, or of near-exhaustion in productive capacity, this does not convey a true picture.
These are very hard questions. We do not have any very good answers to them.
The fact that the big news since World War II is a rise in housing as a share of value added is striking. It raises the question of whether this surge–the rise of valuable urban housing now–is the only such shift in value-added shares. Was there another significant shift a century and more ago? With the coming of the railroad, the iron-hulled steamship, and the first era of globalization, the value of European farmland and European mine installations crashed under competition from what were then developing resource-abundant economies.[2] How significant was this crash then for aggregate wealth and income distributions? Was it large enough to drive a significant share of the great equalization Piketty sees between 1900 and 1930? We do not know.
Moreover, to the extent that shifts in land values are the drivers of shifts in the capital-output ratio, is this really a problem. It is a problem, or rather a reflection and a consequence of a problem, to the extent that it is driven by NIMBYism. But is it a problem otherwise?
As Matt Rognlie has also also rightly stressed, a secondary piece of big news in his numbers is the pre-1990 fall in the net capital share. This fall is driven by a rise in calculated depreciation rates. And this rise in depreciation is real. Our capital stock today contains many more machines that are rapidly obsoleted by Moore’s Law, and so are not built for durability.
However, this raises a puzzle. The pre-1990 fall in the net capital share is not matched by a decline in the relative capitalization of the corporate sector. Matt points out a steady rise in capitalization up to the late 1960s, followed in the 1970s by a “negative bubble”–truly absurdly high earnings yields on equities–that lasts well into the 1980s. Since the start of the 1990s we see a bubbly rise in the relative capitalization of the corporate sector–a rise that persists in spite of sub-par business-cycle performance. There is thus a strong dissonance between what the production-function and depreciation logic says the value of claims to ownership of capital should be, and what financial markets say the value of claims to ownership are. Once again: these are very hard questions, and we do not have any very good answers to them.
Let me conclude quickly.
I strongly endorse what I take to be Matt Rognlie’s bottom line. The post-WWII variation in the observed net capital share is not explainable via returns on the underlying assets. Instead, the decomposition in Rognlie attributes most of the variation in the factor distribution of income to shifts in markups and pure profits, with accumulation and returns playing, outside of housing, a distinctly secondary role if any role.
It is equally hard to find any role for the race between education and technology. There should be such a role For we do think the factors of production are labor, education skills, machines, and buildings (including residences). Variations in factor supplies should show themselves in factor returns.
Likewise, variation in income inequality is hard to attribute to wealth ownership or to human capital investment or to differential shifts in rewards to factors like raw labor, experience-skills, education-skills, and machines.
Matt thus concludes that: “Concern about inequality should be shifted away from the split between capital and labor, and toward other aspects of distribution, such as the within-labor distribution of income.”
The only dissent I wish to make is this: Matt Rognlie is correct now. But this may not still be the case in 50 years, if Piketty is right.
Matt Rognlie’s conclusion is bad news for us economists. It leaves us in the same position as those trying to explain an earlier large puzzle in the production function, the twentieth-century retardation of the British economy. It was Robert Solow who said: “Every discussion among economists of the relatively slow growth of the British economy compared with the Continental economies ends up in a blaze of amateur sociology…” But this time, I really would like for us to be able to do better than we did then.
Note
[1] These big worries are:
References
Anthony B. Atkinson, Thomas Piketty, and Emmanuel Saez (2011), “Top Incomes in the Long Run of History”, Journal of Economic Literature 49:1 (Mar.): pp. 3-71 http://eml.berkeley.edu/~saez/atkinson-piketty-saezJEL10.pdf
Claudia Goldin and Lawrence Katz (2009), The Race Between Education and Technology (Cambridge: Belknap Press: 0674035305) http://amzn.to/1f70tMF
John Maynard Keynes (1936), _The General Theory of Employment, Interest and Money (London: Macmillan) http://amzn.to/1HA7a50
Thomas Piketty (2014), Capital in the Twenty-First Century (Cambridge: Belknap Press: 067443000X) http://amzn.to/1FYDXvf
Emmanuel Saez and Gabriel Zucman (2014), “Wealth Inequality in the United States since 1913 (Berkeley: University of California) http://gabriel-zucman.eu/files/SaezZucman2014Slides.pdf
2065 words
Must-Read: : Big Guvmint Keynesians: “That right economists have pretended for decades…
…that ‘Keynesianism’ is just a synonym for Big Guvmint Liberalism, despite knowing better, and that they managed to get away with it, is actually quite impressive.
It’s mildly true that salt water macroeconomists probably lean a bit more liberal, though they’re generally not the mirror image of the right wing cranks that are fresh water macroeconomists, but you don’t need to be liberal on any economic issue to think that basic Keynesian analysis and demand management (fiscal and monetary) over the business cycle is the best way to perceive things. Advocating expansionary policies during a downturn, and expansionary fiscal policies in particular when interest rates are at the zero bound, is hardly calling for nationalizing the means of production…
This is a weekly post we publish on Fridays with links to articles we think anyone interested in equitable growth should be reading. We won’t be the first to share these articles, but we hope by taking a look back at the whole week we can put them in context.
Links
University of Michigan’s Susan Dynarski lays out the facts on student debt and defaults. [the upshot]
“Capital in the 21st Century” author Thomas Piketty reviews Oxford University economist Anthony Atkinson’s new book “Inequality: What Can Be Done?” [nyrb]
Matthew C Klein argues that Spain’s “beautiful deleveraging” shows the deep flaws of the Euro currency zone. [ft alphaville]
University of Massachusetts-Amherst’s Arindrajit Dube writes explains the relationship between efficiency wages, monopsony, and how raising wages affects profits. [arin dube]
Ryan Avent argues that the best way economies can prepare for the next recession is to continue supporting the current recovery. [the economist]
Friday figure
Figure from “How raising the minimum wage ripples through the workforce” by Ben Zipperer.
Must-Read: All I can say is that Robert Skidelsky has much more patience than I would have, were I in his position:
: A Final Word With Niall Ferguson: “Like any skilful controversialist, Niall Ferguson knows…
…that when you have lost the main battle, it is time for diversionary tactics.
His latest charge against me is that I ‘changed my predictions after the fact.’ He quotes me as saying in November 2010 that Chancellor of the Exchequer George Osborne’s policies doomed the United Kingdom to ‘years of interminable recession.’ He claims that the pickup in UK GDP growth in 2013 – nearly three years after Osborne’s austerity budget of June 2010 – refutes my prediction. But this is nonsense, and Ferguson must know it. Has he never heard of ceteris paribus?… If he took the trouble to read… he would see that my prediction was conditional on existing policies. In fact, the policies changed. The second bout of quantitative easing, from October 2011 to July 2012, injected £175 billion ($272 billion) into the economy. And the austerity measures were sufficiently relaxed after two years for Osborne to be called a ‘closet Keynesian.’ But Osborne’s about-face did not come – and this is the point – before his original policies had done considerable harm…