Weekend reading: “Boosting the competition” edition

Posted on by Nick Bunker

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

Since 2000 the concentration of businesses in the United States has increased and the amount of business investment relative to profits has declined. Are these two trends connected? New research argues that less competition and increased consolidation is pushing down investment growth.

Gene Kimmelman of Public Knowledge and Mark Cooper of the Consumer Federation of America make the case for stronger antitrust enforcement and regulatory oversight in the digital communications industry.

The gap between the unemployment rate for black and white Americans may be at a historical low, but the gap still exists. A recent research paper digs into why this gap remains and how it shrinks as the labor market gets stronger.

In the latest installment of Equitable Growth in Conversation, Heather Boushey talks with Robert Solow, institute professor, emeritus, and professor of economics, emeritus, at the Massachusetts Institute of Technology; Nobel laureate in economics; and a member of Equitable Growth’s Steering Committee.

Is excessive spending always and everywhere the reason for higher government debt? Summarizing some of his new research, John Jay College’s J.W. Mason explains how increasing debt is not equal to deficits.

Links from around the web

Despite increasing attention to the downsides of restrictive noncompete agreements, Idaho recently made it easier for employers to enforce them. Conor Dougherty goes to the state and sees how this new policy might hurt the local economy. [nyt]

How fast can the U.S. economy sustainably grow? Economists try to answer this question by calculating “potential GDP.” Matt Klein writes about new research that suggests most estimates are far underestimating potential GDP. [ft alphaville]

A recent study about the minimum wage increases in Seattle raised questions about the benefits and drawbacks of significantly higher minimum-wage levels. Arin Dube, economist at the University of Massachusetts, Amherst, writes that we should put more weight on studies that look at many minimum-wage increases across the country and not focus jUst on one state. [the upshot]

Many proposed solutions to the problem of “short-termism” in business and finance is to reward shareholders for holding stocks for a long time period. But Alex Edmans, professor of finance at London Business School, proposes “the focus should be on creating large shareholders, not long-term shareholders.” [hbr]

One of President Trump’s pledges on the campaign trail was to fight back against what he saw as unfair trade practices. In office, he seems likely to soon impose significant tariffs on steel. Annie Lowrey investigates into the possible effects doing so. [the atlantic]

Friday figure

Figure is from “Recessions, recoveries, and racial employment gaps in the United States” by Nick Bunker

Must-Read: Anatole Kaletsky: A “Macroneconomic” Revolution?

Posted on by Brad DeLong

Must-Read: Anatole Kaletsky: A “Macroneconomic” Revolution?: “Given the abundance of useful ideas, why have so few of the policies that might have ameliorated economic conditions and alleviated public resentment been implemented since the crisis?… https://www.project-syndicate.org/commentary/replacement-market-fundamentalism-by-anatole-kaletsky-2017-07

…The first obstacle has been the ideology of market fundamentalism. Since the early 1980s, politics has been dominated by the dogma that markets are always right and government economic intervention is almost always wrong…. Market fundamentalism also inspired dangerous intellectual fallacies: that financial markets are always rational and efficient; that central banks must simply target inflation and not concern themselves with financial stability and unemployment; that the only legitimate role of fiscal policy is to balance budgets, not stabilize economic growth. Even as these fallacies blew up market-fundamentalist economics after 2007, market-fundamentalist politics survived, preventing an adequate policy response to the crisis.

That should not be surprising. Market fundamentalism was not just an intellectual fashion. Powerful political interests motivated the revolution in economic thinking of the 1970s. The supposedly scientific evidence that government economic intervention is almost always counter-productive legitimized an enormous shift in the distribution of wealth, from industrial workers to the owners and managers of financial capital, and of power, from organized labor to business interests. The Polish economist Michal Kalecki, a co-inventor of Keynesian economics (and a distant relative of mine), predicted this politically motivated ideological reversal with uncanny accuracy back in 1943:

The assumption that a government will maintain full employment in a capitalist economy if it knows how to do it is fallacious. Under a regime of permanent full employment, ‘the sack’ would cease to play its role as a disciplinary measure, leading to government-induced pre-election booms. The workers would get out of hand and the captains of industry would be anxious ‘to teach them a lesson.’ A powerful bloc is likely to be formed between big business and rentier interests, and they would probably find more than one economist to declare that the situation was manifestly unsound…

The economist who declared that government policies to maintain full employment were “manifestly unsound” was Milton Friedman. And the market-fundamentalist revolution… lasted for 30 years… succumbed to its own internal contradictions in the deflationary crisis of 2007…. If market fundamentalism blocks expansionary macroeconomic policies and prevents redistributive taxation or public spending, populist resistance to trade, labor-market deregulation, and pension reform is bound to intensify. Conversely, if populist opposition makes structural reforms impossible, this encourages conservative resistance to expansionary macroeconomics.

Suppose, on the other hand, that the “progressive” economics of full employment and redistribution could be combined with the “conservative” economics of free trade and labor-market liberalization…. If “Macroneconomics”–the attempt to combine conservative structural policies with progressive macroeconomics–succeeds in replacing the market fundamentalism that failed in 2007, the lost decade of economic stagnation could soon be over–at least for Europe…

Debt ≠ deficits: Why higher state and local government debt isn’t necessarily a result of higher spending

Posted on by David Evans
Concerns about public debt play an important role in policy debates at the state and local levels because governments perceived to have excessive debt face pressure to reduce spending.

