Category: Equitablog

Evening Must-Read: The Hamilton Project: Future of Work Event: Tweets

Posted on by Brad DeLong

The Hamilton Project (@hamiltonproj) | Twitter:

You can watch the full #FutureOfWork forum on @cspan http://cs.pn/1z3WKBP
That concludes our #FutureOfWork event.Thanks to our panelists for a great discussion. Visit http://bit.ly/1BZmC4U for video & audio
Who is going to be technologically displaced if machines take away labor jobs? That’s a social problem, concludes @LauraDTyson #FutureOfWork
‘US has great incentives to do #research, but weak incentives to create #jobs and keep profits here’ – @LauraDTyson #labor #FutureOfWork
Given nature of tech changes, a lot is not going to measurable unless you figure what the output is, @LauraDTyson asks panel #FutureOfWork
Prabhakar of @DARPA: A lot of new tech we develop will only be used by DOD, but some depends on grad students, new businesses, entrepreneurs
Maybe the goal in business isn’t to be the next @Google, but to be bought by Google, says @JHaltiwanger_UM discussing new business models
.@JHaltiwanger_UM notes that declining econ dynamism means decreased ability of labor mrkt to absorb workers displaced by tech #FutureOfWork
Audience Question: Is one challenge with business innovation related to increasing shareholder wealth? #FutureOfWork
.@JHaltiwanger_UM: One misleading statistic is on research & development of new technology and business innovation #FutureOfWork
.@LauraDTyson: Let’s think about technological advancements in terms of distribution. How do we allow everyone to get these opportunities?
.@LauraDTyson: What countries are surpassing us in business dynamism? @JHaltiwanger_UM doesn’t believe we’re too behind #FutureOfWork
.@JHaltiwanger_UM discusses how occupational licensing stifles business innovation & dynamism. Read our new paper: http://bit.ly/1Hdqcz7
‘I love @Uber because it’s bringing #jobs in demand back’ – @amcafee @hamiltonproj #FutureOfWork #businessinnovation
Being analytical & ‘geeky’ is a better way to quantify human capital and labor, says @amcafee #FutureOfWork
.@amcafee Discusses how @Uber is a great, innovative business for creating labor, earning wages #FutureOfWork
Prabhakar make important point: tech is much more than IT. ‘Makers’ & 3D printing; synthetic biology; materials; neurology. #FutureOfWork
Through intersecting science & technology, @DARPA is able to ‘free the brain from the limitations of the body’ says Prabhakar #FutureOfWork
Major area of research that @DARPA is excited about is intersecting biology & physical science w/ tech science, says Prabhakar #FutureOfWork
It’s important to find different ways to make these new tech tools available to lots of people, says Prabhakar of @DARPA. #FutureOfWork
Prabhakar of @DARPA: The word ‘technology’s is used synonymously w/ information. Technology is much more broader than that. #FutureOfWork
.@LauraDTyson asks:To what extent are these amazing changes in technology, that are labor displacing, are discouraging the entrepreneurship?
@hamiltonproj: Robots could snag a lead role in ec debate, says @jimtankersley, featuring new @hamiltonProj work http://wapo.st/1A2HPMV 
.@JHaltiwanger_UM Maybe the business model in the US has changed & we don’t have to do so much experimentation. #FutureOFWork
.@JHaltiwanger_UM The US has been flexible & fluid in these changing economic times by moving workers to new productive places #FutureOfWork
We’ll be back momentarily w/ our second #FutureOfWork panel: @amcafee of @MITSloan, @JHaltiwanger_UM, the Director of @DARPA & @LauraDTyson

