The links between stagnating wages and buyer power in U.S. supply chains

Posted on by David Evans
People walk in and out of a Walmart store. New research shows the effects of the increased power of large corporate buyers such as Walmart and Amazon on wage stagnation among U.S. workers since the 1970s.

Stagnating wages among U.S. workers since the 1970s is well-documented. Also well-known is the outsized—and still growing—market impact of a small number of giant retailers such as Amazon.com Inc and Walmart Inc. What is less known is whether these two trends are linked.

In research I’ve been conducting—detailed in an article recently published in the American Sociological Review—I’ve found that increased pressure from large corporate buyers decreases wages among their suppliers’ workers. The growing influence of these buyers on workers’ wages is significant enough that it accounts for around 10 percent of wage stagnation since the 1970s. My findings show how shifts in market power have affected workers’ wage growth.

Relative to the postwar economic boom, U.S. workers’ pay growth has slowed by around one-half since the 1970s. During that same period, market restructuring has shifted many workers into workplaces heavily reliant on sales to outside corporate buyers. Large retailers such as Walmart and Amazon wield increasing power against manufacturing suppliers and warehousing and shipping contractors. When this happens, big corporate buyers are able to demand lower prices for the goods and services they are buying, and suppliers and contractors must sell at lower prices and try to cut costs. Likewise, companies increasingly outsource noncore functions, including food service, janitorial, and security jobs, a phenomenon known as the fissured workplace. The result is that more and more workers are employed by intermediate employers, which in turn rely on sales to outside corporate buyers.

Anecdotally, pressure from large corporate buyers seems to affect employment conditions at supplier companies. Farris Fashion, for example, was an apparel manufacturer in Arkansas that produced flannel shirts. In the 1980s, Farris became entirely reliant on sales to a single corporate buyer—Walmart—producing shirts under Walmart’s Ozark Trail label. Walmart continually pressured Farris for lower prices, creating pressure for the manufacturing jobs at Farris’ factory to be persistently poorly paid. In 1990, the textile workers union tried to organize Farris. The company’s owner brought his workers together for a meeting and explained that Walmart’s Sam Walton “wouldn’t buy union goods” so they should “stop messing around with the union,” according to Nelson Lichtenstein, the author of The Retail Revolution: How Wal-Mart Created a Brave New World of Business.

What is going on here? There are a few reasons to expect pressure from large corporate buyers to decrease wages among their suppliers. First, prior research suggests that large buyers can pressure suppliers to accept lower profits. If suppliers pay their workers in part by sharing profits—economic rents, in academic parlance—then increased buyer pressure could reduce wages. Second, unlike a supplier company’s own managers, outside buyers enjoy social distance from their suppliers’ workers. This allows large buyers to ignore the fairness norms and social pressure that directly employed workers can use to increase their pay. As a result, prior research finds that when companies outsource previously in-house services such as janitorial or security workers, these outsourced workers face slower wage growth than do remaining, directly employed workers. Finally, compared to dispersed buyers, the benefits of labor cost-cutting are concentrated among one or a small number of buyers. As Walmart was Farris’ sole customer, it could reap the gains of lower wages at Farris without worrying about competitors immediately getting lower prices too.

Unfortunately, testing these predictions is difficult. Most firm- and worker-level data include no information about relationships between corporate buyers and suppliers. I take advantage of a reporting requirement imposed on publicly traded companies since 1978, which stipulates that a supplier company disclose any sales to buyers that account for 10 percent or more of the supplier’s annual revenue. This disclosure requirement offers a rare opportunity to directly observe supplier reliance on large corporate buyers.

These data on publicly traded companies show that companies in several industries that used to provide middle-income jobs for workers without a college degree—such as manufacturing, warehousing, and transportation—have become more likely to rely on sales to large buyers. In 2014, for example, the average publicly traded manufacturing firm received more than 25 percent of its revenue from large buyers, up from 10 percent in the early 1980s. (See Figure 1.)

Figure 1

Next, I look at what happens to wages at publicly traded supplier companies as they become more reliant on sales to outside buyers. As supplier companies become more reliant on sales to large buyers, suppliers’ workers face more wage pressure. A 10 percent increase in revenue reliance on dominant buyers is associated with suppliers’ wages declining by 1.2 percent. This pattern holds even conditional on controls for firm-level bargaining, productivity changes, and other market determinants of workers’ wages. The longer the buyer-supplier relations last, the more wages fall—consistent with the social distance between outside buyers and suppliers’ workers blunting wage norm effects. I also find that mergers among buyers reduce suppliers’ wages, suggesting it is not “unobserved supplier selection” (such as changes in business strategies by suppliers) that drives wage effects, but rather power exercised by dominant buyers. Indeed, the negative wage effects of reliance on large buyers have been intensifying over time. (See Figure 2.)

