Nick Bunker: Weekend reading: “Secular Stagnation: Greg Ip…
…and John Hilsenrath. Long-Term Unemployment: John Hilsenrath and Victoria McGrane and Matt O’Brien. Allocation of Time: Danielle Kurtzleben, Ben Casselman, and Maria Konnikova. Millennials: Adam Davidson. China’s Credit Boom: Jamil Anderlini, David Keohane, and Kaushik Basu…
Paul Krugman: Austerity and Hysteresis: “If you believe official estimates of potential output…
…the Great Recession and its aftermath have done incredible damage, not just to short-run output and employment, but to long-run prospects…. Advanced country real GDP… grew 18 percent from 2000 to 2007… and… was… expected to keep rising at… the same rate… [but] advanced-country GDP is likely… in 2014… [to be] 10 percent below trend…. [with] estimates of economic slack… only 2.2 percent…. Something like an 8 percent hit to economic potential all across the advanced world, which is huge.
One possibility is that the output gap numbers are wrong…. Another possibility is that it’s just a coincidence that underlying growth slowed at the same time as the crisis. But if you take the numbers seriously… hysteresis… is a very big issue…. Austerity equal to one percent of GDP reduces potential output by around 1 percent. That’s huge–easy enough to make austerity a hugely self-defeating policy, even in purely fiscal terms…. Economic policy has been even more destructive than we thought.
Mark Thoma sends us to Steve Cecchetti and Kermit L. Schoenholtz: Monetary Policy Target Regimes: Inflation, Price Level, Nominal GDP, etc.: “The question of the appropriate policy target…
…has become a matter of intense debate…. We conclude that returning to the price path implied by the pre-crisis trend is a realistic possibility. Returning to the earlier nominal GDP path is not. That said, the inflation overshoot that our rough calculations suggest is moderate, so the benefits are likely to be limited. But the costs could include a loss of credibility in the inflation-targeting framework. Would that really be worth it?
Should-Reads:
Dan Hamermesh: Daniel Hamermesh on Economics is Fun: “Stop! Stop, stop, stop. The economics profession is not in disrepute. Macroeconomics is in disrepute. The micro stuff that people like myself and most of us do has contributed tremendously and continues to contribute. Our thoughts have had enormous influence. It just happens that macroeconomics, firstly, has been done terribly and, secondly, in terms of academic macroeconomics, these guys are absolutely useless, most of them. Ask your brother-in-law. I’m sure he thinks, as do 90% of us, that most of what the macro guys do in academia is just worthless rubbish. Worthless, useless, uninteresting rubbish, catering to a very few people in their own little cliques…”
Justin Wolfers (2005): Is Business Cycle Volatility Costly? Evidence from Surveys of Subjective Well-being: “High inflation and, to a greater extent, unemployment lower perceived well-being. Greater macroeconomic volatility also undermines well-being. These effects are moderate but important: eliminating unemployment volatility would raise well-being by an amount roughly equal to that from lowering the average level of unemployment by a quarter of a percentage point. The effects of inflation volatility on well-being are less easy to detect and are likely smaller…”
Snehal Banerjee and Brett Green (2012): Learning Whether Other Traders Are Informed: “Standard rational expectations (RE) models of financial markets assume that market participants know whether other traders are informed, and therefore know how to update their beliefs using prices. We relax this assumption to study return dynamics when investors learn how to use the information in prices. In this setting, the price is a non-linear function of the underlying signal, and, as a result, expected returns and volatility are stochastic and persistent, even when fundamental shocks are i.i.d. Moreover, the price reaction to information about dividends is asymmetric: the price reacts stronger to bad news than it does to good news. In fact, the price can even decrease following positive signals about dividends. The model also generates volatility clustering in which surprises in return realizations (or dividend realizations) are followed by higher volatility and higher expected returns…”
Should Be Aware of:
And:
Jacob Heilbrun: The Neocon Surge: They are not, in fact, being greeted as liberators: “Don’t look now, but the latest installment in the decades-old neocon saga is currently taking place…. Paul Wolfowitz, Douglas Feith and a host of other neoconservatives are seizing the spotlight to conduct their own very personal war of liberation… free themselves from the rap that they got it all wrong. And so they are going into overdrive to pin the blame for the collapse of Iraq on anyone other than themselves. Only this time, the American people, unlike in 2003, seem primed to ignore them…. L. Paul Bremer III… Max Boot… Dick Cheney, emerging from his undisclosed location, teamed up with his daughter Liz… Robert Kagan…”
Daniel Larison: Anne-Marie Slaugher: A Warmonger By Any Other Name: “I can understand why someone wouldn’t want to be called a warmonger. Fortunately, the word still has very negative connotations. Despite the strong bias in favor of military action in our foreign policy debates, being labeled a warmonger remains a definite political liability. This is why those that have a record of advocating for military action are so displeased when the label is applied to them. If supporters of intervention are accurately called warmongers, that will tend to make it harder to get the U.S. into new wars, and that is bound to be frustrating for them. I’m just not sure why the rest of us should care.”