Great first #FutureOfWork panel w/ @LHSummers, @aneeshchopra, @erikbryn & David Autor http://bit.ly/1BZmC4U
.@LHSummers:’We have to think carefully about what the alternative to work is & how meaning & community are found in the absence of work.’
Audience Question: Can growth of technology lead to shorter work wk w/o affecting wages? #FutureOFWork
David Autor of @MIT: We should think of globalization & technology working hand in hand at this point #FutureOfWork
If you’re just joining us, we are live tweeting from our event on the #FutureOfWork in the Machine Age. Tweet your questions!
.@LHSummers argues we need more demand in labor market, not just more training. #FutureOfWork
#FutureOfWork panel turns to discussion on importance of education in the age of the machine http://bit.ly/1A3djml
Do we need to rethink our social contract & policy to help those people left behind in the Machine Age? asks Melissa Kearney #FutureOfWork
Melissa Kearney asks: Will a sufficient amount of people acquire skills & talents to economically prosper in the machine age? #FutureOfWork
A challenge is that people can see disemployment caused by new technology before the impact on productivity, says @LHSummers #FutureOfWork
What do smart machines, robotics & digitization mean for the #FutureOfWork? Read the latest paper from @hamiltonproj: http://invent.ge/1z2vUtI
.@LHSummers notes the growth of unemployment of men, & availability of jobs. Is it due to technology, globalization, policy? #FutureOfWork
When a sector has rapid technological progress but the world can absorb only so much, does it become unimportant? @LHSummers discusses w/ us
.@LHSummers: On one hand we’re convinced of the pervasiveness of technology, & on other hand the productivity proof is dismal. #FutureOfWork
The democratization of entrepreneurship is the most exciting thing I’ve seen, says @aneeshchopra discussing the impact of new technology.
We are now opening big sectors like health care, edu to technology, increasing the productivity, says @aneeshchopra #FutureOfWork
.@aneeshchopra: Health care, energy & edu have not been as plugged into new technology until recently, now new incentives #FutureOfWork
David Autor: What matters is how rapidly technology changes. #FutureOfWork
Our first #FutureOfwork panel is up featuring David Autor of @MIT, @LHSummers, @aneeshchopra & @erikbryn

‘We ain’t seen nothing yet when it comes to technological progress,’ says @amcafee #FutureOfWork
.@erikbryn: Technology is a tool. We should use this tool to create shared prosperity. #FutureOfWork
.@erikbryn How we use technology is important to remember. Is has the potential to create enormous wealth w/o as much work. #FutureOfWork
There’s no economic law that tech growth will benefit everyone equally. Some people will be left behind, says @erikbryn #FutureOfWork
Now LIVE on C-SPAN3: Technology and the workplace #FutureOfWork .. via @BrookingsInst & @hamiltonproj
Great improvements in machine intelligence in uniquely human traits like language, writing, muscle, says @erikbryn #FutureOfWork
.@erikbryn discusses The Great Decoupling of U.S productivity, GDP, employment & income & how technology & machine has impacted this.
One of Roger Altman’s takeaways from @erikbryn & @amcafee book about Machine Age: The effects will cause considerable economic disruption.
@hamiltonproj and we are off :) honored to join @LHSummers on the future of work

Bob Rubin: Will the growth in technology lead to a basic change in our lifestyle, with less work and more leisure? #FutureOfWork
New business formation in the U.S. has decreased significantly. Bob Rubin asks: Is that relevant to business dynamism? #FutureOfWork
Policies focused on edu, job creation, productivity, & research improve the direction of the American worker, says Bob Rubin #FutureOfWork

How will rapid technological change impact the economy & the #FutureOfWork? Read a new @hamiltonproj paper: http://brook.gs/1A6SJRV 
We are live tweeting during today’s #FutureOfWork event, beginning shortly. Send us your questions! http://bit.ly/1BZmC4U

Afternoon Must-Read: Simon Wren-Lewis: Endogenous Supply and Depressed Demand

Posted on by Brad DeLong

Simon Wren-Lewis: Endogenous Supply and Depressed Demand: “Without fiscal austerity the US, UK and Eurozone…

…could currently be at output levels that are above current estimates of potential or natural output…. But are these estimates of potential output really independent of the path of actual output?… We know that stylised view is wrong for a variety of reasons. Labour that has been unemployed may become deskilled. Firms that are forced to cut back on investment in a recession may take time to rebuild their productive capacity. However there may be other ways it is wrong for reasons that are much more difficult to quantity. In particular, if investment falls in a recession, new technology that has to be embodied in new machines may fail to emerge, so the rate of technological progress may appear to decline. These processes may not matter too much in normal (mild and short lived) booms and busts. However following a large recession they may become more important…. After a severe recession which appears to result in a loss of capacity, you use policy to explore the boundaries of just how much capacity has really been lost, and run the risk that inflation may rise as you do so. You do not sit back, tell yourself that below target inflation is probably temporary, and do nothing. And, of course, you do not plan for more fiscal austerity.

