Category: Equitablog

Evening Must-Read: Monetary policy: A Few Points on Slack

Posted on by Brad DeLong

MOAR on the “slack” debate: Ryan Avent: Monetary policy: A few points on slack: “A DEBATE has broken out over just how close America is to full employment

I recommend comments on the subject from Tim Duy and Cardiff Garcia. I’ll make a few points…. 1) The labour market is tightening, as it has for at least the last two years, but it is objectively not tight…. 2) Having said that, we are approaching the point in the business cycle at which the Fed would historically begin tightening…. 3) There is some concern that there is less slack in the American economy than we would normally expect at an unemployment rate of 6.7%…. 4) The question is, should the Fed begin tightening at this point in the slack cycle?5) Wait, that’s not the right question at all! 6) The real question is, why, nearly five years into a recovery from the worst recession of the postwar period, with labour markets looking as bad as in the worst moments of most recent recessions, with full employment another year or two away, with inflation well below the official target, and with interest rates at the zero lower bound: why is the Fed not figuring how to accelerate the recovery? 7) And then, actually, the real question is why the real question, at least where most pundits are concerned, is… (4) rather than… (6). Answer that and you have a pretty good idea why the labour-market recovery has been so awful.

Continue reading “Evening Must-Read: Monetary policy: A Few Points on Slack” →

Things to Read on the Evening of March 12, 2014

Posted on by Brad DeLong

Must-Reads:

  1. Lawrence Summers: Why Austerity Is Counterproductive In The New Economy: “As U.S. and [other] industrial economies are currently configured, simultaneous achievement of adequate growth, capacity utilization, and financial stability appears increasingly difficult… [because of] a substantial decline in the equilibrium or natural real [safe] rate of interest…. Addressing these challenges requires different policy approaches than are represented by the current conventional wisdom…. The recovery has not represented a return to potential, and, according to the best estimates we have, the downturn has cast a substantial shadow on the economy’s future potential…. The record of growth for the last five years is disturbing, but I think that is not the whole of what should concern us…. Until 2007 the economy grew at a satisfactory rate… [but] did it do so in a sustainable way? I would suggest not…. The record of industrial countries over the last 15 years is profoundly discouraging as to the prospects of maintaining substantial growth with financial stability…. The preferable strategy… is to raise the level of demand at any given rate of interest…. Policies that are successful in promoting exports… public investments…. With a standard model, increases in demand actually reduce the long-run debt-to-GDP ratio… [That should drive a] reassessment of the policy issues facing the United States and push us towards placing substantial emphasis on increasing demand…”

  2. The problem with stories like this is that the author reveals himself to be either a clueless dork or an unreliable narrator by virtue of assuming the authorial persona of someone who did not realize what life was really like for typical Americans until he fell out of the bubble and it affected him personally. But if you can look past that… very good: My Life as a Retail Worker: Nasty, Brutish, and Cheap – Joseph Williams: “After veteran reporter Joseph Williams lost his job, he could only find employment in a sporting-goods store. In a personal essay, he recalls his struggles with challenges millions of Americans return to day after day.”

  3. Spencer Ackerman: CIA steals the limelight from the NSA – and finds itself in full-blown crisis: “After a year in which the National Security Agency faced global condemnation, the Central Intelligence Agency has now taken over as the US intelligence body most firmly in the midst of a full-blown crisis. The CIA has dug itself into a morass the NSA has firmly avoided: antagonizing its congressional overseers. It is a crisis redolent with ironies. A White House that labored intently to move past the CIA’s post-9/11 torture legacy, disappointing many supporters, must now resolve a row stemming directly from it. A CIA director who first missed out on his job over fears he was soft on agency torture is now in the crosshairs of what his Senate overseers considers a cover-up. A Senate committee chairwoman who has fiercely defended the NSA’s abilities to collect data on every American phone call is furious that the CIA monitored the network usage of her staff, calling the alleged infraction a potential subversion of the Senate’s constitutionally mandated oversight responsibilities. A Justice Department that limited and ultimately dropped a criminal inquiry into CIA torture without bringing charges now has to consider potential criminal liability against Senate staff conducting their own inquiry; and for CIA officials who allegedly attempted to thwart it.”

