Category: Equitablog

Should-Reads:

1. Max Auffhammer: The Yoga Theorem: “With yesterday’s historical release of the EPA’s new carbon emissions policy, I took an extra day to comb through and digest the news. I have organized my intermediate microeconomics class around something called the ‘Yoga Theorem’. This almost universal truth states that the less flexible you are, the more you will suffer. It holds in a very large number of settings (e.g., tax incidence, market power). Yesterday, the Obama administration… turned up the heat on existing coal fired power plants. This is big news. Almost 40% of energy related US CO2 emissions come from power generation and the new rule will cut these emissions by 30%…. As far as standards are concerned, there is a lot to like about the new rule…. Instead of prescribing what states have to do to meet these standards, there are a number of flexibility mechanisms…. While I applaud the Obama administration for this very smart piece of regulation in a world where the right side of the aisle is hostile to least-cost, market-based approaches, I am concerned that this will do little to move the countries that matter to act in a significant way. China, one day after the new rule was published, signaled that it is likely to put a total cap on carbon emissions–not just the carbon intensity of GDP. We will find out soon whether the negotiating strategies of the LDCs will change at the all important Paris meeting of the parties and how big that Chinese cap is. I am certain that this new rule is part of a solution, but by no means the last word in mitigation policy. We need to do much more. And very soon.”

2. Josh Bivens et al.: Raising America’s Pay: Why It’s Our Central Economic Policy Challengee: “The failure of wages to grow for the vast majority is the leading reason why progress in reducing poverty has stalled over the last three-and-a-half decades. Wage-driven inequality has severed the link between poverty reduction and overall economic growth…. From 1979 to 2012, the impact of rising inequality was nearly five times more important in explaining poverty trends than changes in family structure, while rising educational attainment of low-wage workers actually put downward pressure on the poverty rate over that time. Wage growth is key to poverty reduction: The bottom fifth of non-elderly American households relied on work-related income (wages, benefits, and wage-based tax credits) for more than two-thirds (69.7 percent) of their total incomes in 2010…”

Should Be Aware of:

• Jason Furman: Global Lessons for Inclusive Growth
• Peter Beinart: How he came to regret his pro-war stance
• Cullen S. Hendrix and Marcus Noland: Confronting the Curse: The Economics and Geopolitics of Natural Resource Governance
• Tim Worstall: Marc Andreessen Is Right About Trickle Down As Apple’s iPhone And The $20 Android Prove
• • Re/code
• Larry Fink: Want to Be A Better Investor? Tune Out the Noise
• Marco Lombardi and Feng Zhu: A shadow policy rate to calibrate US monetary policy at the zero lower bound
• John Jacobi: Ensuring Successful Health-Care Reform Follow-Through, Part 2: Affordability
• Lili Loofbourow: Louie, Season 4: “Elevator, Part 6” and “Pamela, Part 1”

And:

1. James Fallows: Prisoners of Knowledge: “It was the most exultantly pro-war that I can recall. The prevailing mood was a William Randolph Hearst–type production. It was not just disagreement on the merits of doing this, it was dismissive ridicule of the weakness of the people who weren’t with the program. [If you were against the war] it was a sign that you shrank reflexively from the use of force, that you were a symptom of America’s long slouch into fearfulness around the world, that you were dismissive of the moral claims of the Kurds or others in Iraq. If you were tough as a thinker and decision-maker, if you were brave about America’s role in the world, and if you were properly sensitive to the moral claims of the people Saddam Hussein had abused, then the logic of history and the times led you not to just support the war, but to embrace it…. The editorial page of the Washington Post… was stridently pro-war and has never reflected on that…. I’ve never seen any introspection from them. They were the only major publication that on the ten-year anniversary didn’t have any look-back.”