Today’s Economic History: 1870 as the Inflection Point in Trade and Transport

Posted on by Brad DeLong

Mid-nineteenth century Massachusetts transcendentalist author and activist Henry David Thoreau’s response to the coming of the railroad was: “get off my lawn!”:

To make a railroad round the world…. Men have an indistinct notion that if they keep up this activity of joint stocks and spades long enough all will at length ride somewhere in next to no time and for nothing, but though a crowd rushes to the depot and the conductor shouts “All aboard!” when the smoke is blown away and the vapor condensed, it will be perceived that a few are riding, but the rest are run over–and it will be called, and will be, “a melancholy accident”…

Indeed, the very first day of operation of the Liverpool and Manchester Railroad, September 15, 1830, George Stephenson’s locomotive, The Rocket, killed the Right Honorable William Huskisson, former President of the Board of Trade–that is, he had been Britain’s Secretary of Commerce (in addition to Secretary of State for War and the Colonies, and Leader of the House of Commons).

The old rule-of-thumb before the railroad was that you simply could not transport agricultural goods more than 100 miles by land. Over that distance the horses or the oxen would have eaten as much as they could have pulled. Either find a navigable watercourse—and it had better be much closer than 100 miles—or find yourself stuck in self-sufficiency for anything other than small and light preciosities, without the ability to buy much made outside your local township that could not be purchased with the (low-value) spinning and weaving labor of your or your neighbors’ womenfolk. For Thoreau on Walden Pond, living deliberately, the fact that it took him a day to walk or ride into Boston was a benefit—part of living deliberately. But that is a (relatively) rich guy’s point of view.

The coming of steam coupled with the metallurgy to cheaply make the rails and the engines of the railroad made a difference. It made transport over land wherever the rails ran as cheap as travel up navigable watercourses or across the oceans had ever been. It made it much faster as well. This was a big difference for people who wanted to move about. The was a big difference for spoilable or time-sensitive goods. This was not much of a difference for durable staples over routes that had been and still could be travelled by water. And since most people had for good reason settled near the water routes, the railroad was a very welcome boost, but not that much more. For the rise of Mexico City—with no water routes to the coasts and thus the world economy—the railroad was a game-change. But for the rise of New York City the game-change was not the Iron Horse but rather the Erie Canal.

The true revolution in transportation? The one that mattered for everyone? That came not in the 1830s with the railroad. That came later: it was the iron-hulled ocean-going coal-fired steamship.

It was the year 1870 thatsaw the Harland and Wolff shipyard of Belfast in northern Ireland launch the iron-hulled (rather than wooden-hulled), steam-powered (rather than wind-powered, but it did still have masts and sails), screw-propellered (rather than paddle-wheeled), passenger steamship the R.M.S. Oceanic. It took 9 days from Liverpool to New York, a journey that in 1800 would have taken more like a month. Its crew of 150 supported 1,000 third-class passengers at a cost of £3–$15–for a third-class passenger. Third class on the Oceanic cost half as much as passage a generation earlier during the Irish Potato Famine had. It coast roughly a fourth as much as in 1800.

£3 in 1870 was the same share of an average person’s earnings then as £2,100 or $3,300 today. Think of it as the equivalent of a business-class transatlantic airfare. Think of it as the rough equivalent of a month and a half’s wages for an unskilled worker. Consider that wage levels in North America or Argentina or Australia or–for white male workers–South Africa or Kenya around 1870 were roughly double those of northwest Europe. The math was clear. If you could find a niche, hold a steady job, and stay out of the bars after the voyage, you could make back your expense in less than a season. Thus after 1870 sending a member of a family across the ocean to work became a possibility open to all save the very poorest of European households. This held for more than Europe: China and India began their own large-scale steamship diasporas in short order.