  4. Susan Berger: How Finance Gutted Manufacturing: “Timken obviously has a business interest in these initiatives: sharing costs for activities that were once borne entirely in-house, educating students who can be recruited for employment, gaining eligibility for new state and federal grants. But in fulfilling its own goals, Timken was also acting as a convener for industry and education. It placed its own resources on the table in order to attract others to do the same. As Timken prepares to split into two smaller publicly listed companies, how likely is it that either of them will be so active in strengthening the Ohio industrial ecosystem? Judging by the records of other companies that have gone through similar restructuring, I am not optimistic…. here is a more favorable climate for manufacturing in the United States today than there has been in decades. Yet these changes are unlikely to have durable effects if the basic weaknesses of the system are not repaired. The new public-private partnerships to rebuild capabilities in the industrial ecosystem seem to have enormous promise. But, as the Timken case illustrates, the financial pressures that broke up American companies in the ’80s persist. The solution may be out of reach. Today California teachers need to protect their pensions by dismantling Ohio manufacturers. The structures of U.S. capital markets and fiscal policy reward investors whose decisions are based on maximizing returns over the short-term. While the Dodd-Frank financial reforms may cut down on some of the riskiest securitization-based investment strategies, new regulations have not created real incentives for the more patient investment that growing production in America requires.”

Continue reading “Things to Read on the Evening of March 12, 2014” →

Debate: How Much Slack?

Posted on by Brad DeLong

This morning’s worthwhile internet debate to watch is the ongoing debate over how much slack there is in the U.S. economy:

Graph Quits Total Nonfarm JTSQUR FRED St Louis Fed FRED Graph St Louis Fed FRED Graph St Louis Fed

Me? I would say that “normal” monetary policy would call for the first rate increases when the JOLTS quit rate crosses 2% heading north. But I would also say that right now and for the foreseeable future “normal” monetary policy is not appropriate: the inflation rate was clearly too low going into the financial crisis to give monetary policy enough room to maneuver–an inflation target of 3% or 4%/year is clearly much more appropriate than a symmetric inflation target of 2%/year, let alone the asymmetric inflation target of 2%/year that we have. And I would say that right now the benefits of a high-pressure economy before our current cyclical unemployment has completed its transformation into structural unemployment are unusually large.

So, yes, I would say that pretty much any sensible cost-benefit analysis would postpone the first rate increases on the current track until 2016 or 2017…

Continue reading “Debate: How Much Slack?” →

The “Bush Boom” and the Obama Stagnation: Wednesday Focus: March 12, 2014

Posted on by Brad DeLong

Let me start by setting out four major components of spending in the economy–spending by foreigners on exports, spending by all levels of the U.S. government purchasing goods and services, spending on residential construction, and spending by businesses on plant and equipment–all measured as percentages of potential output, and all calculated as deviations of their values from the mid-2000s business cycle peak:

The Bush Boom:

  • +1.0%: Exports
  • +0.6%: Government Purchases
  • +0.0%: Nonresidential Investment
  • +1.6%: Residential Investment
  • +3.2%: TOTAL
FRED Graph St Louis Fed

The Obama Stagnation:

  • +3.0%: Exports
  • -2.3%: Government Purchases
  • +1.7%: Nonresidential Investment
  • +0.4%: Residential Investment
  • +2.8%: TOTAL
FRED Graph St Louis Fed

Continue reading “The “Bush Boom” and the Obama Stagnation: Wednesday Focus: March 12, 2014″ →

A response to another attack on the Great Gatsby curve—and can we call it the “line to serfdom” instead?

Posted on by Ed Paisley

Let me apologize up front for this wonky post. In a piece of analysis posted last month, Scott Winship and Donald Schneider attack the Great Gatsby curve, which illustrates the relationship between economic inequality and mobility across countries. Let me first say that I dislike the moniker “Great Gatsby Curve” (apologies to Alan Krueger) because I don’t find it to be a very enlightening description of the effect. Therefore, I propose that we call this relationship the “line to serfdom,” which is not only a more accurate description of the high inequality/low mobility relationship but also an allusion to Friedrich Hayek’s classic tome of Austrian economics, “The Road to Serfdom.”