2. Ashok Rao: This is Ashok: “I think this only further implicates the European elite by serving a certain ‘German perspective’ that requires such a deep prior that any and all monetary stimulus is always and everywhere evil. And while journalists are responsible for their audience, they are also beholden to the truth: and at least given what I know the perspective peddled in this interview is an unfair representation of reality. To a layman reading the interview, the tone is dominated not necessarily by the clarity of Praet’s thought, but the forceful austerity of Schieritz’ question…”

3. Catherine Garcia: A decade later, woman blamed for fiancé’s death discovers it was caused by faulty GM part: “For almost 10 years, Candice Anderson blamed herself for the car accident that killed her fiancé, Mikale Erickson. But in May, she found out that GM has linked his death to a faulty ignition switch…. Anderson told CBS News that in November 2004, the Saturn Ion she was driving in Canton, Texas, went off the road. The airbags did not deploy and there were no skid marks or any other obvious clues as to what had happened. Anderson barely survived, and was found with a small amount of anti-anxiety drugs in her system. She was charged with manslaughter and pleaded guilty to criminal negligent homicide. ‘It’s been a question if I was at fault for his death, and I’ve carried it for so long’, she told CBS News. In May, Anderson and Mikale’s mother, Rhonda Erickson, heard that Mikale’s death was one of 13 GM linked to the faulty ignition switch, a fact confirmed by the National Highway Traffic Safety Administration. The women say they have yet to hear from GM. ‘I think they owe me an apology’, Erickson said. ‘They can’t give me back my son. But, I mean, they could at least give me an apology’.” She would also like to see Anderson’s record cleared.”

4. Brian Buetler: Republican Bergdahl Overreach Will Backfire: “The original sin was to crosswire the question of the propriety of the administration’s communication strategy with the issues surrounding the quality of the deal that secured his release. The answer to the former hinges on the conduct of the soldier himself. If Bergdahl was a deserter, he didn’t deserve a hero’s welcome. But conservatives decided to lace the debate over the terms of his rescue with doubts about his worthiness. The proposition of trading terrorists for a traitor isn’t cursed with nuance. On the basis of third party testimonials, they rendered a verdict on his conduct; and on the basis of that verdict they concluded his rescue was misbegotten, turning the “leave no man behind” ethos on its head…”

Already-Noted Must-Reads:

1. Jared Bernstein: Where’s the Automation in the Productivity Accounts?: “The pace of productivity growth has decelerated…. There’s considerable speculation that the pace at which machines are displacing workers has accelerated…. The robots-are-coming advocates need to explain why a phenomenon that should be associated with accelerating productivity is allegedly occurring over a fairly protracted period where the trend in output per hour is going the other way. A shave with Occam’s razor would lead one to conclude that over this weak expansion characterized by large output gaps, a simpler explanation for decelerating productivity would be weak demand and its corollary, weak capital investment…. Until someone can convince me what’s wrong with the above argument, I don’t want to hear that automation-induced productivity gains are precluding full employment. The problem isn’t productivity; it’s negligent policy.”

2. Ezra Klein: 7 reasons America will fail on climate change: “I don’t believe the United States or the world… will do nearly enough, nearly fast enough, to hold the rise in temperatures to safe levels. I think we’re fucked. Or, at the least, I think our grandchildren are fucked…. 1) We’ve waited so long that what America needs to do is really, really hard — and maybe impossible: In the early 1990s, scientists converged on 2°C…. We’ve waited so long to begin cutting emissions that two degrees looks flatly impossible. We’re on track for 4°C of warming…. The question isn’t whether we’ll fail. It’s how badly we’ll fail…. 2) The people most affected by climate change don’t get a vote: This map… the US… is one of the countries least affected by global warming…. Carbon emissions disproportionately benefit the US and disproportionately harm countries that are not the US…. 3) We’re bad at sacrificing now to benefit later…. 4) The effects of global warming are not easily reversible…. 5) The Republican Party has gone off the rails on climate change…. 6) The international cooperation required is unprecedented, and maybe impossible…. 7) Geoengineering is nuts…. Not to be a killjoy, but it’s hard to believe that the consequences of the huge, unpredictable changes to the global climate can be safely reversed by further efforts to make huge, unpredictable changes to the climate. So what now?… I could make up a more optimistic story. I just don’t believe it…. On climate change, the truth has gone from inconvenient to awful. Right now we’re failing our future. And we will be judged harshly for it.”