Dan Corrigan: Bring Sanity Back With Common Sense Gun Solutions: “74 different school shootings since 20 kids and six adults were slaughtered at Sandy Hook on Dec. 14, 2012. The map darkens every week with death dots, as do similar maps for shooting sprees and gun violence in the U.S. workplace…. Our U.S. Congress has been able to do NOTHING. Our state legislature has been far worse…”
Rob Stavins: What are the Benefits and Costs of EPA’s Proposed CO2 Regulation?: “There are surely ethical arguments (and possibly legal arguments) for employing a global damage estimate….I leave it to legal scholars and lawyers to debate the law, and I defer to the philosophers among us to debate the ethics, but let’s at least ask what the consequences would be for EPA’s analysis if a U.S climate benefits number were used…. The combined U.S.-only estimates of annual climate impacts of CO2 ($3 billion) and health impacts of correlated pollutants ($45 billion) greatly exceed the estimated regulatory compliance costs of $9 billion/year, for positive net benefits amounting to $39 billion/year in 2030…. If EPA’s global estimate of climate benefits ($31 billion/year) is employed instead, then, of course, the rule looks even better, with total annual benefits of $76 billion, leading to EPA’s bottom-line estimate of positive net benefits of $67 billion per year…. The Obama Administration’s proposed regulation of existing power-sector sources of CO2 has the potential to be cost-effective, and… welfare-enhancing…”
John Holbo: The Rhetoric of Having Been Wrong: “This is pretty simple. Either the neocons know they were wrong last time, or they don’t. If you are The Boy Who Cried Wolf, and you don’t know it, you are useless for wolf-crying purposes. If, on the other hand, you know you were wrong before, and you know everyone else knows, but you think you are right this time, and you want to warn everyone, you won’t say ‘now is not the time to re-litigate whether I was perfectly right in the past concerning each and every last wolf.’ No, you will say something reasonable, like: ‘I know you have no reason to trust me, given how wrong I was before in a case that looked an awful lot like this one. I am so sorry for the damage I have done, but I will be even sorrier if the fact that you can’t trust me means even more damage is done. That will be my fault, too, if it happens, so please…’ There is, after all, such a thing as common sense. I was wrong about Iraq. I was one of those Kenneth Pollack-reading liberal queasyhawks, to my ongoing shame…”
This is a weekly post we’ll publish every Friday with links to articles we think anyone interested in equitable growth should read. 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.
Is the growth problem secular? Or is it stagnation?
Greg Ip asks whether our current growth problem is secular, due to supply-side structural changes, or stagnation, due to demand-side cyclical problems. The answer has big implications for monetary policy going forward. [free exchange]
John Hilsenrath riffs off Ip’s post and wonders if the Federal Reserve Board missed the secular supply-side issues during the 2001-2007 business cycle and set the wrong course for interest rates. [wsj]
The problem of the long-term unemployed
The Fed also needs to consider the fate of the long-term unemployed. Can monetary policy bring them back into the labor market? Or have they been locked out? After their meeting this past week, the Federal Open Market Committee appears to think the long-term unemployed aren’t lost yet. [wsj and wonkblog]
These are the days of our lives
Danielle Kurtzleben looks at what Americans do doing during their day. The graph on how working parents spend their time is particularly enlightening. [vox]
And Ben Casselman takes a look at how the unemployed spend their time. [fivethirtyeight]
Time is money and poor Americans don’t have much of either. The problems caused by time poverty. [nyt]
Maybe the kids are alright
“Sleeping in a twin bed under some old Avril Lavigne posters is not a sign of giving up; it’s an economic plan.” Adam Davidson looks at the economic fate of young Americans who moved back home. [nyt magazine]
An end to the Chinese Credit Party?
Is the period of strong credit growth over in China? Here are three takes:
The White House, the Department of Labor, and the Center for American Progress are hosting a Summit on Working Families next week to explore important issues such as equal pay and workplace flexibility. According to recent research by Harvard economist Claudia Goldin, these two issues are intimately related. Moreover, they hold implications for the broader economy.
