Category: Equitablog

Things to Read on the Morning of June 5, 2014

Posted on by Brad DeLong

Should-Reads:

  1. Carter Price: A regional look at single moms and upward mobility: “Why is it that the West Coast states of California, Oregon, and Washington stand out for having relatively high rates of single mothers while also having relatively high rates of economic mobility?… The upsho… is that states with more family friendly laws, such as paid sick days so that parents can take care of sick children and relatively generous parental leave policies so that new parents can spend more time with their newborn children, are more likely to have a relatively high rates of economic mobility despite high rates of single mothers—among them California, Oregon, and Washington. Conversely, parts of America, particularly parts of the Rust Belt, are significantly less mobile than one would expect given the relatively low share of households headed by single mothers…”

  2. Marc Andreesen: Abundance: “Thought experiment: Posit a world in which all material needs are provided for free, by robots and material synthesizers…. Imagine six, or 10, billion people doing nothing but arts and sciences, culture and exploring and learning. What a world that would be. The problem seems unlikely to be that we’ll get there too fast. The problem seems like to be that we’ll get there too slow…”

  3. Nick Bunker: Where are the gains from productivity?: “Data show a decoupling between productivity and compensation in the U.S. labor market since 1973…. Mishel finds that three main factors contributed to the divergence… different price indices used to deflate the output and wage data… a shift from income from labor to capital… the largest source of divergence is the rise in the inequality of compensation…. Increasing productivity is a necessary part of increasing wages for workers. But the last several decades have shown that it’s not… sufficient…”

  4. James Pethokoukis: What conservatives don’t understand about the modern U.S. economy: “A new manifesto making the rounds in conservative circles is as much a time-travel tale as the new comic-book movie, X-Men: Days of Future Past. Activists hope that embracing… tax cuts and balanced budgets, will unite and then ignite the Republican Party. Reagan-era nostalgia, unfortunately, is not much of a superpower…. The 10-page document emerged from a recent hush-hush meeting of top conservative leaders, including Sens. Ted Cruz (R-Texas) and Mike Lee (R-Utah), co-organized by Reagan Attorney General Ed Meese. Titled “Reform, Restore, Modernize — An Agenda To Restore The American Dream,” the plan covers foreign policy and cultural issues, as well as economic policy. From the get-go, the manifesto stumbles…. It bemoans the Not-So-Great Recovery. But there is no suggestion the economy faces longer-term problems that predate Obamanomics. There have been jobless recoveries after each of the past three downturns…. It’s not all about Obama’s economy. Such a potential scenario demands a policy agenda including education reform, a national innovation policy encouraging more startups and federal research spending, and wage subsidies for low-income workers. But if your analytical lens is a simplistic ‘Barack Obama is Jimmy Carter’, then a different policy path naturally follows…. Light taxation and small government are principles worth preserving. But they must be applied in a modern fashion…”

Should Be Aware of:

And:

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Afternoon Must-Read: Michael Albertus and Victor Menaldo: Gaming Democracy: Elite Dominance during Transition and the Prospects for Redistribution

Posted on by Brad DeLong

Michael Albertus and Victor Menaldo: Gaming Democracy: Elite Dominance during Transition and the Prospects for Redistribution: “Inequality and democracy are far more compatible empirically than social conflict theory predicts….

There is a relationship between democracy and redistribution only if elites are politically weak during a transition; for example, when there is revolutionary pressure. Redistribution is also greater if a democratic regime can avoid adopting and operating under a constitution written by outgoing elites and instead create a new constitution that redefines the political game. This finding holds across three different measures of redistribution and instrumental variables estimation. This article also documents the ways in which elites ‘bias’ democratic institutions…

Afternoon Must-Read: Martin Wolf: Legitimate Business Unlocks Growth

Posted on by Brad DeLong

Martin Wolf: Legitimate Business Unlocks Growth: “If Narendra Modi, India’s prime minister, seeks an example…

of a democratically elected leader embarked on radical reform, he could look to Enrique Peña Nieto. True, the latter is president of a far-smaller country, and a richer one – Mexico’s average standard of living is double India’s…. Both need to generate market-oriented growth in economies that show a huge gulf between a high-productivity formal sector and a low-productivity informal one. Mr Peña Nieto has embarked on bold reforms. Is his the model to be followed?… For those who believe that opening up to trade is a guarantee of rapid growth, this is a sobering tale: the ratio of trade to GDP jumped from 39 per cent in 1990 to 65 per cent in 2011. Exports to the US rose sixfold under Nafta. Yet the economy underperformed…. While productivity rose at a compound rate of 5.8 per cent a year between 1999 and 2009 in companies employing more than 500 people, it rose at just 1 per cent a year in companies employing between 10 and 500 people, and fell at a rate of 6.5 per cent in companies employing fewer than 10….