3. Paul Krugman: Energy Choices: “Nate Silver got a lot of grief when he chose Roger Pielke Jr., of all people, to write about environment for the new 538. Pielke is regarded among climate scientists as a concern troll – someone who pretends to be open-minded, but is actually committed to undermining the case for emissions limits any way he can. But is this fair? Well, I’m happy to report that Pielke has a letter… that abundantly confirms his bad reputation…”

4. Cardiff Garcia: Routinous, Rouinous: “The chart comes via this recent note from the Dallas Fed, and the theme will be familiar to those who have read the earlier work of Frank Levy, Richard Murname, and David Autor…. These were mainly middle-income jobs, and as their share of the work force declined, the nonroutine jobs at opposite ends of the wage spectrum–nonroutine cognitive and manual jobs — replaced them…. Another worry is that even jobs that were once considered impossible to automate because of their distinctly ‘human’ qualities might themselves be vulnerable…. Food service and retail jobs are being replaced by kiosks. Machine intelligence is already changing the legal industry. Robots will take over some pattern recognition duties and surgery from doctors. Driverless cars will replace long-distance truck drivers…. What is nonroutine to a human will one day be (by definition?) routine to a machine…”

5. Joe Romm: 7 Reasons America Should Succeed On Climate Change: “1. What America and the world needs to do is really, really cheap economically, as key clean technologies plummet in cost…. 2. All of the people who get a vote are severely affected by climate change…. 3. We’re sometimes very good at sacrificing now to benefit later (and to benefit others)…. 4. There NEVER will be a time when aggressive climate action is not the best strategy for everyone….

6. The Republican Party has gone so far off the rails on climate change that it is triggering a backlash…. 6. The international cooperation required is unprecedented, but the key country for a treaty, China, is on a path toward capping its carbon emissions…. 7. Geoengineering is nuts…”

Joe Romm: 7 Reasons America Should Succeed On Climate Change: “1. What America and the world needs to do is…

…really, really cheap economically, as key clean technologies plummet in cost…. 2. All of the people who get a vote are severely affected by climate change…. 3. We’re sometimes very good at sacrificing now to benefit later (and to benefit others)…. 4. There NEVER will be a time when aggressive climate action is not the best strategy for everyone….
5. The Republican Party has gone so far off the rails on climate change that it is triggering a backlash…. 6. The international cooperation required is unprecedented, but the key country for a treaty, China, is on a path toward capping its carbon emissions…. 7. Geoengineering is nuts…

There has been very little recovery of the employment share from its business-cycle nadir trough. Very little. And it isn’t happening now.

Fromhttp://www.bls.gov/:

Two-thirds of the 1.2%-point reduction in the unemployment rate in the past year comes from a further decline in labor-force participation; only one-third comes from an increase in the employment-to-population ratio:

Nominal wages today are 2.05% above their level of last year–and with a 2%/year trend rate of labor-productivity growth, that means that the rate of inflation consistent with a stable labor share of income is 0.05%. There is no inflation pressure on this economy at all save for pressure exerted by widening inequality, and damned little of that:

Cardiff Garcia: Routinous, Rouinous: “The chart comes via this recent note from the Dallas Fed…

…and the theme will be familiar to those who have read the earlier work of Frank Levy, Richard Murname, and David Autor…. These were mainly middle-income jobs, and as their share of the work force declined, the nonroutine jobs at opposite ends of the wage spectrum–nonroutine cognitive and manual jobs — replaced them…. Another worry is that even jobs that were once considered impossible to automate because of their distinctly ‘human’ qualities might themselves be vulnerable…. Food service and retail jobs are being replaced by kiosks. Machine intelligence is already changing the legal industry. Robots will take over some pattern recognition duties and surgery from doctors. Driverless cars will replace long-distance truck drivers…. What is nonroutine to a human will one day be (by definition?) routine to a machine….”

I am once again flummoxed by the number of economists of note and reputation who have been commenting on Piketty’s Capital in the 21st Century without, apparently, bothering to do the work to understand the basic arithmetic scaffolding of the book.

I think that the most fruitful way to understand the basic arithmetic is via the road I took in my “Mr. Piketty and the ‘Neoclassicists'”, focusing on the equilibrium rate of accumulation n+g, the wedge ω between the rate of accumulation and the warranted rate of net profit, the warranted rate of net profit r_nw, and the resulting equilibrium wealth-to-annual-net-income ratio K/Y_n.

But there is another road–one that goes not through prices but through the quantities of the Solow growth model: gross savings, depreciation, and population and technology growth. I think this road is less illuminating and more likely to cause confusion. But perhaps it will help some people who do not currently do so to understand the arithmetic scaffolding of the book.