Moreover, the Oceanic also carried 150 first class passengers at £15 a head. It carried them in sufficient luxury and with sufficient cosseting as to qualify (if you were not prone to sea-sickness) as a vacation. That is the same share of average income then that $17,000 would be today. Thus the rich could and did make global travel a regular part of their normal lives rather than an arduous duty and trial. Railroad baron and heir William Kissam Vanderbilt and suffragette Alva Erskine Smith could take their daughter Consuelo to England to meet and (unhappily) marry Charles Spencer-Churchill, ninth Duke of Marlborough. Speculator Leonard Jerome and Clara Hall could take their daughter Jeanette to England to meet and (happily?) marry Charles’s uncle, Lord Randolph Henry Spencer-Churchill. Randolph and Jeanette appear to have anticipated things, for seven months after their marriage was born Winston S. Churchill, Prime Minister of Great Britain 1940-1945 and 1951-1955—and even the dockyard cranes along the Thames River bowed as his coffin passed by in January 1965.

The falling cost of transporting people marched alongside a falling cost of transporting goods. Flour that cost 1.5 cents per pound more in London than in New York in 1840 cost only 0.5 cents per pound more after 1870 . This was a fall in the price of carrying the raw materials for a loaf of bread across the Atlantic. What had cost the equivalent of 30 minutes’ worth of unskilled labor time in 1840 cost less than ten minutes’ worth come 1870. After 1870 every commodity that was neither exceptionally fragile nor spoilable could be carried from port to port across oceans for less than it cost to move it within any country.

All this mattered for two reasons.

First, it meant that everyplace in the world was, as long as there were connecting harbors, docks, and railroads, cheek-by-jowl to every other place, economically. Everyone’s economic opportunities and constraints depended on what was going on across the globe. This had not been true before. Before just the consumption patterns of the elite depended on what was going on in other countries and on other continents.

Second, wherever you could cheaply move goods in mass you could move other things. Most particularly, you could also move and supply armies. Thus conquest—or at least invasion and devastation—became things that nearly any European power could undertake in nearly any corner of the world.

Morning Must-Read: Nick Bunker: Income Inequality Over the Business Cycle

Posted on by Brad DeLong

I must say, Stephen Rose used to do very good work. But more and more I find that the stuff he puts out these days has a “gotcha” in it–a decision as to what to look at that is debatable, that shapes his conclusions massively, and that he does not warn me about his importance. Having to dig for what the “gotcha” is in each case is time consuming, boring, and annoying. I think he should stop.

Vir spectabilis Nick Bunker does the heavy lifting:

Nick Bunker: Income Inequality Over the Business Cycle: “Stephen Rose argues that income inequality…

…has not risen since the end of the Great Recession… takes aim at research by University of California-Berkeley economist Emmanuel Saez showing that 95 percent of the income gains from 2009 to 2012 were captured by the top 1 percent of earners… assert[s claims]… inequality has risen since the Great Recession… based upon a ‘statistical gimmick.’

Rose… look[s] at changes in incomes since 2007, the peak of the last business cycle…. Saez and… Piketty show… income excluding capital gains… [of] the top 1 percent dropped from 18.3 percent in 2007 to 16.7 percent in 2009…. During economic expansions, workers at the bottom of the income ladder see very large gains and those at the top see large gains as well. Those in the middle miss out. And during recessions, the incomes at both ends lose the most…. By starting his measurement from the peak of the last business cycle in 2007, Rose includes the years that have the most income reduction for those at the top. But the expansion beginning in 2009… is not over….

Yes, if 2007 is the benchmark year, incomes at the top have declined. And yes, if 2009 is the benchmark year, incomes at the top have increased dramatically…. What isn’t reasonable is using a peak as a benchmark to claim inequality hasn’t increased over an incomplete business cycle…

How does income inequality change over the business cycle?

Posted on by Nick Bunker

Has income inequality risen in recent years? The obvious rejoinder to that question is “well, over what time period?” This seemingly simple clarification can spark quite a bit of debate among economists and researchers. A new paper looking at the changes in income inequality shows how important the time periods we choose can be in understanding trends in inequality and the overall economy.

The paper, by George Washington University professor Stephen Rose, argues that income inequality has not risen since the end of the Great Recession in 2009. In particular, Rose takes aim at research by University of California-Berkeley economist Emmanuel Saez showing that 95 percent of the income gains from 2009 to 2012 were captured by the top 1 percent of earners. Rose claims that any assertion that inequality has risen since the Great Recession is based upon a “statistical gimmick.”

