Category: Equitablog

Things to Read on the Afternoon of June 3, 2014

Posted on by Brad DeLong

Should-Reads:

  1. Christopher Smith: FRB: FEDS Notes: The effect of labor slack on wages: Evidence from state-level relationships: “Some have argued that the unemployment rate may overestimate labor market slack, because the LTU are largely structurally unemployed and exert significantly less wage and price pressure. If so, then using the aggregate unemployment rate to forecast wage or price inflation may be misleading. However, this Note, along with the companion note showing that a state’s LTU rate normalizes as its STU rate normalizes, and the cross-city inflation-based evidence presented in Kiley (2014), suggest against the idea that the LTU should be strongly discounted from measures of labor market slack. This Note also provides some suggestive empirical support for possibly considering broader measures of labor market slack, such as those including non-participants who may be somewhat attached to the labor market, when assessing wage and price pressures…. Moreover, because some segments of those not in the labor force also appear to generally apply downward pressure to wages as well, the unemployment rate may somewhat understate the degree of labor slack that matters for aggregate wage and price movements…”

  2. Jonathan Chait: Here Are the Papers That Think You’re an Idiot: “The Obama administration just unveiled one of the most consequential and far-reaching proposals of this presidency. One might think that, for good or ill, this constitutes an important story…. Some publications are covering this enormous policy story. Others find that way too boring and have moved on to the vital question of how will this affect the midterm elections?… The Washington Post leads with a story about the midterm ramifications. Politico leads with–ha-ha, you don’t really need to ask, do you?… The New York Times leads with a policy story…. The Huffington Post — mocked by the journalistic establishment as sideboob/aggregation clickbait — leads with links to nine stories, eight of which deal with policy…”

  3. Nick Bunker: Workers’ declining share of income: “The recent decline in the labor share of income is verified by any number of researchers—here’s a good summary…. The share of income going to capital may have increased because the price of capital goods has declined…. This is exactly the result found by economists Loukas Karabarbounis and Brent Neiman, both of the University of Chicago, who estimate about half of the decline is due to the lower price of investment goods…. Michael Elsy… Bart Hobkin… and Aysegul Sahin… find that the increasing offshoring is a ‘leading potential explanation’… Tali Kristal… finds that the decline in unionization, added by technological change, was the primary driver of the decline…”

Should Be Aware of:

And:

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Afternoon Must-Read: Robert Hall: Quantifying the Lasting Harm to the U.S. Economy from the Financial Crisis

Posted on by Brad DeLong

Robert Hall: Quantifying the Lasting Harm to the U.S. Economy from the Financial Crisis: “The financial crisis and ensuing Great Recession…

…left the U.S. economy in an injured state. In 2013, output was 13 percent below its trend path from 1990 through 2007. Part of this shortfall—2.2 percentage points out of the 13—was the result of lingering slackness in the labor market in the form of abnormal unemployment and substandard weekly hours of work. The single biggest contributor was a shortfall in business capital, which accounted for 3.9 percentage points. The second largest was a shortfall of 3.5 percentage points in total factor productivity. The fourth was a shortfall of 2.4 percentage points in labor-force participation. I discuss these four sources of the injury in detail, focusing on identifying state variables that may or may not return to earlier growth paths. The conclusion is optimistic about the capital stock and slackness in the labor market and pessimistic about reversing the declines in total factor productivity and the part of the participation shortfall not associated with the weak labor market.

When does health insurance count as income?

Posted on by Nick Bunker

The debate over growing income inequality in the United States often involves sometimes arcane decisions about what exactly constitutes income. One such instance involves government-provided health insurance. The non-partisan Congressional Budget Office in 2012 changed how it measured the value of government-provided insurance in order to be consistent in how they measure the value of insurance provided by employers and the government.. The very technical change, however, happens to have a significant effect on the trends in incomes for low-income households.

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 cash for the household. If a household has $5,000 left over after paying for housing and food, for example, then the fungible value of the health insurance is $5,000. The value to households could go up to the average cost of the program.