Figure 2

Overall, as noted above, the increased power of corporate buyers can account for around 10 percent of wage stagnation among publicly traded companies since the 1970s. These findings imply that understanding wage stagnation requires attention to changing contracting relationships between companies. Wage stagnation is not only a result of inadequate education or skills among individual workers. The organizational context of workers’ jobs—what kind of company and workplace they are employed by—also affects workers’ power to bargain about wages. This organizational context goes beyond immediate, within-organization characteristics—such as a company’s collective bargaining agreements or its ownership structure. Relationships between organizations are also factors in the organizational context that affect workers’ jobs and pay.

The findings in this study suggest that in an era of outsourcing and market concentration, these between-organization relationships are increasingly important for setting workers’ wages—to the overall detriment of workers.

—Nathan Wilmers is a doctoral student in sociology at Harvard University and a 2017 Doctoral grantee of the Washington Center for Equitable Growth. In July 2018, he will be starting as an assistant professor at the Massachusetts Institute of Technology’s MIT Sloan School of Management.

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Galbraithian economics: Countervailing power edition

Posted on by David Evans

It is John Kenneth Galbraith’s world. We simply live in it.

I have always found it interesting that economists have worked so hard to pretend that we do not live in John Kenneth Galbraith’s world. Harvard University’s Andrei Shleifer once remarked to me that the collapse of Galbraith’s influence—that there were next to no “Galbraithians”—was a very interesting puzzle in the history of economic thought.

But now there are some Galbraithians!

In a new working paper released earlier this month, “Unions and Inequality Over the Twentieth Century: New Evidence from Survey Data,” co-authors Henry S. Farber, Daniel Herbst, and Ilyana Kuziemko at Princeton University and Suresh Naidu at Columbia University write:

U.S. income inequality has varied inversely with union density … But moving beyond this aggregate relationship has proven difficult, in part because of the absence of micro-level data on union membership prior to 1973. We develop a new source of micro-data on union membership, opinion polls primarily from Gallup (N ≈ 980, 000), to look at the effects of unions on inequality from 1936 to the present. First, we present a new time series of household union membership from this period. Second, we use these data to show that, throughout this period, union density is inversely correlated with the relative skill of union members. When density was at its peak in the 1950s and 1960s, union members were relatively less-skilled, whereas today and in the pre-World War II period, union members are equally skilled as non-members. Third, we estimate union household income premiums over this same period, finding that despite large changes in union density and selection, the premium holds steady, at roughly 15–20 log points, over the past eighty years. Finally, we present a number of direct results that, across a variety of identifying assumptions, suggest unions have had a significant, equalizing effect on the income distribution over our long sample period…

And, indeed, I did eventually write up my take on the answer to Shleifer’s question, in a review of Parker’s biography of Galbraith:

If there were justice in the world, John Kenneth Galbraith would rank as the 20th century’s most influential American economist. He has published several books that are among the best analyses of modern U.S. history, played a key role in mid-century policymaking, and advised more presidents and senators than would seem possible in three lifetimes. Yet today, Galbraith’s influence on economics is small, and his influence on U.S. politics is receding by the year. In this lively and thoughtful biography, Parker sets himself the task of explaining Galbraith’s career: why it was so dazzling, and why its long-term impact has turned out to be so much less than expected. The result is not only the story of a smart, witty, and important man, but also a fascinating meditation on the rise and fall of twentieth-century American liberalism.

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Weekend reading: “household insecurity” edition

Posted on by David Evans

This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth published this week and the second is the work we’re highlighting from elsewhere. 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.

Equitable Growth round-up

Household income in the United States has steadily become more volatile over the past several decades, even among those headed by college-educated people. Nisha Chikhale digs in on what’s behind this rise in household insecurity and its implications for overall economic growth and macroeconomic stability in a new report and accompanying issue brief.

Does raising the U.S. minimum wage have a negative effect on the employment of low-wage workers? In a new Equitable Growth Working Paper, U.S. Census Bureau economists Kevin Rinz and John Voorheis use linked employer-employee data to study this question. They find that increasing the minimum wage increases earnings for those at the bottom of the income ladder without decreasing employment. Read more about the paper’s findings and their implications for policy in the Value Added about the paper by Kate Bahn.

In a new column on the importance of geography for economic mobility, Richard Florida of CityLab and the University of Toronto highlights the newest work on the impact of education on U.S. intergenerational mobility by University of California, Berkeley economist and Equitable Growth grantee Jesse Rothstein.