Rose says that Saez’s statistics overstate the increase in income inequality since 2009. He does so by looking at changes in incomes since 2007, the peak of the last business cycle, through what he calls the “bounce-back years” since 2009. In other words, Rose measures income trends since the beginning of the recession, not the beginning on a new economic expansion (as Saez does). Another major point that Rose makes is that fluctuations in the incomes of the top 1 percent, and therefore inequality, are driven primarily by changes in realized capital gains on the sale of stocks and bonds and other assets. Because this kind of income is the result of a decision to sell an asset, the gains are “clumpy” and not evenly distributed over years. And they are also very volatile as these kinds of assets take a hit during recessions, resulting in lower realized capital gains and thus less income

(Another major complaint by Rose of research that shows rising income inequality is about using pre-tax incomes versus post-tax incomes, but that’s a topic for another day.)

So what do Rose’s findings say about those of Saez? A look at the top income data gathered by Saez and Paris School of Economics professor Thomas Piketty shows that the share of income excluding capital gains going to the top 1 percent dropped from 18.3 percent in 2007 to 16.7 percent in 2009, the year the recession ended. So it seems unlikely that capital gains are responsible for all that volatility. Even when capital gains are stripped out of measures of income growth, incomes at the top are quite volatile during recessions. So labor income appears to jump around quite a bit as well. A paper by economists Fatih Guvenen at the University of Minnesota, Serdar Ozkan at the U.S. Federal Reserve Board, and Jae Song at the U.S. Social Security Administration shows that labor income actually is quite volatile across the business cycle .

The paper looks at how incomes change over the business cycle. They use data from the Social Security Administration that lets them track the incomes of specific workers over several years. (Note that the SSA data does not include capital gains.) What they find is that that there is a large variation in how the incomes of workers grow over the business cycle.

During economic expansions, workers at the bottom of the income ladder see very large gains and those at the top see large gains as well. Those in the middle miss out. And during recessions, the incomes at both ends lose the most. In other words, incomes for those at the bottom and the top are very volatile. The chart below shows how this distinction held over the last full business cycle. (See Figure 1.)

Figure 1

021915-va-incomegrowth

What does this means for Rose’s paper? Well, by starting his measurement from the peak of the last business cycle in 2007, Rose includes the years that have the most income reduction for those at the top. But the expansion beginning in 2009, when incomes jump up, is not over yet. As the chart above shows, there are very different dynamics during expansions and recessions. The full dynamics of the most recent expansion have yet to play out. So Rose doesn’t have an adequate comparison for 2007 yet. The Piketty and Saez data only go up to 2013, though last year’s data are preliminary, which means they have captured more of the expansion in their data but their analysis also does not include the entire business cycle because it hasn’t happened yet.

So the level of incomes for the top 1 percent might not have reached their 2007 level peak because the economy hasn’t reached a similar point in its growth cycle yet. This comparison is a bit like comparing the heights of a 12 year old and an 18 year old. Yes, one is taller than the other. But it’s incomplete to compare them without considering age. One person is still growing.

So yes, if 2007 is the benchmark year, incomes at the top have declined. And yes, if 2009 is the benchmark year, incomes at the top have increased dramatically. Reasonable people can disagree about the best benchmark. But what isn’t reasonable is using a peak as a benchmark to claim inequality hasn’t increased over an incomplete business cycle.

The lesson: A more complete evaluation of the extent of the increase in income inequality since 2009 will have to wait until this business cycle has completed its course.