Starting in 2012, CBO changed the way they valued these programs. Instead of using the fungible value, they simply impute the average cost to every household that uses the program, regardless of income. This means any increase in the cost of the program—an increase in payments to doctors, for example—would register as an increase in household income.

Changing this definition has had a significant effect on the measured incomes of households that have government provided insurance, particularly low-income households. Using the 2011 definition, the average income for a household in the bottom 20 percent grew by 18 percent from 1979 to 2007. Using the new definition, the average income for the bottom fifth grew by 41 percent over that same period. (Note that the CBO made other changes in the data, including the price index used, but the health insurance change was the largest change.)

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. Clearly they need to think through this question deeper. The value of Medicare and Medicaid is just one example of the technical questions surrounding the definition of income. If we want to understand the causes and possible consequences of income inequality, we should make sure we can all agree on what constitutes income.

 

Reviewing Lawrence H. Summers’s Review of Piketty V: Secular Stagnation and the High-Pressure Economy: Tuesday Focus: June 32014

Posted on by Brad DeLong

Mark Thoma sends us to Larry Summers at Michael Tomasky’s Democracy Journal:

Lawrence H. Summers: The Inequality Puzzle: “His policy recommendations are unworldly….

Success in combating inequality will require addressing the myriad devices that enable those with great wealth to avoid paying income and estate taxes…. If, as I believe, envy is a much less important reason for concern than lost opportunity, great emphasis should shift to policies that promote bottom-up growth. At a moment when secular stagnation is a real risk, such policies may include substantially increased public investment and better training for young people and retraining for displaced workers, as well as measures to reduce barriers to private investment in spheres like energy production, where substantial job creation is possible. Look at Kennedy airport… if a moment when the United States can borrow at lower than 3 percent in a currency we print ourselves, and when the unemployment rate for construction workers hovers above 10 percent, is not the right moment to do it, when will that moment come?

The relationship between the PikettyWorld, in which increases in the wealth-to-annual-income ratio do not see any substantial reduction in rates of profit, either because rich dominance of politics puts the state’s thumb on the scale or because the rise of the robots means that capital and labor are no longer complements, and the SummersWorld, in which there is a very low real interest rate, is complex.

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Morning Must-Read: Peter Orszag: Toward a Progressive Tax Policy

Posted on by Brad DeLong

Peter Orszag: Toward a Progressive Tax Policy – Bloomberg View: “A progressive consumption tax… already embraced by many conservative[s]…

…because it is, compared with other types of taxes, economically efficient. But it is efficient in no small part because it imposes a tax on wealth…. As William Gale and Benjamin Harris of the Brookings Institution have pointed out, the efficiency benefits from a consumption tax occur from a combination of effects… imposing a one-time tax on existing wealth [during the transition]… ‘is a major component of the efficiency gains because of the creation of a consumption tax’. The dirty little secret about consumption taxes is that their putative benefits come largely from Piketty’s core idea: a tax on wealth. The inherent problem with a [flat] consumption tax, though, is that it is regressive…. The solution to this dilemma is a progressive consumption tax…. David Bradford… wages are subject to a progressive tax, and business cash flow is taxed at the highest wage-tax rate. The result is a consumption tax that imposes larger proportionate burdens on high-income families than on low-income ones… promoted by the conservative American Enterprise Institute, whose economists are most unlikely to embrace a simple wealth tax….

Another idea to address growing concentrations of assets that would be more practical in the U.S. than a global wealth tax would be to shift the U.S. estate tax to an inheritance tax…. Neither a progressive consumption tax nor an inheritance tax may be politically viable in the U.S. at the moment, but everything in life is relative. Compared with a global wealth tax, they seem eminently doable.