If this round-up wasn’t enough for you, check out UC-Berkeley economist and Equitablog author Brad DeLong’s round-up of worthy reads on equitable growth from this past week.

Links from around the web

Rules requiring that recipients of social safety net programs, such as Medicaid, housing aid, and Supplemental Nutrition Assistance Program work a minimum of 20 hours a week are being drafted and debated as part of current legislation before the U.S. Congress. But what if there are no jobs to work at where you live? Emily Badger and Margot Sanger-Katz write about how proposals to address this issue might only further embed racial and geographic biases about who is “deserving” of the federal social safety net. [the upshot]

The Chicago School has been synomous with the consumer welfare standard in antitrust law for decades. Now a new essay by University of Chicago economist Eric Posner, Microsoft Corp.’s E. Glen Weyl, and Columbia’ University’s Suresh Naidu argue that U.S. antitrust law must consider effects for workers, not just consumers when evaluating proposed mergers. They argue that many labor markets in the United States are concentrated and uncompetitive, or monopsonistic, which suppresses wages and economic growth. [bloomberg]

Despite the low U.S. unemployment rate and complaints from employers about the challenge of finding workers, wage growth remains an anemic 2.5 percent. Compare that to 3.5 percent to 4 percent during both of the last two economic expansions. Evan Horowitz digs into some of the recent debate about explanations for sluggish wage growth. [boston globe]

Matthew Stewart argues that it’s not just the concentration of wealth and privilege among the top 0.01 percent that’s hurting economic mobility in the United States, but also the concentration among the top 9.9 percent, or those with net worths of at least $1.2 million. [the atlantic]

Friday figure

Figure is from “Household insecurity matters for U.S. economic growth and stability,” by Equitable Growth’s Nisha Chikhale.

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Brad DeLong: Worthy reads on equitable growth, May 10-17, 2018

Posted on by David Evans

Worthy reads at Equitable Growth:

  1. The awesomely smart and industrious Chye-Ching Huang of the Center for Budget and Policy Priorites praises Greg Leiserson‘s must-read guide to understanding last December’s tax bill. There was space for a growth-promoting corporate tax cut that did not widen income inequality that much. That space was occupied, instead, by something that manages to increase inequality sharply while reducing projected national income—three steps backward for equitable growth.
  2. Increasingly it looks to me like a career-interruption and child-raising penalty are institutions designed to figure out which men are committed to the job and are thus worth paying to keep but are misapplied to women. Alan Greenspan a generation and a half ago saw a market opportunity for his forecasting firm to get more productive workers for the salary dollar. But it looks as though he was and is a substantial exception: Sarah Jane Glynn writes in “Gender wage inequality: What we know and how we can fix it” that “women are still severely limited by gender pay inequality…. Close to half of all currently employed workers (46.7 percent), yet… average earnings of… full time, year round is 80.5 percent of men…”
  3. Nick Bunker provides an excellent tweetstorm on the issues involved in thinking about slack, wage growth, unemployment, and employment. He also mourns for the pre-twitter bite web: “remember blogposts? Those were cool!” It is certainly the case that Twitter has devoted zero—nay, less than zero—effort to building tools for curating tweet call-and-response episodes into anything that Plato would recognize as a dialogue…
  4. The extremely thoughtful Miles Kimball highlights my very brief talk about who the market works for from last fall’s Institute for New Economic Thinking conference in Edinburgh…

Worthy reads not at Equitable Growth:

