Shiller CAPE Is Currently Pricing in One Great Recession Every Decade

Posted on by Brad DeLong

Note to Self: Spent the Berkeley Econ faculty lunch talking to Yuriy Gorodnichenko, Pierre-Olivier Gourinchas, St. Matthew the Greater, Dmitriy Sergeyev, and a couple of others about a very wide range of topics, ending with r-star (which Yuriy has to discuss Saturday at the Clausen Center Conference). I left the conversation desperate to figure out how Shiller’s stock-market CAPE index which currently suggests substantial stock market valuation even with a low fundamental safe real interest rate r-star is affected by the low earnings of the crisis years 2008-2011…

Yes, it makes a significant difference:

2017 11 15 Shiller Alternative CAPE

Replacing actual earnings from 2007 on with just flat real earnings until actual earnings catch up knocks the Alternative CAPE index down by 5, from higher than any time save during the High Dot-Com Bubble to lower than during the 1995-2007 part of the Great Moderation era. Taking Shiller CAPE at face value means that your idea of stock market fundamentals is currently pricing in one Great Recession every decade. If you do not believe that, you should not take Shiller CAPE at face value…

2017 11 15 Long Run Shiller Alternative CAPE

Data: http://delong.typepad.com/2017-11-15_shiller_cape_alternative.csv
Notebook: https://www.dropbox.com/s/9vhwu0d26wobpg8/2017-11-15%20Shiller%20Alternative%20CAPE.ipynb

# set up function to import data as a pandas time series dataframe object 

import pandas as pd
import os
from urllib.request import urlretrieve

URL = "http://delong.typepad.com/2017-11-15_shiller_cape_alternative.csv"
FILENAME = "2017-11-15_shiller_cape_alternative.csv"

def get_stocks_data(filename, url, force_download = False):
    if force_download or not os.path.exists(filename):
        urlretrieve(url, filename)
    data = pd.read_csv(filename, index_col = 0)
    return data

# import shiller data as a pandas time series dataframe object
# read it in from web if necessary

stocks_data = get_stocks_data(URL, FILENAME)
stocks_data.rename(columns = {'CAPE’':'Alternative CAPE'}, inplace = True)

stocks_data['Alternative CAPE'].plot()
stocks_data['CAPE'].plot()

plt.title("Stock Market Value as a Multiple of a 10-Year

Lagged Moving Average of Earnings”,
size=20)
plt.ylabel(“Multiple of 10-Yr Average of Lagged Earnings”)
plt.xlabel(“Year”)
plt.xlim(1970, )
plt.legend()

stocks_data['Alternative CAPE'].plot()
stocks_data['CAPE'].plot()
plt.title("Stock Market Value as a Multiple of a 10-Year

Lagged Moving Average of Earnings”,
size=20)
plt.ylabel(“Multiple of 10-Yr Average of Lagged Earnings”)
plt.xlabel(“Year”)
plt.legend()

Medicaid’s financial benefits are larger than previously thought

Posted on by Emilie Openchowski
Supporters of Medicaid expansion celebrate their victory, in Portland, Maine. Voters decided they wanted Maine to expand Medicaid to some 70,000 citizens in a public referendum in November 2017.

Given the costs associated with out-of-pocket health expenses across the United States, it’s no surprise that Medicaid can have a significant impact on the financial health of American families. But new research looks at the extent to which Medicaid has indirect benefits on household financial well-being as well—in the form of expanded access to credit. The new paper released last week by Kenneth Brevoort of the Consumer Financial Protection Bureau, Daniel Grodzicki of Pennsylvania State University, and Martin Hackmann of the University of California, Los Angeles, documents how the reduction in unpaid medical bills led to a sizable boost in credit access, making Medicaid’s financial benefits double that of previous estimates.

Throughout its history, eligibility for the joint federal-state Medicaid program primarily covered low-income children and their parents, as well as those with disabilities. The passage of the Affordable Care Act expanded the scope of the federal piece of the program, providing states with the money to enable Medicaid to cover any adult earning less than 138 percent of the poverty line, or about $16,000. At least, that was the intention. While the Medicaid provision of the ACA was originally intended to be a nationwide mandate, a later Supreme Court decision allowed states to decline the additional federal funding. Today, 18 states have not expanded their Medicaid programs.