Piketty and his coauthors estimate that back before 1914 the wealth-to-annual-net-income ratio for northwest European economies was on the order of 700%: the total holdings of property by the economy’s wealthholders amounted to seven times annual income. They also calculate a northwest European rate of growth of income of 1.2%/year–about half from population and labor force, and about half from labor productivity. In the framework of the Solow growth model, you can calculate the rate of savings out of gross income required to maintain that wealth intensity from the formula:

if you know the annual rate at which wealth is subject to depreciation δ.

Three depreciation rates have been proposed. I tend to favor a depreciation rate of 3.33%/year–a lot of the wealth held in the economy back before World War I was in the form of land, which does not depreciate, or various property rights guaranteed by successful rent-seeking of one sort or another. With a depreciation rate of 3.33%, we calculate that 25.7% of gross output was saved and reinvested in maintaining and building the wealth stock; of this 8.4% of gross output keeps the capital stock growing at the 1.2%/year rate of income, and 17.3% of gross output covers the depreciation.

Alex Tabarrok favors a depreciation rate of 5.0%/year–what one would get out of a standard long-run growth model. This seems to me a little high given what kinds of property make up the claims to income included in Piketty’s definition of “capital”. But it is certainly in the admissible range. For this depreciation rate, we calculate that 32.1% of gross output in northwest Europe back before World War I was saved and reinvested in maintaining and building the wealth stock; of this, once again 8.4% keeps the capital stock growing at the 1.2%/year rate of income, and 23.7% to cover depreciation.

Krusell and Smith favor a deprecation rate of 10%/year–and I genuinely do not understand why they think it is appropriate. We are not, after all, dealing with short-run business-cycle fluctuations in which the pieces of the capital stock that vary are made up mostly of inventories and machines here. We are talking about land, very durable buildings, powerful property rights and the ability to summon the police to protect them–claims over future output that do not, I think, erode away at anything like 10%/year. And, indeed, if you try to understand the pre-WWI northwest European economies with such an assumed depreciation rate, you get results that strike me as completely nonsensical: 46.1% of gross output in gross investment; I think we would have noticed if, in pre-WWI northwest Europe’s economies, two out of every five workers spent their days simply keeping society’s collective capital stock from depreciating by repairing rust and wear-and-tear. That is simply not what the pre-WWI northwest European economies looked like.

But the Belle Époque comes to an end. World War I, the Bolshevik Revolution, the Great Depression, and World War II wreak their effects on the North Atlantic. The wealth-to-annual-net-income ratio falls to 300% or so as the growth acceleration of the twentieth century raises the rate of growth of income to 3.0%/year. And then during the Thirty Glorious Years of post-WWII social-democracy and growth the wealth-to-annual-net-income ratio shows no signs of rising swiftly back to its previous equilibrium of 700%. Viewed from the perspective of the Solow growth model, the economy of the generation after 1950 is and remains much less capital-intensive than the economy before World War I, and to support this lower capital-intensity equilibrium requires savings rates out of gross output reduced by a third from their pre-WWI shares:

Starting around 1980, Piketty argues, the North Atlantic shifted out of its Social-Democratic Era and is now moving into a new configuration, with increasingly-concentrated wealth, savings no longer reduced by highly progressive capital taxation and fear of expropriation, and slower rates of population and labor productivity growth. Piketty expects the consequence to be a rise in the savings rate back to Belle Époque levels and a return to the capital intensity and inherited-wealth dominance of those days. In my view, the next questions are two:

1. Would this be a good thing? More savings and wealth accumulation by the rich that increase the capital intensity of the economy increase real wages for the working class and the poor, no? Here I think the answer is perhaps–and I think this is what the debate over Piketty should be about. Unfortunately, that is not the debate we are having. Instead, we have:

2. Can this happen? And Krusell and Smith and company are saying: no, it cannot. As the capital-output ratio rises, the desire to consume wealth pushes the gross savings rate goes down and the fact that capital depreciates at 10%/year pushes the net savings rate down much further, and so there are no macroeconomic forces in play that could push the wealth-to-annual-net-income ratio far up above its current value of 300%.

But if the savings rate necessarily falls as the wealth-to-annual-net-income ratio rises, why was the (gross) savings rate half again as high back before World War I when the economy was wealth-dominated as it is today? And from where comes the 10%/year depreciation rate assumption?

What we clearly have here is a failure to communicate. And I really, really do not think that it is the result of a failure to try on Thomas Piketty’s part.