  1. From the University of Oregon, Mark Thoma‘s Economists’ View continues to be the single best link aggregator in economic policy and theoretical economics: read him, and the things he links to.
  2. If you do not make the Economic Policy Institute one of your trusted information intermediaries, you are doing it wrong. Badly wrong.
  3. Noah Smith sends us to hard but very important truths about why African Americans are so poor relative to their fellow citizens: William Darity plus a team of six more scholars write in “What We Get Wrong About Closing the Racial Wealth Gap” that “a narrative that places theonus of the racial wealth gap on black defectiveness is false in all of its permutations. We challenge the conventional set of claims that are made about the racial wealth gap in the United States. We contend that the cause of the gap must be found in the structural characteristics of the American economy, heavily infused at every point with both an inheritance of racism and the ongoing authority of white supremacy…”
  4. This is true. This makes the sharp slowdown in measured productivity growth since 2007 a great puzzle—and is one important thing making me believe it is a depression-related “hysteresis” phenomenon. Read Jeff Desjardins, “A brief history of technology” in which he writes that “the rate at which newly commercialized technologies get adopted by consumers is also getting faster…. Through increased connectivity, instant communication, and established infrastructure systems, new ideas and products can spread at speeds never seen before—and this enables a new product to get in the hands of consumers in the blink of an eye…”
  5. This is not new, but it is true, and I take it as a sign of hope that this can now be said and attract a mass audience: George Yancy: “The Ugly Truth of Being a Black Professor in America.“
  6. An interesting and complex argument from Ben Thompson in The Moat Map: “Aggregators and Platforms….Apple and Microsoft, the two “bicycle of the mind” companies…platforms…. Google and Facebook …products of the Internet…not to platforms but to aggregators …Platforms need 3rd parties….Aggregators attract end users by virtue of their inherent usefulness and, over time, leave suppliers no choice but to follow the aggregators’ dictates….[But] what of companies like Amazon, or Netflix?…Clearly both have very different businesses—and supplier relationships—than either Google and Facebook on one side or Apple and Microsoft on the other, even as they both derive their power from owning the customer relationship….Owning the customer relationship remains critical: that is the critical insight of Aggregation Theory. How that ownership of the customer translates into an enduring moat, though, depends on the interaction of two distinct attributes: supplier differentiation and network effects…”
  7. The states have been serving as laboratories of democracy over the past decade, with Wisconsin and Kansas seeing the greatest policy swerves and serving as the most striking ominous warnings. Read David Cooper‘s report “As Wisconsin’s and Minnesota’s lawmakers took divergent paths, so did their economies: Since 2010, Minnesota’s economy has performed far better for working families than Wisconsin’s,” in which he writes that “even years removed from when each governor took office, there is ample data to assess which state’s economy—and by extension, which set of policies—delivered more for the welfare of its residents. The results could not be more clear: by virtually every available measure, Minnesota’s recovery has outperformed Wisconsin’s…”
  8. With respect to U.S. technological leadership, it may be time to start quoting John Donne: “Ask not for whom the bell tolls…” And remember England, starting a century and a half ago, when reading Dan Wang‘s “How smartphones made Shenzhen China’s innovation capital.” Wang highlights that “companies have invested millions of dollars in figuring out how to make them small, cheap, and light enough to include in smartphones. And most of these chips have proven useful well beyond the smartphone market. As a result, we’re in the midst of a hardware renaissance, in which it’s easier than ever to develop and market new gadgets. The center of this renaissance is Shenzhen…”
  9. The Sisyphean work of getting people to recognize that the Reagan “morning in America” boom was a standard Keynesian reaction to a larger federal deficit in a time of high unemployment continues: Menzie Chinn, in “The Reagan Tax Cuts and Defense Buildup: Supply-Side Miracle or Keynesian Stimulus?” writes that “this set of outcomes does not deny the existence of some supply side effect—the dots in Figure 2 don’t line up exactly on a straight line—but the overall pattern seems to be more consistent with an AD shift from the tax cuts and spending increases (combined with monetary policy relaxation) as opposed to a supply-side scenario as laid out by Wanniski and Laffer…. Bruce Bartlett, who was there at the inception, reminds me of Barry Ritholtz’s review of Reaganomics. See also Bartlett’s piece on the subject…”
  10. Written four years ago, and IMHO not just one of the best things written in 2014 but a true keeper, is something nobody interested in the slippage between maximizing income and maximizing social well-being should fail to read: Steve Randy Waldman‘s 2014 presentation: Welfare economics.
  11. Nearly 60 years ago California made provision for moving into an era of the knowledge-based economy: “A Master Plan for Higher Education in California.”
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Issue Brief: Household insecurity matters for U.S. macroeconomic stability

Posted on by Austin Clemens

What is household economic insecurity?

Households are economically insecure when they’re unable to plan for expenses, save or invest for their future economic security, and pay down debts. Household insecurity in the United States can be influenced by differences in income, wealth, credit access, or family structure.

Economists use income volatility as the easiest proxy for household insecurity. Households that experience a gain or drop in income of 25 percent or more from one month to the next or one year to the next can be said to have a volatile income. Large swings in income can make it difficult to plan for expenses, and volatile drops in income increase a household’s likelihood of experiencing insecurity, especially if coupled with low savings (lack of wealth), lack of social insurance, and limited access to credit.

Household income volatility has been increasing for all families, even those with a college-educated head of household. A 2016 Federal Reserve report found that 32 percent of U.S. adults report that their incomes vary from month to month, and 42 percent of those with volatile incomes and/or volatile expenses say that they have “struggled to pay their bills at times because of this volatility.” This insecurity matters, not only for a family’s ability to cope with daily expenses but also has implications for wider economic stability.

What are some drivers of household income volatility and potential buffers?