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Where are the gains from productivity?

Posted on by Nick Bunker

The U.S. Bureau of Labor Statistics today released updated data on labor productivity, defined as output per hour worked, showing that it decreased by 3.2 percent on an annual basis during the first three months of 2014. On a year to year basis, productivity grew by 1 percent since the first quarter of 2013. The decline is discouraging since growth in labor productivity is the source of prosperity for workers.

According to economic theory, labor productivity is at the root of wages. A worker should be compensated for their marginal value of labor, the amount of value they add to their employer by working one more hour. The value created depends on the price of the good or service being created as well as the worker’s productivity. The higher the worker’s productivity, the higher her wage should be. Of course, this theory doesn’t work out perfectly in the real world and misses important parts of the wage-setting process. But productivity serves as a good baseline of where wages should be.

Even with rising productivity, workers’ wages may not increase as quickly as they could. The past several decades have seen the link between productivity and the returns to workers break. So where have the rewards of productivity gone?

Data show a decoupling between productivity and compensation in the U.S. labor market since 1973. (We use total compensation here since using just wages would miss out other forms from compensation such as retirement benefits and health insurance.) According to an analysis by Larry Mishel of the Economic Policy Institute, labor productivity grew by an average annual rate of 1.6 percent from 1973 to 2011 while median hourly compensation grew at an average annual rate of about 0.3.

Mishel finds that three main factors contributed to the divergence. The first is a technical difference between the different price indices used to deflate the output and wage data. In other words, inflation for goods workers produce has been slower than for goods workers buy. Mishel finds that this divergence explains about one-third of the divergence.

The second source of divergence is a shift from income from labor to capital. Workers aren’t receiving all of the gains of their productivity; some of those gains are going to owners of capital instead. Mishel finds that this shift is responsible for about one-fifth of the gap.

The largest source of divergence is the rise in the inequality of compensation, responsible for just over 45 percent of the gap. The compensation of the typical worker is not growing with productivity since more and more of compensation is going to the top earners. Other research corroborates this point. Ian Dew-Becker of Duke University and Robert Gordon of Northwestern University find that from 1966 to 2001, only the top 10 percent of earners saw wage growth at or above productivity growth.

Increasing productivity is a necessary part of increasing wages for workers. But the last several decades have shown that it’s not a sufficient part.

Things to Read on the Morning of June 4, 2014

Posted on by Brad DeLong

Should-Reads:

  1. Terry J. Fitzgerald and Juan Pablo Nicolini: Is There a Stable Relationship between Unemployment and Future Inflation? Evidence from U.S. Cities: “This paper makes two straightforward points that we argue are central to understanding the literature and debate surrounding the stability of the Phillips curve. First, the endogeneity of monetary policy implies that aggregate data are largely uninformative as to the existence of a stable relationship between unemployment and future inflation. Second, if the NAIRU model is assumed to be true, regional data can be used to identify the structural relationship between unemployment and future inflation. We find that a 1 percentage point increase in the unemployment rate is associated with a roughly 0.3 percentage point decline in inflation over the next year.”

  2. Mike Albertus and Victor Menaldo: How democracies are gamed for power and profit: an addendum to Piketty: “We find that some countries adopt policies that systematically tend to favor the majority of the population and thus reduce inequality, whereas others instead create policies that favor elites and the wealthy more broadly. The chief determinant of this broad difference… is political institutions. Democracy can… be the great equalizer… when transition occurs in the wake of revolution or, alternatively, when elites are unable to impose a constitution that persists…. If, by contrast, economic elites are strong on the eve of democratization, this result reverses. Less redistributive policies that allow inequality to grow ensue…. Capitalism need not churn inexorably toward spiraling inequality. Indeed, we find that in democracies where elites have little say in writing the social contract, redistribution is more likely…. Most countries inherit elite biases from former periods of autocratic rule that hobble their capacity to counteract increasing inequality…. Elite influence can choke off egalitarian policies even in well-established democracies such as the United States and Great Britain that democratized gradually and were never quite able to tame the disproportionate power of elites. Recent work by Gilens and Page makes this point abundantly clear–even going so far as suggesting that the United States looks more like an oligarchy in democratic clothing.”