Things to Read at Night on February 18, 2015

Posted on by Brad DeLong

Must- and Shall-Reads:

 

  1. Stephen G Cecchetti and Enisse Kharroubi (2014): Why Does Financial Sector Growth Crowd Out Real Economic Growth? (Basel: BIS) http://www.bis.org/publ/work490.pdf “We… concluded that the level of financial development is good only up to a point, after which it becomes a drag on growth, and that a fast-growing financial sector is detrimental…. Financial sector growth benefits disproportionately high collateral/low productivity projects… the strong development in sectors like construction, where returns on projects are relatively easy to pledge as collateral but productivity (growth) is relatively low…. Where financiers employ the [most] skilled workers… productivity growth is lower than it would be had… entrepreneurs attract[ed] the [most] skilled labour…. [Thus] financial booms in which skilled labour work for the financial sector, are sub-optimal when the bargaining power of financiers is sufficiently large…. We focus on manufacturing industries and find that industries that are in competition for resources with finance are particularly damaged by financial booms… manufacturing sectors that are either R&D-intensive or dependent on external finance suffer disproportionate reductions in productivity growth when finance booms…”

  2. Ben Walsh: “Here’s a chart saying ‘the rich have gotten poorer since 2007’. Here’s a chart showing the wealth of the rich. They don’t seem to be getting poorer. @Adennisdillon: @BenDWalsh Other problem is picking a bubble year as a baseline.

  3. Simi Kedia and Thomas Philippon: The Economics of Fraudulent Accounting: “We argue that earnings management and fraudulent accounting have important economic consequences. In a model where the costs of earnings management are endogenous, we show that in equilibrium, low productivity firms hire and invest too much in order to pool with high productivity firms. This behavior distorts the allocation of economic resources in the economy. We test the predictions of the model using firm-level data. We show that during periods of suspicious accounting, firms hire and invest excessively, while managers exercise options. When the misreporting is detected, firms shed labor and capital and productivity improves. Our firm-level results hold both before and after the market crash of 2000. In the aggregate, our model provides a novel explanation for periods of jobless and investment-less growth.”

Should Be Aware of:

The Intellectual War Over the Rise of the Machines Continues…: Focus

Posted on by Brad DeLong

I see that the vir illustris Lawrence Mishel, our neighbor here in the Great Center-Left Atrium Building at 1333 H St. N.W., has had his ire awakened by the femina clarissima Melissa Kearney and her forthcoming Hamilton Project event on robots tomorrow: http://www.hamiltonproject.org/papers/future_of_work_in_machine_age/…

Lawrence Mishel: Failed Theory Posed by Wall Street Dems Puts Hillary Clinton in a Bind: “There was a time where it was plausible to argue that more education and innovation were the primary solutions to our economic problems. But that time has passed…. You cannot tell that, however, to the… Hamilton Project…. The new framing paper… details how ‘advancing computer power and automation technology’ creates a challenge for:

how to educate more people for the jobs of the future, how to foster creation of high-paying jobs, and how to support those who struggle economically during the transition…

the same analysis we heard from the Clinton administration 20 years ago, when the discussion was of a ‘transition to the new information economy.’ Let them eat education. The education-only solution wasn’t appropriate when it was first put forward, and it is not even remotely plausible now….

According to Autor’s “The Polarization of Job Opportunities in the U.S. Labor Market”… technological change… was polarizing the job market… necessitating major changes in… education…. Over the last few years… researchers, including Autor, have documented that occupational job polarization has not been present in the 2000s…. My research with my then-colleague Heidi Shierholz, and with economist John Schmitt of the Center for Economic and Policy Research, was the first to document these trends…. [While] innovation may yield higher productivity and more growth… entire center-left field of economists… acknowledges that this will not necessarily lead to robust wage growth…. Hopefully they will soon embrace many of the recommendations of CAP’s Inclusive Prosperity report…

I note Larry Mishel’s invocation of both melior princeps Hillary Rodham Clinton and of “Wall Street Democrats”. I infer that the stakes appear not just to be attaining correct thought, but also involve shaping the policies and staffing of a potential Democratic administration come 2017…

Some more context:

Lawrence Mishel: Policies that Do and Do Not Address the Challenges of Raising Wages and Creating Jobs: “Policies that help to achieve full employment…

…are the following:

  1. The Federal Reserve Board needs to target full employment with wage growth matching productivity….
  2. Targeted employment programs… [for the] many communities that will still be suffering substantial unemployment….
  3. Public investment and infrastructure….
  4. Reducing our trade deficit….

It is a welcome development that policymakers and presidential candidates in both parties have now acknowledged that stagnant wages are a critical economic challenge…. Globalization has… served to suppress wage growth for non-college-educated workers…. Two sets of policies… have greatly contributed to wage stagnation that receive far too little attention….