Goldin published a paper earlier this year in the American Economic Review titled “A Grand Gender Convergence: Its Last Chapter.” She calls the converging roles of men and women “among the grandest advances in society and the economy in the last century.” Goldin argues that what is needed to complete this convergence is not necessarily government mandates or a changing role of men in the household, “(although that wouldn’t hurt),” but instead policies to foster workplace flexibility.
Goldin examines the gender wage gap in a number of different professions over the years and finds that the difference in earnings by gender can be explained by differences in the degree to which jobs allow for flexibility in the hours worked (rather than penalize an employee’s need for flexible hours over the course of a career). In professions hiring people with MBA or JD degrees, for example, Goldin finds that the gender pay gap significantly increases over time. In the corporate and legal sectors, there is a reward to working not only long hours but also to working those hours continuously, which is critical to becoming a top manager or partner but is at odds with flexible scheduling over the course of a career. Indeed, the increase in the gender pay gap in these professions appears to coincide with the arrival of children, which disproportionately affects women.
In contrast, Goldin finds that some professions in the health sector do not penalize taking time off, and in those professions the gender pay gap does not increase significantly over time. For pharmacists, for example, the difference in pay between men and women does not increase significantly over the course of their career, even after they have children. Overall, Goldin concludes that occupational pay differences are “largely due to the value placed on the hours and job continuity of workers.”
Policies to promote workplace flexibility could include policies which aim to improve the availability of quality childcare and provide more options that may prevent women from temporarily leaving the workforce, or paid family leave, which would also reduce turnover. Cities such as Boston are already seeking to close the gender pay gap, including through policies to encourage workplace flexibility.
As Betsey Stevenson of the Council of Economic Advisers notes: “Boston recognizes that this isn’t just an issue of fairness and isn’t just an issue of equity as a moral value… this is about competitiveness and having competitive advantage.” Workplace flexibility policies may not only promote gender equity but also increase attachment to the workforce, which could boost productivity and long-term growth.
Rob Stavins: What are the Benefits and Costs of EPA’s Proposed CO2 Regulation?: “There are surely ethical arguments (and possibly legal arguments) for employing a global damage estimate,..
…I leave it to legal scholars and lawyers to debate the law, and I defer to the philosophers among us to debate the ethics, but let’s at least ask what the consequences would be for EPA’s analysis if a U.S climate benefits number were used…. The combined U.S.-only estimates of annual climate impacts of CO2 ($3 billion) and health impacts of correlated pollutants ($45 billion) greatly exceed the estimated regulatory compliance costs of $9 billion/year, for positive net benefits amounting to $39 billion/year in 2030…. If EPA’s global estimate of climate benefits ($31 billion/year) is employed instead, then, of course, the rule looks even better, with total annual benefits of $76 billion, leading to EPA’s bottom-line estimate of positive net benefits of $67 billion per year…. The Obama Administration’s proposed regulation of existing power-sector sources of CO2 has the potential to be cost-effective, and… welfare-enhancing…
John Holbo: The Rhetoric of Having Been Wrong: “This is pretty simple…
…Either the neocons know they were wrong last time, or they don’t. If you are The Boy Who Cried Wolf, and you don’t know it, you are useless for wolf-crying purposes. If, on the other hand, you know you were wrong before, and you know everyone else knows, but you think you are right this time, and you want to warn everyone, you won’t say ‘now is not the time to re-litigate whether I was perfectly right in the past concerning each and every last wolf.’ No, you will say something reasonable, like: ‘I know you have no reason to trust me, given how wrong I was before in a case that looked an awful lot like this one. I am so sorry for the damage I have done, but I will be even sorrier if the fact that you can’t trust me means even more damage is done. That will be my fault, too, if it happens, so please…’ There is, after all, such a thing as common sense. I was wrong about Iraq. I was one of those Kenneth Pollack-reading liberal queasyhawks, to my ongoing shame…
Cardiff Garcia: The growth of US student loan debt: causes and consequences: “Both rising tuition and a higher share of students borrowing…
…have contributed just as much as higher student enrollment…. A recent New York Fed report:
Between 2004 and 2012, the number of borrowers increased by 70% from 23 million borrowers to 39 million. In the same period, average debt per borrower also increased by 70%, from about $15,000 to $25,000.
And… Brookings….
From 2002 to 2012, inflation-adjusted (2012 dollars) college costs—defined as the sum of room, board and “net tuition” (tuition costs after subtracting federal, state, and private [non-loan] aid, as well as any discounts offered by the institution)—rose by 41 percent within public four-year institutions, by 9 percent for private four-year institutions, and actually fell 7 percent for two-year public institutions… average college costs rose by about 16 percent….