  3. Marshall Steinbaum: Missing the Point on Income Inequality in the 1920s and Today: “Gary Burtless… takes issue with widely publicized findings that income inequality in the United States has reached the level that prevailed in the 1920s…. According to Burtless, that conclusion ignores the creation of the welfare state, consisting of Social Security, Medicare, Medicaid, and other government programs that aim to redistribute disposable income and goods and services…. The potential for policies to rectify income inequality and boost economic growth is very high, which by itself invalidates long-term conservative arguments that government is powerless or ineffective in the face of ‘the market’s’ inexorable force. Burtless’ claim is correct, but [should have noted that] some conservative critics… are using the welfare state they… [seek to] dismantl[e] to… argu[e] that inequality either doesn’t really exist or is at least not as bad…”

  4. Nick Bunker: When does health insurance count as income?: “The debate over growing income inequality… involves… what exactly constitutes income…. Prior to 2012, CBO valued Medicare, Medicaid and the Children’s Health Insurance Program based on how much money these health insurance programs freed up for the household….Starting in 2012, CBO… simply impute[s] the average cost… [so] any increase in the cost of the program—an increase in payments to doctors, for example—would register as an increase in household income…. As health economist Uwe Reinhardt at Princeton University points out, CBO can’t be blamed for muddling through with these data issues. Economists really don’t have a consensus on how to measure the value of these programs…”

Should Be Aware of:

And:

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Afternoon Must-Read: Max Auffhammer: Why I Think Not Building Keystone XL Leaves a Billion Barrels of Bitumen in the Ground. |

Posted on by Brad DeLong

Max Auffhammer: It just doesn’t add up. Why I think not building Keystone XL will likely leave a billion barrels worth of bitumen in the ground: “Whenever oil sands come up in casual conversation, many of my economist friends argue that…

…“The Canadians are just going to build pipelines to the East and West and ship the stuff to Asia and elsewhere.”… Alberta’s oil sand reserves are estimated at 168.7 billion barrels, which eclipses the reserves of Iran, Iraq, Kuwait and Russia…. They are in the form of crude bitumen… well to wheel emissions from these oil sands are 14-20% higher than those of a weighted average of transportation fuels used in the United States…. Even if every pipeline project on record is built on time and rail capacity is expanded aggressively, there still is not enough transport capacity to meet industry projected supply. This means, of course, that Keystone XL matters…. I think that… not permitting Keystone XL will likely leave 1 billion barrels in the ground by 2030….

There is simply not sufficient transport capacity to realize the supply projections by Canadian Petroleum Producers out to 2030… regulatory uncertainty… currently oil sands enjoy an unfair advantage… in the absence of a carbon tax or other price based mechanism, its price is artificially lower than socially optimal… delaying extraction of oil sands now will lead to lower demand in the future… higher transport costs by rail… the very costly development of local refining capacity in Alberta…. Of course, globally speaking, 1 billion barrels sounds like a lot, but the US consumes that amount in about 50 days. As carbon is a stock pollutant as far as human time frames are concerned, not permitting Keystone “buys time” for alternative transportation fuels and climate policies to develop…

Afternoon Must-Read: Larry Ball: Long-Term Damage from the Great Recession in OECD Countries

Posted on by Brad DeLong

Larry Ball: Long-Term Damage from the Great Recession in OECD Countries: “This paper estimates the long-term effects…

…of the global recession of 2008-2009 on output in 23 countries. I measure these effects by comparing current estimates of potential output from the OECD and IMF to the path that potential was following in 2007, according to estimates at the time. The losses in potential output range from almost nothing in Australia and Switzerland to more than 30% in Greece, Hungary, and Ireland; the average loss, weighted by economy size, is 8.4%. Most countries have experienced strong hysteresis effects: shortfalls of actual output from pre-recession trends have reduced potential output almost one-for-one. In the hardest-hit economies, the current growth rate of potential is depressed, implying that the level of lost potential is growing over time.