Winship and Schneider make three arguments against a consistent correlation between economic inequality and mobility across countries. Specifically:

  • The Luxembourg Income Study’s Gini Coefficient is a better measure of inequality than the World Bank’s Gini coefficient (Gini coefficient is a measure of the income inequality, with higher numbers indicating a higher concentration of a country’s income among the top earners).
  • Rank correlation coefficients are a better measure of mobility than intergenerational elasticity.
  • Recently released data indicates that the mobility trend has been relatively flat over time in the United States.

I’ll address each of these points below. But let’s first begin with the line to serfdom itself. Figure 1 has the full data set from University of Ottawa economist Miles Corak’s paper, which includes 22 countries instead of the 11 countries included in the Winship and Schneider analysis (it is unclear why they decided to cut half of the countries from their comparison). I used mobility data from Figure 1 of Corak’s paper and Gini data from the World Bank to create Figure 1.

roadtoserfdom1

This graph indicates an inverse relationship between inequality in a country and economic mobility between generations. The line is known as the “Great Gatsby Curve” (or, if my arguably more apt name takes off, the line to serfdom).

With this in mind, let’s turn to the three points Winship and Schneider make about the Gatsby Curve (or line to serfdom).

Point 1: Luxembourg Income Study

Winship and Schneider contend that the analysis should have been done using the Luxembourg Income Study’s Gini coefficient because it “has taken great care to make each country’s measure as comparable as possible.” I do not have strong feelings as to which is the appropriate Gini coefficient to use in this situation, but for consideration I have reproduced the inequality/mobility relationship using LIS data in Figure 2 below. Five of the 22 countries included by Corak were not in the LIS data set (Argentina, Chile, New Zealand, Pakistan, and Singapore), so this chart includes only 17 countries.

Winship and Schneider used only 11 countries and found a slightly flatter line than the original. In contrast, when we include the data omitted from their work, we find an even steeper line. Therefore, when using Winship and Schneider’s preferred measure of inequality, higher levels of inequality indicate much lower levels of mobility than using the World Bank’s numbers.

Furthermore, in addition to having a higher slope than the line visible using Corak’s initial measure of inequality, using the LIS data also results in a line with a higher R^2 value. So when more data are included, the relationship between inequality and mobility is strengthened, not weakened using their preferred inequality measure.

roadtoserfdom2

Point 2: Rank correlation

The second point made by Winship and Schneider is more nuanced. They note that when using rank correlation (how much a child’s income rank is related to the parents’ income rank) to measure mobility instead of the intergenerational elasticity (how much a child’s income is related to the parents’ income), the international relationship between inequality and mobility is murkier. Specifically, they focus on a positive relationship between mobility and inequality when comparing three countries: Canada, Sweden and the United States. The fact that this conclusion relies on only three data points indicates that it does not result in a reliable regression. In other words, the data are simply not sufficient to draw meaningful conclusions across countries.

I will note that Winship and Schneider readily admit there are not sufficient data across countries to do a rigorous analysis using the rank correlation. Yet the data released by the Equality of Opportunity Project cover the majority of the United States and indicate that both the size and shape of the middle class matters. In an earlier blog post, I responded to Winship and Schneider’s first attack on the Gatsby curve using these data. The bottom line is that the rank correlation measure of inequality is correlated with inequality measures related to the size of the middle class in the United States.

Even if there were sufficient data to draw the conclusion they propose, should we prefer the rank correlation measure? On the one hand, we should care about both measures, as both are useful for a providing a textured understanding of problems related to low mobility and high inequality.  On the other hand, if we are going to prefer one measure over another then I would suggest that the intergenerational elasticity is more important because it captures the consequences of mobility. The income gap between children of high-income individuals versus children of low-income individuals describes the income penalty from the birth lottery.