Calculations here: https://www.icloud.com/iw/#numbers/BAKWqmBPWn9zULDVGZGBDMJheVCgDvXgeXaF/20140605_Piketty_Solow.numbers

1351 words

Paul Krugman: Energy Choices: “Nate Silver got a lot of grief when he chose Roger Pielke Jr….

…of all people, to write about environment for the new 538. Pielke is regarded among climate scientists as a concern troll – someone who pretends to be open-minded, but is actually committed to undermining the case for emissions limits any way he can. But is this fair? Well, I’m happy to report that Pielke has a letter… that abundantly confirms his bad reputation…. Pielke:

Carbon emissions are the product of growth in gross domestic product and of the technologies of energy consumption and production. More precisely, this relationship is called the Kaya Identity – after Yoichi Kaya…. A ‘carbon cap’ necessarily means that a government is committing to either a cessation of economic growth or to the systematic advancement of technological innovation in energy systems on a predictable schedule…. Because halting economic growth is not an option, in China or anywhere else, and because technological innovation does not occur via fiat, there is in practice no such thing as a carbon cap.

This is actually kind of wonderful, in a bang-your-head-on-the-table sort of way. Pielke isn’t claiming that it’s hard in practice to limit emissions without halting economic growth, he’s arguing that it’s logically impossible. So let’s talk about why this is stupid…. Emissions reflect the size of the economy and the available technologies. But they also reflect choices… about what to consume… how to produce it… which of a number of energy technologies to use. These choices are, in turn, strongly affected by incentives…. Electricity consumption isn’t in a fixed relationship with GDP…. Even more important, there are many ways to generate electricity: coal, gas, nuclear, hydro, wind, solar…. That doesn’t mean that reducing emissions has no cost–but again, the idea that, say, a 30 percent fall in emissions requires a 30 percent fall in GDP is ludicrous…. Pielke’s fallacy… [is] the notion that there’s a rigid link between growth and pollution…. What we actually need is a change in the form of growth–and that’s exactly the kind of thing markets are good at, if you get the prices right. Anyway, I guess I should thank Pielke for his intervention, which has helped clarify how we should think both about energy issues and about him.

Ezra Klein: 7 reasons America will fail on climate change: “I don’t believe the United States…

…or the world… will do nearly enough, nearly fast enough, to hold the rise in temperatures to safe levels. I think we’re fucked. Or, at the least, I think our grandchildren are fucked…. 1) We’ve waited so long that what America needs to do is really, really hard — and maybe impossible: In the early 1990s, scientists converged on 2°C…. We’ve waited so long to begin cutting emissions that two degrees looks flatly impossible. We’re on track for 4°C of warming…. The question isn’t whether we’ll fail. It’s how badly we’ll fail…. 2) The people most affected by climate change don’t get a vote: This map… the US… is one of the countries least affected by global warming…. Carbon emissions disproportionately benefit the US and disproportionately harm countries that are not the US…. 3) We’re bad at sacrificing now to benefit later…. 4) The effects of global warming are not easily reversible…. 5) The Republican Party has gone off the rails on climate change…. 6) The international cooperation required is unprecedented, and maybe impossible…. 7) Geoengineering is nuts…. Not to be a killjoy, but it’s hard to believe that the consequences of the huge, unpredictable changes to the global climate can be safely reversed by further efforts to make huge, unpredictable changes to the climate. So what now?… I could make up a more optimistic story. I just don’t believe it…. On climate change, the truth has gone from inconvenient to awful. Right now we’re failing our future. And we will be judged harshly for it.

Jared Bernstein: Where’s the Automation in the Productivity Accounts?: “The pace of productivity growth has decelerated….

…There’s considerable speculation that the pace at which machines are displacing workers has accelerated…. The robots-are-coming advocates need to explain why a phenomenon that should be associated with accelerating productivity is allegedly occurring over a fairly protracted period where the trend in output per hour is going the other way. A shave with Occam’s razor would lead one to conclude that over this weak expansion characterized by large output gaps, a simpler explanation for decelerating productivity would be weak demand and its corollary, weak capital investment…. Until someone can convince me what’s wrong with the above argument, I don’t want to hear that automation-induced productivity gains are precluding full employment.  The problem isn’t productivity; it’s negligent policy.