Morning Must-Read: Isabel Gorsk: Belarus Plans Serfdom

Posted on by Brad DeLong

Isabel Gorsk: Belarus plans to bring back serfdom: “Alexander Lukashenko is living up to his reputation as Europe’s last remaining dictator…

…The president of Belarus has decided to bring back serfdom on farms in a bid to stop urban migration… prohibiting farm labourers from quitting their jobs and moving to the cities. “Yesterday, a decree was put on my table concerning–we are speaking bluntly–serfdom,” the Belarus leader told a meeting on Tuesday to discuss improvements to livestock farming, gazeta.ru reported. The serfdom decree would beef up the power of regional governors and “teach the peasants to work more efficiently,” Lukashenko said. Governors who failed to ensure timely and efficient harvests in their regions would get the sack, he added….Low agricultural wages and limited prospects have persuaded many farm workers to leave the countryside to seek opportunities in the cities or in neighbouring Russia…

Morning Must-Read: Ben Adler: Nine Things About Obama’s New Climate Rules

Posted on by Brad DeLong

Ben Adler: The nine things you need to know about Obama’s new climate rules: “1.  What will the rules do?…

…The EPA intends to create a “rate-based” limit on greenhouse gas emissions from power plants for each state… a standard for how much CO2 is emitted per megawatt hour of electricity…. 2. How much will the plan cut emissions? Nationwide… reduce power plants’ CO2 emissions from 2005 levels by 26 or 27 percent by 2020 and about 30 percent by 2030…. The targets make more sense politically than policy-wise…. 3. Why are these referred to as regulations on “coal-fired power plants,” and why are opponents calling this a “War on Coal”? Coal is the most carbon-intensive fossil fuel, and it accounts for more than 40 percent of American electric generation and 74 percent of the CO2 emissions from the electricity sector. Under the proposed rules, only coal plants will have to be cleaned up, reduce their usage, or be retired…. 4. What do states have to do? Each state will be required to submit its own plan… make coal plants more efficient… increase natural gas-burning capacity, increase non-carbon energy producing capacity… and reduce demand for electricity through improved efficiency…. 5. How will this affect the mix of fuels the U.S. uses? It’s bad for coal and it’s good for natural gas. It’s good for renewables too. Controversially among environmentalists, the plan also specifically encourages nuclear energy…. 6. How much of a difference will it make in the big scheme of things? It is expected to cut U.S. CO2 emissions by more than 6 percent from 2005 levels by 2020… a significant step…. Moving away from coal has many other environmental benefits… mercury… and sulfur… asthma attacks…. 7. Are there any downsides? Increased natural gas production has its drawbacks…. 8. Will it hurt the economy? No…. 9. What happens now? There will be a public comment period for 120 days, and during the week of July 28, EPA will hold hearings in Denver, Atlanta, Pittsburgh, and Washington, D.C. Denver and Pittsburgh are both in states with large reserves of coal and natural gas. The rules will then be finalized by June 2015…

Things to Read at Lunchtime on June 2, 2014

Posted on by Brad DeLong

Should-Reads:

  1. Paul Krugman: For Bonds, This Time is Different: “Bloomberg has an interesting piece on how high bond prices and low yields have been shocking investors who relied on old models. Some of this… is because many people still… haven’t wrapped their minds around… a zero-lower-bound economy and… a low-inflation trap. But… structural change is happening fast… the demographic transition… Europe very quickly turning Japanese… the US, although growing faster, also turning down sharply. Add to this the fact that what we thought was normal actually depended on ever-growing household debt, and it becomes clear that historical expectations about normal [safe] interest rates are likely to be way off…”

  2. Brad Plumer: A guide to Obama’s new rules to cut carbon emissions from power plants: “Why is the EPA regulating carbon-dioxide?… The agency is required… to regulate carbon-dioxide under the existing Clean Air Act so long as there was evidence that the gas endangered public health. Most scientists agree that it does — and, in 2009, the EPA issued an ‘endangerment finding’ to that effect…. Now the EPA must turn its attention to existing power plants, using section 111(d) of the Clean Air Act. This is a relatively untested section of the Clean Air Act, and the agency has a fair bit of leeway in how to apply this section to carbon-dioxide…. The EPA will propose a ‘performance standard’ requiring a certain level of emissions cuts from power plants. Each state will then have to come up with a plan to implement those standards…. Coal power plants could adopt more efficient technology. Or perhaps electric utilities could switch from coal to natural gas…. Or perhaps utilities could boost their supply of wind or solar or nuclear power. Or promote energy efficiency in homes. Or power plants could join some sort of cap-and-trade program…. This time, however, the agency seems poised to allow power plants to meet the emissions limits through changes ‘beyond the fenceline’ — that is, power companies can use wind generation or efficiency programs elsewhere (say) to meet the standard…. That baseline is important. Emissions from US power plants have already fallen roughly 13 percent between 2005 and 2013…. So this rule would effectively require power plants to cut their emissions 13.5 percent between now and 2020, or 19 percent between now and 2030. That’s somewhat less than environmentalists were pushing for…. How much will these new rules cost the economy?… The Natural Resources Defence Council previously estimated that a more ambitious plan would cost electric utilities as much as $14.6 billion by 2020… lower than the benefits… which run from $28 billion to $63 billion…”