For low- and middle-income households, income from work is the largest source of total household income. Therefore, changes in labor market conditions that impact families’ incomes have significant implications for their economic security such as:

  • Alternative work arrangements—including temporary work, contracting, on-call work, and freelancing—mean more variable work hours and income, with less access to benefits that can help smooth volatility such as unemployment insurance.
  • Unpredictable work schedules, enabled by “just-in-time” scheduling software, make worker hours and incomes unpredictable and variable, even from week to week.

Savings and access to credit are stopgaps that families can use to fill in the gaps when income is insufficient to meet basic needs such as due to job loss. Specifically:

  • Recent research finds that increasing displaced workers’ credit limit allows individuals to take up to 3 weeks longer to find a job, and when they do find work, they receive higher earnings.
  • Another recent paper shows the significant decline in the wealth share of the bottom 90 percent of American families over the past three decades, which in turn means they have less savings to fall back on in times of high negative volatility.

Social insurance is another buffer against income volatility, especially from job loss and in the absence of savings and credit. Examples include unemployment insurance and the Supplemental Nutrition Assistance Program.

Why does household insecurity matter for macroeconomic stability?

Household insecurity has implications for how much families decide to consume. Household consumption contributes nearly 70 percent of overall Gross Domestic Product, the largest component of U.S. economic growth. Therefore, maintaining strong consumer demand is important for stable economic growth.

Principles to support household security and macroeconomic stability

Factors that are drivers of household income volatility such as alternative work arrangements are on the rise. Factors that mitigate exposure to risk—such as social insurance programs and family savings—are declining. Therefore, in order to help increase household security and support stable economic growth, we must look for remedies to promote access to stable economic resources and to minimize risk. Some examples of ways to do this include:

  • Policies that ensure workers are guaranteed more stable and predictable work schedules, which can help families to better manage expenses and responsibilities
  • Policies that support strong labor force attachment such as paid family and medical leave
  • Strengthening social insurance programs such as unemployment insurance and SNAP

This brief summarizes the paper “Household insecurity matters for U.S. economic growth and stability” by Nisha Chikhale. The paper lists sources for the research summarized here.

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New research indicates that minimum wage increases appear to benefit all low-income U.S. workers over time

Posted on by David Evans
A woman leads a march in favor of a minimum wage of $15 an hour at Seattle-Tacoma International. A new working paper shows that raising the minimum wage appears to benefit all low-income workers over time

Amid concerns about rising economic inequality and stagnant wages in the United States, raising the minimum wage is becoming increasingly common at the state and local level, while calls for raising the federal minimum also grow louder. Though economists find that declining real minimum wages (after accounting for inflation) contribute to increased income inequality, it has not been clear whether raising the minimum wage would produce long-term earnings gains for low-income workers. New research by economists Kevin Rinz and John Voorheis at the U.S. Census Bureau, however, uses high-quality linked employer-employee data to find that minimum wage increases do indeed decrease earnings inequality by increasing earnings for those at the bottom of the income ladder without short- or long-term declines in employment, as Econ 101 would predict.

In order to know whether minimum wage increases are a well-targeted remedy for rising inequality and stagnant wage growth, policymakers need to know how earnings respond to those increases, taking into account potential side effects arising over time such as laying off workers or a decrease in hiring rates so that the overall employment rate of low-wage workers declines. Rinz and Voorheis provide evidence addressing this question in their new Equitable Growth working paper, “The distributional effects of minimum wages: Evidence from linked survey and administrative data.” They confirm that raising the minimum wage decreases income inequality, increases earnings growth, and increases family incomes at the bottom of the distribution, using data and methods similar to those used in recent research by economist Arindrajit Dube at the University of Massachusetts Amherst. But their research extends Dube’s analysis by incorporating an administrative source of earnings data into the analysis, which indicates they are driven by true variation in earnings at the bottom of the income distribution.

In order to examine the impact of minimum wage increases over time—such as whether it would lead to diminished hiring of low-income workers—Rinz and Voorheis consider the effects of minimum wage increases on so-called growth-incidence curves, which measure how the dollar values associated with various percentiles of the earnings distribution change over a given period. Considering effects on growth-incidence curves could reveal whether the initial earnings increases experienced by workers at the bottom of the distribution are reversed over time by increases in the likelihood of their spending time unemployed. What the two researchers find instead is that the lowest percentiles of the earnings distribution grow faster year over year when minimum wages rise. Moreover, the magnitude of this growth effect increases when measuring growth over longer periods, extending up to five years. This suggests that the initial earnings effects of minimum wage increases may become greater over time rather than reverse as time passes.