Aggregate factors:

  1. Excessive unemployment….
  2. Unleashing the top 1 percent: finance and executive pay….

Labor standards, labor market institutions, and business practices….

  1. Raising the minimum wage….
  2. Updating overtime rules….
  3. Strengthening rights to collective bargaining….
  4. Regularizing undocumented workers….
  5. Ending forced arbitration….
  6. Modernizing labor standards: sick leave, paid family leave….
  7. Closing Race and gender inequities….
  8. Fair contracting….
  9. Tackling misclassification, wage theft, prevailing wages, and enforcement…

To summarize, Larry’s recommended policies are four:

  1. Correct, full-employment macro policy.
  2. Proper public spending–especially to boost our infrastructure capital.
  3. Reining-in our hypertrophied financial sector and the CEO-takeover-private-equity cycle that gives the CEO and his (almost always his) bucelarii the equivalent of a 25% equity stake in the company they run.
  4. Restoring worker bargaining power in the labor market.

As a card-carrying neoliberal and as a member of the Rubin wing of the Democratic Party, what do I think of all this?

Well, I think that Larry is largely right. A big push for more and better education will not solve our labor market problems.

Now it will alleviate some labor market problems. Increasing the number of people who finish college–both through figuring out how to use modern technologies to complement instructors and through more-generous college financing–is an investment that has a high societal rate of return on the order of 6%/year or so, plus it will do a lot to bring the wages and salaries of the 20%-60% and the 60%-95% slots of the income distribution together by changing relative supplies of workers qualified for the jobs associated with those slots.

Moreover, the Hamilton Project view and the Great 1333 H Center-Left Atrium Building view are, I think, in accord on the necessity for boosting public investment and on the necessity of macroeconomic policies that succeed in avoiding unnecessary unemployment–even if the Hamilton Project has not yet gotten to where I think it needs to be in terms of how the public sector ought to be financed in this era of the global savings glut.

But such education-promoting policies will do little or nothing to redistribute back to the 20%-95% slots of the income distribution any of the immense wealth that has been grabbed by the top 5% and 1% and 0.1% and 0.01% slots of the income distribution. Take a look at http://eml.berkeley.edu/~saez/TabFig2013prel.xls. See the rise of the top 5% from 15% to 25% of total incomes, of the top 1% from 5% to 12%, of the top 0.1% from 2.5% to 9%, and of the top 0.01% from 0.7% to 4% are not driven by processes over which even successful pro-education policies as our educational system is currently structured have any purchase.

Larry’s non-education policies include two that are all-boat-lifting policies–the top 0.01% as well as the 20%-60%–in the form of full-employment and infrastructure, and two that are bargaining power related: the cutting-back of the pretensions of finance and its associates in the CEO suites and a restoration of labor’s power to bargain for a share of the joint product in situations where everyone is already locked-into the employer-employee relationship. He thinks that that is what we need to do, and should do, and should focus on.

Kearney, Hirshbein, and Body are not so sure as they look at the “proliferation of smart machines, networked communication, and digitization… [and their] potential to transform the economy in groundbreaking ways…” They see three things going on:

  1. Job Polarization: Even though it has not been apparent in the data in the 2000s, it was clearly there in the 1990s, and–in their view, and mine–may well reemerge in the data in 2010s and 2020s. As they put it: “work involving visual and language recognition and in-person interaction has… proved mostly elusive for computers to master…. Robots will have a hard time… in food service, cleaning, and caregiving… [as] dexterity, eyesight, and communication give humans a comparative advantage…. [Moreover,] computers are very far from being able to use creativity, intuition, persuasion, and imaginative problem-solving…” The problem in the face of the potential for an additional wave of polarization is then: how do we make being a janitor, a home health aide, an exercise-class leader, a hairdresser, or a cafeteria line worker not what they are now but rather middle-class jobs? People using their brains in very basic and easy ways from a brainwork perspective got middle-class blue-collar and white-collar jobs on assembly line and in cubicles in the second half of the twentieth century. Can we recapture that for service-sector jobs analogous to those that did not have middle-class status a generation ago? That is a hard and interesting question–and I think the answer, if there is an answer, is much harder and more complicated than “tweak the labor-relations system so they can form a union…”