  3. Chris Blattman: This is my teaching nightmare: “Professor Christensen did something ‘truly disruptive’ in 2011, when he found himself in a room with a panoramic view of Boston Harbor. About to begin his lecture, he noticed something about the students before him. They were beautiful, he later recalled. Really beautiful. ‘Oh, we’re not students’, one of them explained. ‘We’re models.’ They were there to look as if they were learning: to appear slightly puzzled when Professor Christensen introduced a complex concept, to nod when he clarified it, or to look fascinated if he grew a tad boring. The cameras in the classroom–actually, a rented space downtown–would capture it all for the real audience: roughly 130,000 business students at the University of Phoenix, which hired Professor Christensen to deliver lectures online.”

Should Be Aware of:

And:

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Workers’ declining share of income

Posted on by Nick Bunker

Senior fellow Jared Bernstein at the Center for Budget and Policy Priorities recently asked why capital is so much stronger than labor in our economy. Bernstein focuses on the effects of concentrated wealth on economic policy, but his question could be looked at in another way. The relative strength of capital in the economy can be measured as its share of income. The share of total income going to capital, instead of to workers, has been increasing since the 1980s. Understanding what’s driven this shift can tell us why capital has been flourishing compared to labor in recent decades.

The recent decline in the labor share of income is verified by any number of researchers—here’s a good summary of the trends in the data, though the exact size of the decline is up for debate. The potential causes of this shift are rapid advances in information technology, globalization, and the decline of labor market institutions such as unions. Three recent research papers examine all three of these trends and the consequences for workers’ share of income relative to capital.

The share of income going to capital may have increased because the price of capital goods has declined. This line of thinking rests on the idea that the information technology revolution of the past several decades has made technology much cheaper. As equipment becomes less expensive compared to workers, companies used capital more readily than labor—and thus the demand for labor declined. The result is a decreasing share of income going to labor. This is exactly the result found by economists Loukas Karabarbounis and Brent Neiman, both of the University of Chicago, who estimate about half of the decline is due to the lower price of investment goods.

The other potential culprit is globalization and the opening of the American economy to international markets. Economists Michael Elsy of the University of Edinburgh, Bart Hobikin of the San Francisco Federal Reserve Bank, and Aysegul Sahin of the New York Fed, find that the increasing offshoring is a “leading potential explanation” of the declining labor share of income. The researchers come to their conclusion by looking at the changes in the labor share within different U.S. industries. Labor shares within industries have been fluctuating for decades, but the present decline has been driven by the trade and manufacturing sectors. This fact would indicate that increased foreign competition is a large factor in the declining labor share.

The third potential cause is the weakening of labor market institutions such as unions. If the bargaining power of workers declines then they will have a harder time negotiating a higher share of income. Sociologist Tali Kristal of the University of Haifa looks at industry-level data on labor shares and finds that the decline in unionization, added by technological change, was the primary driver of the decline.

These papers argue for one or two specific factors being the primary cause of the decline, but these forces are hard to untangle. Capital goods may have become less expensive compared to labor due to information technology or it could be because globalization made labor cheaper. And increasing offshoring may have been due to the declining strength of organized labor.

Clearly economists have more to understand about this phenomenon. We may be moving from an era when inequality of labor income was largest source of inequality to an era where income inequality between labor and capital is the biggest driver. Hopefully the papers cited above are just the beginning of a new line of inquiry.