In order to provide some sense of the magnitude of these effects, the authors applied their five-year estimates of the effects of increases to the minimum wage to a hypothetical 37 percent increase. This number mirrors the magnitude of the minimum wage increase that Seattle enacted between 2013 and 2016, using recent periods of economic expansion and contraction as a baseline. The authors argue that this indicates that such an increase would have made the economic growth of the late 1990s somewhat more progressive, rather than the increasing income inequality that we saw, and would have mitigated some of the worst earnings losses of the Great Recession of 2007–2009.

This new research provides strong evidence-based support for the effectiveness of increasing the minimum wage since Rinz and Voorheis’ working paper is able to more directly assesses how minimum wage increases affect the earnings of the workers most directly affected by them, rather than estimating effects by looking at cross-sections of the population in different time periods. This is done by estimating the effects of minimum wage increases on income mobility profiles of the workers effected by minimum wage increases, which measure how so-called within-person income growth varies across the distribution. Within-person income growth follows an individual’s income growth trajectory over time. The fact that higher minimum wages lead the incomes of workers at the lower end of the income distribution to grow faster suggests that particular low-income workers may see their earnings increase. Percentile values, however, are aggregate outcomes and do not necessarily reflect the experience of specific individuals, so most workers at the low end will experience an increase, but not all will.

With robust findings using two earnings-growth concepts—growth-incidence curves and within-person income— Rinz and Voorheis’ income mobility profile estimates indicate that increasing the minimum wage also leads to faster earnings growth for workers who begin at low percentiles of the income distribution. The estimates are largest at the lowest percentiles and grow in magnitude over time. Given the high average rates of earnings growth experienced by people who begin at the bottom of the distribution, this effect represents a meaningful but modest increase in the rate of earnings growth.

Rinz and Voorheis’ working paper is an important contribution to the minimum wage debate. Their estimates directly examine possible downward pressure on earnings growth that could arise from minimum wage increases such as increased time spent out of work. While they do not delineate which particular mechanisms produce the changes in earnings, they do provide some hints as to which mechanisms may be dominant. This pattern could be consistent with reduced employee turnover at businesses, keeping workers on job ladders within their firms and leading to subsequent promotions. The pattern also could be consistent with firms gradually decompressing their wage distributions—increasing the pay of workers who previously earned close to the minimum wage in order to retain relative earnings structure within the firm—following minimum wage increases.

In sum, this new research uses high-quality administrative data with established methods to improve our understanding of how minimum wage increases affect low-income workers who work in jobs that pay at or near the legally established minimum wage. By looking at the effect on workers over time, they are able to show that increasing the minimum wage does not, as some predict, lead to long-term negative consequences for those workers who are affected. This suggests that a higher minimum wage is a useful policy tool to counter rising earnings inequality, especially for those at the low end of the distribution.

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The extremely intelligent Martin Wolf reviews Maria Mazzucato. I blush to say that her book is still in the pile—I have not read it yet: Martin Wolf: Who creates a nation’s economic value?

Posted on by David Evans

The extremely intelligent Martin Wolf reviews Maria Mazzucato. I blush to say that her book is still in THE PILE—I have not read it yet: Martin Wolf: Who creates a nation’s economic value?: “Who creates value? Who extracts value? Who destroys value?…

…If we mistake those who do the second or third for those who do the first, or mistake those who do the first for those who do the second or third, we will end up with impoverished and unhappy societies, in which plunderers rule. Many advanced western countries, in particular the US and Britain, have already reached that state, according to Mariana Mazzucato. The consequences of this, including soaring inequality and declining growth are already visible, argues the author…. An obvious example is the way the financial sector generated a huge increase in household debt in the years leading to the financial crisis of 2007-09. This funded zero-sum competition to buy the existing housing stock at soaring prices. Its legacy included a huge crisis, a debt overhang, weak growth and political disenchantment. Yet, for those who created, manipulated and sold this debt, it was a gold mine. This represented value extraction and destruction…. Much the same picture can be seen in asset management, with its excessive trading, exorbitant fees, lack of transparency, poor stewardship and conflicts of interest. This financial sector, together with the “shareholder value maximisation” that economists have promoted, has had a malign effect on the corporate sector as a whole, argues Mazzucato….

That it is hard to see much wider economic benefit from the massive increase in the relative size and influence of finance over the past half century seems self-evident…. If this is success, what might failure look like?…

Mazzucato also attacks… information technology and pharmaceuticals… the award of overly generous or simply unjustifiable rights to intellectual property….

A fundamental thesis… is that mistaking value extraction for value creation, and vice versa, has its roots in the errors of economists…. In Mazzucato’s view the evident failings of our economies are a consequence of our inability to distinguish among activities that create, redistribute and destroy value…. What I would have liked to see far more of, however, is a probing investigation of when and how governments add value. The US government, for example, has played an extraordinary role in innovation….