  2. The New Technostructure: In a world in which rapidly-progressing information technology is obsoleting human brains as blue-collar cybernetic complements to manufacturing machines and white-collar substitutes for software ‘bots shuffling data, labor will be abundant. If that world also sees a global savings glut pushing down interest rates, capital will also be abundant. The scarce and valuable factor of production will then be access to the nexuses of processes that put the robots to work making things that the brands entice consumers to buy–membership in what we might, adapting Galbraith, call the New Technostructure. Kearney et al. (and Brynjolfsson and McAfee) seem to see a focus on “entrepreneurship” as a way both to maximize the number of people with access to this New Technostructure and also to put some downward pressure on its income share to the benefit of other factors of production. I find myself very skeptical indeed…

The danger of tomorrow’s Hamilton Project event, I think, is that the people there will take their “advances in artificial intelligence and broad technological development will create employment possibilities that we cannot yet begin to imagine…”, “major commitment to increasing education and skill levels…”, and “fostering business and organization innovation…” to be things we know how to do. I do not think we know what we need. I don’t think making community college and four-year college free will do it. I don’t think tax credits for small businesses, cheerleading incubators, and entrepreneurial mentorship coaches will do it. At this stage “increasing education” and “fostering innovation” are simply placeholders for policies we will not be able to imagine until we see more of the shape of our future.

So I find myself reminded of John Maynard Keynes on, of all people, Leon Trotsky:

We lack more than usual a coherent scheme of progress…. No one has a gospel. The next move is with the head…

Note: As Larry Mishel says, “The Inclusive Prosperity Report”:

co-chaired by Lawrence H. Summers… calls for full employment (a ‘high pressure economy,’ as Summers calls it), a more welcoming environment for collective bargaining, higher labor standards (overtime, minimum wage, earned sick and paid family leave), changes in corporate governance, and large scale public investment to address middle-class wage stagnation…

See https://www.americanprogress.org/issues/economy/report/2015/01/15/104266/report-of-the-commission-on-inclusive-prosperity/

Evening Must-Read: Stephen G Cecchetti and Enisse Kharroubi: Why Does Financial Sector Growth Crowd Out Real Economic Growth?

Posted on by Brad DeLong

Stephen G Cecchetti and Enisse Kharroubi (2014): Why Does Financial Sector Growth Crowd Out Real Economic Growth? (Basel: BIS) http://www.bis.org/publ/work490.pdf “We… concluded that the level of financial development is good only up to a point…

…after which it becomes a drag on growth, and that a fast-growing financial sector is detrimental…. Financial sector growth benefits disproportionately high collateral/low productivity projects… the strong development in sectors like construction, where returns on projects are relatively easy to pledge as collateral but productivity (growth) is relatively low…. Where financiers employ the [most] skilled workers… productivity growth is lower than it would be had… entrepreneurs attract[ed] the [most] skilled labour…. [Thus] financial booms in which skilled labour work for the financial sector, are sub-optimal when the bargaining power of financiers is sufficiently large…. We focus on manufacturing industries and find that industries that are in competition for resources with finance are particularly damaged by financial booms… manufacturing sectors that are either R&D-intensive or dependent on external finance suffer disproportionate reductions in productivity growth when finance booms…

Lunchtime Must-Read: Simi Kedia and Thomas Philippon: The Economics of Fraudulent Accounting

Posted on by Brad DeLong

Simi Kedia and Thomas Philippon: The Economics of Fraudulent Accounting: “We argue that earnings management and fraudulent accounting…

…have important economic consequences. In a model where the costs of earnings management are endogenous, we show that in equilibrium, low productivity firms hire and invest too much in order to pool with high productivity firms. This behavior distorts the allocation of economic resources in the economy. We test the predictions of the model using firm-level data. We show that during periods of suspicious accounting, firms hire and invest excessively, while managers exercise options. When the misreporting is detected, firms shed labor and capital and productivity improves. Our firm-level results hold both before and after the market crash of 2000. In the aggregate, our model provides a novel explanation for periods of jobless and investment-less growth.