Point 3: U.S. mobility over time has been flat

Winship and Schneider also charge that inequality has risen but mobility has not fallen, suggesting inequality and immobility are not related. They correctly note that a recently released working paper from the Equality of Opportunity team finds that the rank correlation measure of economic mobility has been stable of time. Sadly the new data do not include information on my preferred mobility measure, the intergenerational elasticity. If someone knows of a good data source for intergenerational elasticity over time for the United States please let me know. I would love to see if that replicates our line to serfdom.

I have two posts looking at this recently released data on the change in economic mobility in the United States over time. My first post provides the most apt response to their assertions. For those that haven’t read it, the bottom line is that while the data indicate that mobility has been generally flat for birth cohorts from 1971 to 1993 despite rising inequality, in the same time frame the U.S. economy nearly doubled, racial desegregation efforts went into effect, and opportunities for women grew substantially. Despite all the social progress and economic gains, economic mobility did not rise. Perhaps absent these changes, mobility would have fallen, though rigorous analysis would be needed to verify such assertions. My second post on these data includes maps of the changes in economic mobility over time.

Conclusion

While this may sound like the standard “OMG-someone-is-wrong-on-the-Internet” response, in this case being wrong carries important consequences. The Winship-Schneider piece is part of a narrative that economic mobility and inequality are unrelated and therefore policymakers’ attention to economic inequality is misplaced. These claims are not supported by the data or by published economic literature. There is much more analysis to do before one can make claims delinking economic inequality and mobility—just as there is plenty of analysis to consider when examining whether there are links between income inequality and economic growth.

 

Afternoon Must-Read: Joseph Williams: My Life as a Retail Worker: Nasty, Brutish, and Cheap

Posted on by Brad DeLong

The problem with stories like this is that the author reveals himself to be either a clueless dork or an unreliable narrator by virtue of assuming the authorial persona of someone who did not realize what life was really like for typical Americans until he fell out of the bubble and it affected him personally.

But if you can look past that… very good:

My Life as a Retail Worker: Nasty, Brutish, and Cheap – Joseph Williams: “After veteran reporter Joseph Williams lost his job,

he could only find employment in a sporting-goods store. In a personal essay, he recalls his struggles with challenges millions of Americans return to day after day.

Afternoon Must-Read: Spencer Ackerman: CIA Steals the Limelight from the NSA – and Finds Itself in Full-Blown Crisis

Posted on by Brad DeLong

Spencer Ackerman: CIA steals the limelight from the NSA – and finds itself in full-blown crisis: “After a year in which the National Security Agency faced global condemnation, the Central Intelligence Agency has now taken over as the US intelligence body most firmly in the midst of a full-blown crisis. The CIA has dug itself into a morass the NSA has firmly avoided: antagonizing its congressional overseers. It is a crisis redolent with ironies. A White House that labored intently to move past the CIA’s post-9/11 torture legacy, disappointing many supporters, must now resolve a row stemming directly from it. A CIA director who first missed out on his job over fears he was soft on agency torture is now in the crosshairs of what his Senate overseers considers a cover-up. A Senate committee chairwoman who has fiercely defended the NSA’s abilities to collect data on every American phone call is furious that the CIA monitored the network usage of her staff, calling the alleged infraction a potential subversion of the Senate’s constitutionally mandated oversight responsibilities. A Justice Department that limited and ultimately dropped a criminal inquiry into CIA torture without bringing charges now has to consider potential criminal liability against Senate staff conducting their own inquiry; and for CIA officials who allegedly attempted to thwart it.”

Afternoon Must-Read: Susan Berger: How Finance Gutted Manufacturing

Posted on by Brad DeLong

Susan Berger: How Finance Gutted Manufacturing: “Timken obviously has a business interest in these initiatives:

sharing costs for activities that were once borne entirely in-house, educating students who can be recruited for employment, gaining eligibility for new state and federal grants. But in fulfilling its own goals, Timken was also acting as a convener for industry and education. It placed its own resources on the table in order to attract others to do the same. As Timken prepares to split into two smaller publicly listed companies, how likely is it that either of them will be so active in strengthening the Ohio industrial ecosystem? Judging by the records of other companies that have gone through similar restructuring, I am not optimistic….