The book has three significant strengths. First, Mazzucato pushes us to get away from the simplistic creed that markets are always good and governments always bad. Second, she offers the Left a positive goal of prosperity-inducing innovation rather than a sterile and ultimately destructive politics of resentment and redistribution. Finally, she forces us to ask ourselves what adds value to society and how to create an economic and social order that promotes that. The book itself adds value by forcing us to confront these points.

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How do we write regulations that constrain aggregators that want to hack our brain and attention and empower platforms that enable us to accomplish what we prudently judge our purposes to be when we are in our best selves?: Ben Thompson: Tech’s two philosophies

Posted on by David Evans

OK, Ben: how do we write regulations that constrain aggregators that want to hack our brain and attention and empower platforms that enable us to accomplish what we prudently judge our purposes to be when we are in our best selves? How was it that printing managed to, eventually, generate a less-unhealthy public sphere? Young Habermas, where are you now that we need you?: Ben Thompson: Tech’s Two Philosophies: “Apple and Microsoft, the two ‘bicycle of the mind” companies’… had broadly similar business models… platforms.

…Google and Facebook, on the other hand, are products of the Internet, and the Internet leads not to platforms but to aggregators…. The business model follows from these fundamental differences: a platform provider has no room for ads, because the primary function of a platform is provide a stage for the applications that users actually need to shine. Aggregators, on the other hand, particularly Google and Facebook, deal in information, and ads are simply another type of information. Moreover, because the critical point of differentiation for aggregators is the number of users on their platform, advertising is the only possible business model; there is no more important feature when it comes to widespread adoption than being “free.”… Google and Facebook have always been predicated on doing things for the user, just as Microsoft and Apple have been built on enabling users and developers to make things completely unforeseen….

Google and Facebook are fundamentally more dangerous: collective action is traditionally the domain of governments, the best form of which is bounded by the popular will. Google and Facebook, on the other hand, are accountable to no one. Both deserve all of the recent scrutiny they have attracted, and arguably deserve more. That scrutiny, though, and whatever regulations that result, must keep in mind this philosophical divide: platforms that create new possibilities—and not just Apple and Microsoft!—are the single most important economic force when it comes to countering the oncoming wave of computers doing people’s jobs, and lazily written regulation that targets aggregators but constricts platforms will inevitably do more harm than good…. Companies like Apple and Amazon can, as I noted, win in the long run by offering a superior user experience, but more importantly…. Discontent is a greenfield of opportunities to build new businesses and new jobs alleviating that discontent. For that we need platforms on which to build those businesses, and yes, we will need artificial intelligence to do things for us so we have the time.

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I agree with Noah Smith and with the Economist here: Noah Smith: OK, so The Economist has an ongoing series of articles about the shortcomings of the economics profession

Posted on by David Evans

I agree with Noah Smith that a lot of interesting work is being done in academic economics—even in macro. I agree with the Economist that academic economists are more-or-less neutralized at best in the public sphere, with bad actors, bad methodology, and bad ideologues drowning out information. I agree that economics should do a much better job of policing its own internal community and standing within it via what my colleague Alan Auerbach calls “obloquy”. I agree that economics should do a much better job of managing its discursive modes, in both empirical and theoretical work. But I do wish the Economist would turn its microscope on what purports to be economic journalism more: Noah Smith: OK, so The Economist has an ongoing series of articles about the shortcomings of the economics profession: “https://www.economist.com/news/finance-and-economics/21740403-first-series-columns-professions-shortcomings-economists…

…I’m going to go ahead and write about it before it’s finished, so hopefully the later installments will be better than the first three! The Economist’s articles each contain some useful background knowledge about a field of econ, and they are better than the Standard British Econ Critique that gets repeatedly dished out (https://www.bloomberg.com/view/articles/2018-04-25/critics-of-economics-are-dwelling-in-the-past). But that’s about all I can say for them. Let’s take the first one, which is about economic growth (really, development). The thesis is that economists don’t understand the causes of long-run growth. That is true!! Most development and growth economists will cheerfully admit that they don’t know what makes countries go from poor to rich…. Most development economists are agnostic about the Big Question of what makes countries go from poor to rich, and spend their time researching relatively modest interventions that can be used to make countries a little bit less poor.

Nor does the article do justice to many of the theories it does mention.For example, its problem with the Solow model is that we don’t understand what the Solow residual is. If that were the only problem, the Solow model would still be incredibly powerful! Growth accounting is summarily dismissed, again because we don’t know what the residual is. Again, the implication seems to be that if a growth theory isn’t a Theory of Everything, it’s a failure. That explaining some aspects of growth, but not others, is useless…. The whole article assumes a self-assurance on the part of growth and development economists that, with a few exceptions, does not actually exist.