Those state decisions enable researchers to assess the effectiveness of Medicaid. By comparing states that expanded their Medicaid programs in 2014 to those that did not, Brevoort, Grodzicki, and Hackmann’s research found that Medicaid expansion reduced the incidence of newly acquired medical debt by 30 percent to 40 percent overall, adding up to a total $3.4 billion in savings two years after the reform was enacted. For individuals who were newly covered by the program, this translated to $900 annually. It is well-documented that Medicaid-expansion states saw an increase in coverage and improvements in self-reported health outcomes. But this new paper demonstrates that families also experienced improved financial well-being due to a decline in medical bills.

While the reduction in household debt is an important aspect of Medicaid’s financial benefits, it is not the only one. Considering the ways in which unpaid debt tarnishes families’ financial health, there are even broader implications for economic well-being. Other research establishes how, in the United States, the uninsured pay only 20 percent of out-of-pocket medical costs, leaving 80 percent of their medical bills unpaid. Some hospitals and care providers absorb the rest of the costs, but if they do not (which is often the case), then the balance is sent to third-party collection agencies and reported to credit bureaus, directly affecting credit scores and individuals’ financial health overall.

The reduction in debt, therefore, can mean immediately better financial health and improved outcomes down the road. Brevoort, Grodzicki, and Hackmann underscore those findings by looking at delinquency rates, which are remarkably lower following the expansion, especially for consumers with subprime credit scores. People in the states that expanded their Medicaid programs under the Affordable Care Act also received more offers of credit and at much better terms compared to those in states that did not. The authors documented major savings due to lower annual interest rates, with an average of about $280 per year for those who were newly eligible for Medicaid.

Brevoort, Grodzicki, and Hackmann find that the financial benefits of Medicaid double once you consider the indirect factors combined with the reduction in out-of-pocket spending They note that they view this estimate as conservative “since it ignores other benefits, including a reduction in hassle costs of collections and legal actions.” Access to credit is crucial to economic well-being and prosperity, whether that’s buying a home, starting a business, or taking out a loan to help finance a child’s education.

Should-Read: Jasjeet S. Sekhon: Causal Inference in the Age of Big Data

Posted on by Brad DeLong

Should-Read: Jasjeet S. Sekhon: Causal Inference in the Age of Big Data: “The rise of massive datasets that provide fine-grained information about human beings and their behavior offers unprecedented opportunities…

…for evaluating the effectiveness of social, behavioral, and medical treatments. With the availability of fine-grained data, researchers and policymakers are increasingly unsatisfied with estimates of average treatment effects based on experimental samples that are unrepresentative of populations of interest. Instead, they seek to target treatments to particular populations and subgroups. Because of these inferential challenges, Machine Learning (ML) is now being used for evaluating and predicting the effectiveness of interventions in a wide range of domains from technology firms to clinical medicine and election campaigns.

However, there are a number of issues that arise with the use of ML for causal inference. For example, although ML and related statistical models are good for prediction, they are not designed to estimate causal effects. Instead, they focus on predicting observed outcomes. Treatment effects, however, are never directly observed, and creating validation datasets where ground truth is known is difficult. Such validation is of particular importance because although ML algorithms have been designed to overcome prediction challenges when the data generating process is unknown, they cannot overcome bias when treatment assignment is a function of variables that are not observed…

Should-Read: Lant Pritchett: The Perils of Partial Attribution: Let’s All Play for Team Development

Posted on by Brad DeLong

Should-Read: Lant Pritchett: The Perils of Partial Attribution: Let’s All Play for Team Development: “There was a growth acceleration in 1993 that created 1.1 trillion in additional GDP…

…Then, there was another growth acceleration in 2002 that created another 2.5 trillion in GDP (over and above the previous). Together, relative to the “business as usual” trajectory there has been 3.6 trillion dollars in gain (this cumulative additional GDP is larger than the annual total of the UK or France of about 2.8 trillion).