There is a more favorable climate for manufacturing in the United States today than there has been in decades. Yet these changes are unlikely to have durable effects if the basic weaknesses of the system are not repaired. The new public-private partnerships to rebuild capabilities in the industrial ecosystem seem to have enormous promise. But, as the Timken case illustrates, the financial pressures that broke up American companies in the ’80s persist. The solution may be out of reach. Today California teachers need to protect their pensions by dismantling Ohio manufacturers. The structures of U.S. capital markets and fiscal policy reward investors whose decisions are based on maximizing returns over the short-term. While the Dodd-Frank financial reforms may cut down on some of the riskiest securitization-based investment strategies, new regulations have not created real incentives for the more patient investment that growing production in America requires.

Things to Read at Lunchtime on March 11, 2014

Posted on by Brad DeLong

Must-Reads:

  1. Mark Thoma: Inequality in Capitalist Systems is Not Inevitable: “At some point, one I believe we’ve passed already, the benefits of inequality in terms of incentives are surpassed by the costs. As Joseph Stiglitz argues: ‘Inequality leads to lower growth and less efficiency. Lack of opportunity means that its most valuable asset – its people – is not being fully used. Many at the bottom, or even in the middle, are not living up to their potential, because the rich, needing few public services and worried that a strong government might redistribute income, use their political influence to cut taxes and curtail government spending. This leads to underinvestment in infrastructure, education, and technology, impeding the engines of growth.’ Capitalism is a wonderful economic system, but it is not perfect. Government intervention is needed to soften the impact of recessions, to overcome market failures, and to offset the rising inequality that threatens capitalism’s ability to serve the vast majority of households to the fullest possible extent.”

  2. Kevin Drum: Dianne Feinstein Upset that CIA Is Spying on Dianne Feinstein: “If the CIA has lost Dianne Feinstein…. ‘The head of the Senate Intelligence Committee on Tuesday sharply accused the CIA of violating federal law and undermining the constitutional principle of congressional oversight as she detailed publicly for the first time how the agency secretly removed documents from computers used by her panel to investigate a controversial interrogation program.’ Sen. Dianne Feinstein (D-Calif.) said that the situation amounted to attempted intimidation of congressional investigators, adding: “I am not taking it lightly.” In the end, I suspect that she will indeed take it lightly. Still, if there’s one thing an intelligence agency shouldn’t do, it’s get caught monitoring the Senate committee that oversees it. The intelligence community can spy on millions of Americans and Dianne Feinstein yawns. But spy on Dianne Feinstein and you’re in trouble.”

  3. Yuriy Gorodnichenko and Gérard Roland: What is at stake in Crimea? “Annexing Crimea [is not] likely to be his ultimate objective: Crimea obtains almost all of its fresh water and electricity from continental Ukraine, many of its people will resist a return to Russia…. What are the real reasons for Putin’s actions and what is at stake?… There is a strong determination among a large majority of Ukrainians to live under democratic institutions of high quality, similar to those in the West…. The success of this revolution is Putin’s worst nightmare, because such a revolution could extend to Russia too…. Putin is therefore determined to do everything he can to make the young Ukrainian democratic experience a failure. The invasion of Crimea was a first step…”

  4. Joe Weisenthal reports on Vince Reinhart: Economy’s Growth Potential Is Now 2 percent – Business Insider: “So what’s behind the new slow potential growth rate for the U.S. economy?… Declining Labor Force Participation… [and] declining productivity [growth]…. The big ramifications here are probably for the Fed, which may get unwanted levels of inflation faster than they want or expect. Bigger picture is that this is something that a lot of folks are talking about right now: The end of extensive slack in the economy. Just as an example, this is a chart from a new chartbook from Deutsche Bank’s Torsten Slok, who spends a lot of time look at wage inflation trends.”

Continue reading “Things to Read at Lunchtime on March 11, 2014” →