Yes, a few people like John Cochrane make wild promises about the growth effects of certain policies. They are rare.

The second article is about business cycle theory. There’s really not much in this one, besides a short, informal history of Keynesian, New Classical, and New Keynesian models that won’t enlighten anyone who isn’t already acquainted with the subject. Macroeconomics is trying a lot of new things – finance-based models, heterogeneous-agent models, search-based models, behavioral models, and quite a lot more. The article does not mention these. Nor does the article suggest a way forward, other than to briefly name-check Minsky and Kindleberger and saying that macroeconomists must “sort out their disagreements” and “come to grips” with their “epistemological woes”. There is so much about macro to critique that I’m frankly kind of astonished that this article didn’t do much actual critiquing!

The third article, my least favorite of the bunch, is about applied micro. Which the authors seem to think is in a parlous state…. I do appreciate this name-check (though @jamesykwak deserved it more), and it’s good that the article talks about the empirical turn in microeconomics…. I’m also glad that this article, unlike the others, actually takes the time to explain a bit about how the research in question actually works! That’s great! Though the example of Levitt’s abortion-crime study (which turned out to have major problems) isn’t the best.

So why does the article say that applied micro is unreliable? Because of the same general critiques of empirical science that are everywhere nowadays: Publication bias, low power, and replication. These critiques are good and useful… in the academic literature. In the public sphere, though, they are often misused. A general attitude of “Don’t trust empirical research” has taken hold in some quarters that is lazy, anti-intellectual, and just plain wrong. Publication bias is a problem. BUT, any result will be followed up on by other researchers. Most empirical questions have not ONE paper investigating the question, but MANY….

The article then makes one of the most annoying arguments in journalism, which is to find two conflicting results and conclude that the entire literature is full of conflicting results: Studies finding small or no short-term effects of minimum wage on employment vastly outnumber studies finding big effects, but the article does not mention meta-analysis or the relative quality of the methodologies in question. Waving around papers on publication bias and doing he-said-she-said cherry-picking of empirical results is a GREAT way to get the public not to trust whole literatures full of good, valuable, careful, highly informative research. This kind of thing is not good for anyone. It doesn’t help improve the academic literature, and it doesn’t help policymakers or the public extract information from the academic literature….

I guess I’m being too nitpicky about these Economist articles. They really are more informed, and more informative, than the average Econ Critique piece coming out of British newspapers. The real problem here is the need to structure every article about the econ profession as a critique. Is there something in British politics that makes it necessary to bash economists to prove you’re Very Serious these days? Something about Brexit? Or Corbyn?… Enough grumping…

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Will the Trump Fed be “normal”?: Ken Rogoff: Donald Trump’s normal Fed

Posted on by David Evans

Will the Trump Fed be “normal”? I will give Ken Randy Quarles. I grant Rich Clarida. But Marvin Goodfriend does not seem to me to be a particularly normal Federal Reserve appointment. He’s one of the “debasement” crowd who had no respect for Ben Bernanke’s judgment and tried as hard as they could to limit his freedom of action. If that’s “normal”, “normal” is not a good thing. And otherwise… a lot of unfilled seats. I told Jason Furman he needed to fill up the Fed Board on January 4, 2017. He did not do so: Ken Rogoff: Donald Trump’s Normal Fed : “Unfortunately, the battle for the Fed’s independence is far from over…

…Trump may just be keeping his powder dry until a real conflict erupts. Right now, the Fed’s planned interest-rate hikes are largely prophylactic. Inflation is rising only very slowly, even as the economy seems to be running red-hot. But the moment of reckoning could still come. And, assuming that Trump stays healthy, avoids impeachment, and runs again, the last thing he would want in 2019 and 2020 is sharply higher interest rates, an untimely rise in unemployment, and a likely price collapse in his beautiful stock market. In a crunch, the Fed’s much-vaunted independence could prove more fragile than most people realize. It is not enshrined in the US Constitution, and the president and Congress maintain several levers of control. An act of Congress created the Fed in 1913, and in principle Congress could revamp it, say, by greatly increasing congressional oversight, or by starving it of funding. Indeed, from time to time bills have floated around Congress that would have done just that.

For now, Fed appointees have been treated almost as well as generals in the Trump universe. True, with ballooning deficits and the approach of the 2020 election campaign, testing times lie ahead. But for now, let’s acknowledge that this is one area where the Trump presidency has been almost normal–so far…

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