Furthermore, there is evidence that many students and households don’t understand what they’re getting themselves into…. That’s the background against which Obama is now proposing a plan to expand the number of borrowers who can cap their loan repayments at 10 per cent of their income, along with endorsing a bill that would allow more students to refinance at lower rates. (The latter is unlikely to get through Congress, as the proposed budgetary offset is the proposed closing of loopholes for the wealthy. Republicans are already pushing back.)
From $350 billion to $1 trillion in student debt in the eight years from 2004-2012 is an extraordinary increase–so large that even though I have checked and re-checked I cannot help but fear that somewhere an apples-and-oranges comparison has crept into the mix.
It also very strongly suggests that the marginal borrowers do not have a handle on what they are doing. If it made no sense for borrowers to take out more than $350 billion in debt in 2004–if the marginal material and psychological benefit of college then was no greater than the marginal burden of debt repayment–then it really makes no sense for borrowers to take out $1 trillion in debt in 2012. Either of them are little borrowers in 2004 we’re irrationally scared of taking on student debt loads, or them are total borrowers today are much too blasé about the burdens–and by “marginal”, we mean all those holding all the tranches between $350 billion and $1 trillion.
As I have said before, the key questions are: how likely are those taking on the extra debt to actually finish their B.A. degrees in a reasonable amount of time? How quickly can we move from a regime of fixed repayments to one of income-contingent loans (or, as Aaron Edlin points out, a more attractive system of income-contingent grants)? And how then do we manage the borrowing-attending decision when potential students no longer fear landing in permanent debt peonage?
My instinct is that Clark Kerr had it right: that the best compromise is to make education free for those willing to devote the time, but to make students borrow to cover their living expenses. That treats getting educated as having positive externalities broadly understood equal to the cost of education, and my guess is that is the right order of magnitude. But that is only an instinct.
These are not questions that I can answer with clarity and confidence, or even on which I can guess in a relatively informed manner. So: a question for the internet: who should I take as my guides, and whose analyses should I trust on these questions?
Should-Reads:
Steve Beshear: Without Obamacare, there is no Kynect: “There had been an extreme amount of effort put in for months… planning for the rollout of the Affordable Care Act, planning the website, organizing connectors, doing educational outreach. There were thousands of people involved all during the spring and summer…. We didn’t require people to register and sign-in before they could browse our website. You could go on and plug your numbers in and see what kind of subsidy you’re going to get. The federal website was set up where everyone had to sign in first, and that just created a bottleneck…. At midnight when October 1 rolled around, we crossed our fingers…. We were working hard to make sure that everything worked, but we had no idea that we would be one of the few whose website would actually work when we started. All at once, we were a national model because we were working with ease…. Before I made the decision to expand Medicaid, I wanted an answer to the question of whether we could afford to do so. It’s easy to determine its the right thing to do, if you can do it without bankrupting the state. I brought PriceWaterhouseCooper in and they did that study for us that indicated that not only can you afford it, but you really can’t afford not to. This is a positive economic impact on your state for the next five to ten years…”
Nick Bunker: The Federal Reserve can’t stop supporting economic growth now: “A look at the Fed’s earlier attempts at quantitative easing indicates the relationship between QE and financial stability isn’t so clear cut. Economist Gabriel Chodrow-Reich of Harvard University looked at the effects of unconventional monetary policy and found there is no trade-off between expansionary monetary policy and financial stability. The International Monetary Fund (via Mike Konczal) has also looked into this question and found evidence that monetary policy affects financial stability in a variety of ways but says it’s not certain which effect would be the strongest. So the total effect of tightening policy is uncertain. Even if monetary policy could easily pop bubbles, the Fed is mandated to promote maximum employment. With our current labor market, employment is anything but maximum…”
Doug Elmendorf: CBO’s Projections of GDP Per Capita: “The agency projects that real GDP per capita will grow, on average, by about 2 percent per year between 2014 and 2017, when it is expected to return to its historical relationship with the economy’s potential output (see the table below). CBO projects that, after 2017, real GDP will grow at the same rate as potential GDP—by an average of about 2¼ percent per year during the 2018–2024 period—because the agency does not attempt to predict the timing or magnitude of business cycle fluctuations in the economy so far into the future. With the population expected to grow by about 1 percent per year, real GDP per capita is projected to grow, on average, by about 1¼ percent per year between 2018 and 2024–a slower rate than the annual average rate of about 2 percent since 1950. That difference reflects CBO’s projection that real GDP will grow more slowly over the latter part of the projection period than it has in the past several decades, primarily because of slower growth of the labor force stemming from the retirement of the baby boom generation…”
Should Be Aware of:
And:
Matthew Yglesias: Has the World Gone Entirely Mad?: “Perhaps. People have been looking for a new tech bubble for years long before there was any evidence of one, and now we have some real evidence…. Totally ridiculous novelty companies attracting seven-figure investments… people investing a million bucks in an app that just sends ‘yo’ to people…. You should probably think of this as a general illustration of the principle that investing in early-stage startups is not really a rational act. Hogeg has the money to spare (apparently), has a relationship with Arbel, probably enjoys this media attention, and stands at least a sliver of a chance of somehow making this investment pay off. So why not?”