What caused this additional gain? Of course, no one is really sure exactly what it was and how to parse out the factors and simplistic (e.g. “trade reform”) explanations are almost certainly, well, simplistic. But something did happen and it almost certainly had to do with deft handling of the macro-economy plus a well-executed shift in strategy towards greater reliance on markets and more openness to the global economy (which is not saying that “laissez faire” was the answer or that India turned into a “neo-liberal” state).

Who caused this additional gain? In order to achieve a national policy shift there were of course hundreds, if not thousands of people who participated in producing evidence, disputing explanations of India’s past growth, examining alternatives for the future. But let me single out one group. The ICRIER (India Council on Research on International Economic Relations) was a think tank founded in 1981 that, according to its 20th anniversary document:

The Indian Council for Research on International Economic Relations (ICRIER) was established in August 1981 as an autonomous, policy-oriented, not-for-profit, research institution. This initiative was intended to foster improved understanding of policy choices for India in an era of growing international economic integration and interdependence….

There is a narrative in which Ford Foundation, a global philanthropy provides some millions of dollars of funding that play some role in creating a think tank that itself then plays some role in providing the conditions in which good policy choices are made that then results in the creation of 3.6 trillion in additional output of Indians. Suppose the Ford Foundation gave 36 million dollars (I have no idea what it really was but I strongly suspect this was the right order of magnitude and I just make it divisible) to support ICRIER….

In a very strange turn of events the organizations and supporters of the wildly successful “team development” are under pressure to sacrifice actions that can produce trillions in gains (in the economy, in education, in health, etc.) through systemic transformation. Instead development actors are being pressured to do only actions for which “rigorous evidence” proves “what works” but that leads inevitably to a focus on individualized actions known to produce at best mere millions—but for which the donors and external development actors can take direct causal credit. But there are real dangers from the perils of partial attribution in which individual actors care more about what they can take credit for than whether there is team success.

Should-Read: Matteo Maggiori, Brent Neiman, and Jesse Schreger: International Currencies and Capital Allocation

Posted on by Brad DeLong

Should-Read: Matteo Maggiori, Brent Neiman, and Jesse Schreger: International Currencies and Capital Allocation: “The external wealth of countries has increased dramatically over the last forty years…

…Much is still unknown about trillions of dollars of capital allocated across the globe. Using a novel security-level dataset covering more than $27 trillion of global securities portfolios we find that the structure of global portfolios is driven, at both the macro and micro level, by an often neglected aspect: the currency of denomination of the assets. If a bond is denominated in the currency of one particular country, then investors based in that country tend to own the vast majority of that bond. This implies that the much-studied home bias in bonds is instead mostly currency bias.

Foreigners’ portfolios are very different from domestic portfolios: foreigners only finance a subset of domestic firms, those that issue bonds in the foreigners’ currency. The dollar and the euro are exceptions to this pattern, with companies in the US and EMU uniquely able to place local currency bonds in foreign portfolios. We uncover a large and pervasive shift in the use of these international currencies starting around the 2008 financial crisis. Cross-border portfolio holdings have starkly shifted away from euro-denominated bonds and toward dollar-denominated bonds…

What does the research show about the need for fair work scheduling legislation in the United States?

Posted on by Emilie Openchowski
A retail employee folds shirts for display on the main-floor area of a Seattle-based outdoor, bike, ski, and clothing company.

Rep. Rosa DeLauro (D-CT) today is hosting a press conference with workers and advocates for fair scheduling practices to highlight her legislation, the Schedules That Work Act. Sen. Elizabeth Warren (D-MA) is the sponsor of the companion bill in the Senate. The legislation is intended to address the unpredictable and inconsistent workplace schedules that affect about 17 percent of U.S. workers, particularly among low-income workers in retail and service-industry jobs. The proposed legislation, for example, would require employers to provide workers with their schedules two weeks in advance and compensate workers who are sent home from a scheduled shift because there’s not enough work for them that day.