Matthew Yglesias: 9 reasons the Fed made a mistake today: “The Fed should have done the opposite and increased the amount of QE it’s doing. Here are nine great reasons why: 1) The unemployment rate is still really high…. 2) Inflation is still really low…. 3) QE doesn’t undermine financial stability…. 4) The long-term unemployed still count…. 5) It’s working in Japan…. 6) Labor force dropouts will return…. 7) Inflation expectations are… low…. 8) Wage gains have been pathetic…. 9) Businesses can afford to pay more…”
Matthew Yglesias: This disruptive think piece will change the world: “If your company (like Vox Media!) is funded by venture capital two things are going on: 1. You’re not profitable enough to finance investment out of retained earnings, and. 2. You’re not creditworthy enough to get a loan from a bank. Disaster! Why would anyone ever give a company like that money? Well… if you get a small ownership stake in the next Google or Facebook you’re going to strike it rich. So how do you think you’re going to convince someone to make a long-shot, high-reward investment in your unprofitable, non-creditworthy company? Well, it’s hard. And you’re definitely not going to do it by being humble and well-mannered. You need to sell the sizzle…. Not only are you asking people to take a reckless gamble… you’re asking people who are already rich and don’t even really need the money that will come from your company’s success. So you need to appeal to their vanity and egomania…. And yet the alternative to the buzz economy is even worse. It is definitely A Good Thing that we have Google and its excellent search engine rather than the bad old indexes we used to put up with…”
Robert Skidesky: Robert Skidelsky knocks the scientific halo off mainstream economists’ teaching and research: “The growing discontent of economics students with the university curriculum…. Students at the University of Manchester advocated an approach ‘that begins with economic phenomena and then gives students a toolkit to evaluate how well different perspectives can explain it’…. Andrew Haldane, Executive Director for Financial Stability at the Bank of England, wrote the introduction…. Students have little awareness of neoclassical theory’s limits, much less alternatives to it…. The deeper message is that mainstream economics is in fact an ideology–the ideology of the free market…. The austerity policies that Europe used to fight the recession from 2010 on were based on the belief that there was no recession to fight. These ideas were tailored to the views of the financial oligarchy. But the tools of economics, as currently taught, provide little scope for investigating the links between economists’ ideas and the structures of power…. So what is keeping the mainstream’s intellectual apparatus going?… An institutional structure that… rewards orthodoxy and penalizes heresy. The great classics… from Smith to Ricardo to Veblen, go untaught…. It has become an article of faith that any move toward a more open or ‘pluralist’ approach to economics portends regression to ‘pre-scientific’ modes of thought…. Curriculum reform can… remind students that economics is not a science like physics, and that it has a much richer history than is to be found in the standard textbooks…. Indeed, mainstream economics is a pitifully thin distillation of historical wisdom on the topics that it addresses…. What students are taught today certainly does not deserve its imperial status in social thought…”
Binyamin Applebaum: The Fed Appears to Have Been Wrong About Growth. Again: “Federal Reserve officials, who have persistently overestimated the strength of the economic recovery, predicted last June that the economy in 2014 would finally grow more than 3 percent for the first time since the recession. The updated forecasts the Fed will publish on Wednesday are likely to reflect more modest expectations…. The Fed’s policy-making committee is still expected to announce another $10 billion cut in its monthly bond purchases…. But the continuing wait for faster growth has reinforced the concern of some critics that the Fed is retreating too quickly from its stimulus campaign… undermining its own forecasts by providing less support to the economy…. ‘Given the persistent overoptimism about the growth outlook by Federal Reserve officials and others in recent years, we shouldn’t count our chickens before they hatch’, William C. Dudley, president of the Federal Reserve Bank of New York and vice chairman of the Fed’s policy-making committee, said last month in New York. The pattern is striking. In every year since 2008, Fed officials have steadily reduced their initial expectations for economic growth. In each year except 2012, they had still overestimated the strength of the economy in June of the forecast year. The consequences at times have been painful. Fed officials have said they did not act more strongly to stimulate the economy in the immediate aftermath of the recession because they expected the economy to rebound more quickly…