The Washington Center for Equitable Growth has spent a lot of time studying the issues surrounding unpredictable work schedules. In a new report for the Hamilton Project on modernizing labor standards for the 21st century, Equitable Growth’s Heather Boushey and Bridget Ansel explain how unpredictable scheduling harms workers’ ability to balance their job responsibilities with other obligations such as arranging childcare. They highlight research done by sociologists Daniel Schneider of the University of California, Berkeley and Kristen Harknett at the University of California, San Francisco, which finds that unpredictable work schedules are associated with household financial insecurity and poor health. You can learn more about Schneider and Harknett’s research here.

Unpredictable scheduling also hurts the firms that engage in these types of employment practices and thus crimps growth in the broader economy. Boushey and Ansel lay out these broader consequences in an issue brief on the subject, in which they highlight research by the University of Chicago’s Susan Lambert that finds managers themselves place part of the blame for high employee turnover (among the stores surveyed for this research, turnover was more than 100 percent for part-time employees) on unstable schedules.

While Congress hasn’t taken action on the Schedules That Work Act, policymakers at the local level in San Francisco, Seattle, and Emeryville, CA, have all passed legislation that penalizes employers for giving insufficient notice of work schedules. Whether federal legislators decide to follow their lead, the research is accumulating that unpredictable work schedules threaten not only the stability of U.S. families but also businesses’ bottom lines. Neither outcome is good for economic growth.

Should-Read: Laura Tyson and Lenny Mendonca: Facing the Four Structural Threats to US Democracy

Posted on by Brad DeLong

Should-Read: Laura Tyson and Lenny Mendonca: Facing the Four Structural Threats to US Democracy: “As California has shown, structural barriers to good governance can be eliminated through citizen-driven reforms…

…The California legislature has cleaned up redistricting, introduced “top two primaries” and an aggressive disclosure system, reformed term limits, eliminated a supermajority rule for state budgetary measures, and improved the ballot-initiative process. As a result, the legislature has become dramatically more effective, and its approval rating has gone from just 14% seven years ago to 57% today–its highest level since 1988. There is little reason to believe that Congress will reform itself. But if the movement for progressive federalism continues to gain momentum and push through meaningful state- and local-level reforms, federal lawmakers will not be able to maintain the status quo indefinitely. With a renewed confidence in democracy, citizens can take action to ensure that elected officials are governed by the right incentives, and motivated to pursue bipartisan solutions to the country’s problems.

If California can do it, so can other states. America’s founders created the Tenth Amendment precisely because they worried about dysfunction in the capital. It’s time we used it.

Should-Read: Paul Krugman: Trump and Ryan Versus the Little People

Posted on by Brad DeLong

Should-Read: Paul Krugman: Trump and Ryan Versus the Little People: “Consider four hypothetical taxpayers…. First is the poster child family Paul Ryan keeps talking about…

…a family with two children making $59,000 a year. In the first year of the Cut Cut Cut Act, such a family would indeed receive a tax cut… from… loss leaders to help sell the plan…. By 2027, with the plan fully phased in, that exemplary family would actually be facing a significant tax increase….

Second… someon… further up the scale… [who] still works for a living…. “Wall Street[‘s]” Gordon Gekko sneers at “a $400,000-a-year working Wall Street stiff flying first class and being comfortable.”… Once you take lost deductions into account, especially reduced deductions for state and local taxes, he almost certainly ends up facing a tax hike….

But what about owners of small businesses? Under current law, their business income is “passed through” to their personal income, and taxed accordingly. The Cut Cut Cut Act would instead allow people with such income to pay only 25 percent… [but] the G.O.P. bill imposes rules that… limit the 25 percent rate to “passive” income recipients…. You get the full tax break only if you own a business but don’t, you know, actually run it.

Finally… Eric Trump… inherit[s]… a business he doesn’t run…. He’ll get his inheritance tax-free…. He’ll get to pay a low tax rate on his business income. And his stocks will pay higher dividends, because the G.O.P. bill also sharply cuts corporate tax rates….

So when Gary Cohn… says that the bill’s goal is “to deliver middle-class tax cuts to the hard-working families in this country,” he’s claiming that up is down and black is white…. You might wonder how Republicans imagine that they can get away with this…. Anyone who has paid attention to U.S. politics knows…. First, they will lie…. Second, they will try to distract working-class voters by stoking racial animosity…

Must-Read: Claudia Goldin: How to Win the Battle of the Sexes Over Pay (Hint: It Isn’t Simple)

Posted on by Brad DeLong

Must-Read: Claudia Goldin: How to Win the Battle of the Sexes Over Pay (Hint: It Isn’t Simple): “Billie Jean King… the United States Open… 1972… $10,000. Ilie Năstase, her male counterpart, won $25,000…

…Ms. King fought hard for equal rights and, on the tennis court, she won. By 1973, men and women received the same prizes at the Open…. That is not the reality in the overall labor market, however…. Fighting to eradicate discriminatory employment practices is absolutely needed, of course…. Unequal treatment in hiring and in the work setting is real…. Yet… the time demands of many jobs can explain much of the pay difference, a finding that has sobering implications. Eliminating the gender earnings gap will require changes in millions of households and thousands of individual workplaces….

The gap is a statistic that changes during the life of a worker. Typically, it’s small when formal education ends and employment begins, and it increases with age. More to the point, it increases when women marry and when they begin bearing children. Using the data that shows women earn 81 cents for each dollar earned by men, when the careers of recent college graduates start, the gap is much smaller: 92 cents for each male dollar. By the time college-educated women are 40 years old, they earn 73 cents…. Correcting for time off and hours of work reduces the difference in the earnings between men and women but doesn’t eliminate it….

Women disproportionately seek jobs—including full-time jobs—that are more likely to mesh with family responsibilities, which, for the most part, are still greater for women than for men. So, the research shows, women tend to prefer jobs that offer flexibility: the ability to shift hours of work and rearrange shifts to accommodate emergencies at home. Such jobs tend to be more predictable, with fewer on-call hours and less exposure to weekend and evening obligations. These advantages have a negative consequence: lower earnings per hour, even when the number of hours worked is the same….

Certain job characteristics have a big impact on the gender earnings gap… Subject to strict deadlines and time pressure… Expected to be in direct contact with other workers or clients… Instructed to develop cooperative working relationships… Assigned to work on highly specific projects… Unable to independently determine their tasks and goals Occupations with a lower level of these characteristics (like jobs in science and technology) show smaller gaps…. Men’s earnings tend to surge when there are fewer substitutes for a given worker, when the job must be done in teams and when clients demand specific lawyers, accountants, consultants and financial advisers. Such differences can account for about half the gender earnings gap. These findings provide more nuance in explaining why the gap widens with age and why it is greater for women with children…

Statement on status of Tax Foundation response to Equitable Growth critique

Posted on by Emilie Openchowski

Yesterday, in the context of the Tax Foundation’s score of the Tax Cuts and Jobs Act, the Washington Center for Equitable Growth published a partial critique by Greg Leiserson, Director of Tax Policy and Senior Economist, of the model the Tax Foundation uses to project the macroeconomic impact of tax legislation. We provided a copy of the analysis to Tax Foundation staff on Wednesday, November 8, the day before its release.

This critique made two key arguments:

  1. The Tax Foundation appears to incorrectly model the interaction between federal and state corporate income taxes, thus overstating the effect of statutory rate cuts.
  2. The Tax Foundation appears to treat the estate tax as an annual property tax paid by businesses, which results in inflated estimates of the effect of repealing the tax.

As noted in the original, this critique did not attempt a complete assessment of the Tax Foundation model, which would be impossible without greater knowledge of the equations that make up the model.

The Tax Foundation has since acknowledged that the interaction between federal and state corporate income taxes in its model is incorrect and stated that the flaw will be addressed. Accordingly, the organization reduced its projected growth figure for the Tax Cuts and Jobs Act. We appreciate the Tax Foundation’s prompt attention to this issue. Leiserson has provided additional technical assistance to help with the changes to the model necessary to correct the problem.

In addition, the Tax Foundation indicated that staff would be putting out a longer response that would provide greater detail on the modifications it made to the model in response to Leiserson’s first critique and would address the second issue he raised. As this latter issue potentially has an effect on the growth estimate of nearly 1 percent of gross domestic product, any changes could substantially affect the results of its analysis of pending tax legislation. We look forward to this additional analysis.