Over the past 50 years, there has been substantial growth in both public and private debt relative to U.S. gross domestic product, or GDP. The increases in federal and household debt are familiar. Less discussed is the long-term rise in state and local government debt, from less than 8 percent of GDP in the 1950s to around 18 percent today. While small relative to other sectors of the U.S. economy, this increase is not trivial. Among other things, concerns about public debt play an important role in policy debates at the state and local levels because governments perceived to have excessive debt face pressure to reduce spending.

New Working Paper
The evolution of state-local balance sheets in the US, 1953-2013

In a recently released working paper at the Washington Center for Equitable Growth, I and my co-authors Arjun Jayadev and Amanda Page-Hoongrajok use data from the U.S. Census Bureau’s Census of Governments to get a better picture of this long-term rise in state and local government debt—and of the even less discussed rise in state and local government assets. The Census Bureau data offer the most comprehensive view available on state and local government budgets and balance sheets. Our working paper is based on an accounting decomposition that explicitly incorporates all the factors contributing to changes in the debt ratio at state and local levels.

In discussions of historical changes in debt and other balance sheet variables, it is usually assumed that these changes are straightforward reflections of changes in real activity. If the debt-to-income or debt-to-GDP ratios are rising for some sector or unit, then it’s assumed that it must have been borrowing more and that it was spending more in relation to its income. The assumption that changes in debt reflect the level of borrowing, which in turn reflects spending on goods and services relative to income, is so taken for granted that it is usually not even stated. But it is not necessarily true. Debt ratios have denominators as well as numerators. And borrowing reflects a wide range of sources and uses of funds, not all of which involve real income or expenditure flows.

We know that factors other than current expenditures and income have played a central role in historical changes in debt ratios for other sectors. The behavior of U.S. federal debt relative to GDP depends at least as much on variation in interest rates relative to GDP growth rates as it does on shifts in the fiscal balance. The rise in debt-to-GDP ratios in the 1980s, in particular, is primarily due to disinflation and higher interest rates rather than anything to do with the federal budget. Conversely, the fall in debt ratios in the United States and many other countries after World War II owes more to interest rates below economic growth rates than to fiscal surpluses. And as Arjun Jayadev and I have shown in an earlier paper, the long-term rise in household debt in the United States was driven more by higher interest rates and slower income growth rates than by increased borrowing—and the deleveraging after the financial crisis was driven by higher defaults as much as by reduced borrowing.

In the new paper, we look at the full range of factors influencing state and local balance sheets. Our basic approach is a variance decomposition, in which we break down variations in debt growth across time and between states into all the factors that contribute to it—revenues and expenditures but also nominal income growth (which affects the denominator of the debt ratio) and net accumulation of financial assets, including contributions to pension funds. This last factor is not important for the federal government because pension contributions for public employees make up a small and stable fraction of federal spending, and the federal government does not hold significant financial assets outside of trust funds. But for state and local governments, both pension contributions and additions to directly held financial assets play important roles in the evolution of their finances over time.

We look first at variation over time—at what makes the difference between years in which aggregate state and local debt is rising, stable, or falling as a share of GDP. The key results of our paper show the share of the variance in annual debt ratio growth accounted for by each of the variables shown. (See Table 1.)

Table 1

We find that for the state and local sector as a whole, the most important source of variation in debt ratio growth is nominal income growth—that is, real growth plus inflation. Fifty-two percent of the variance in annual debt ratio changes is explained by the ratio’s denominator, rather than its numerator. The next most important factor is the pace of asset accumulation, explaining 33 percent of variation in debt ratio growth. Only 17 percent of variation in state and local debt ratio changes is attributable to fiscal surpluses and deficits. For state governments alone, the fiscal balance accounts for 31 percent of variance in debt ratio growth.

Despite legal balanced-budget requirements, state (though not local) governments do sometimes see significant fiscal deficits. But these are mainly financed on the asset side, not by increased borrowing. This was very clear during the Great Recession period: Between 2007 and 2010, state budgets moved from modest surpluses to deficits—reaching an aggregate deficit of 0.5 percent of GDP in 2009—while debt ratios rose significantly. Yet surprisingly, there was no direct connection between these two developments; deficits were accommodated entirely by reduced asset accumulation, with no increase in credit-market borrowing. Meanwhile, the rise in debt ratios was fully explained by the fall in nominal income.

When we turn to variations in debt growth across states, rather than over time, borrowing matters more and nominal income growth matters less because in the postwar United States, most variations in nominal income growth are shared across states. But the states that borrow more are not necessarily the ones with higher deficits. During the period of rapidly rising state debt during the 1980s, for example, more than all of the variation in debt ratio growth is explained by asset accumulation. In other words, states that increased debt more during the 1980s were actually the ones with above-average surpluses; they nonetheless borrowed more because their pension fund contributions and other asset purchases were even larger than their surpluses. So during the 1980s, the difference between states with big rises in debt ratios and those with stable or falling ratios is entirely due to the former adding assets more rapidly.

In contrast, during the 2000s, variations in state debt ratio growth are mainly accounted for by variation in state fiscal balances, just as the conventional view assumes. But it’s important to add that variations in borrowing across states are due to variation in revenues rather than in expenditures. In fact, during the Great Recession period, the states with more rapid debt growth actually had lower state spending as a share of state domestic product than the states with less debt growth. (See Table 2.)

Table 2

So what do we take from this? Why does it matter?

First, the paper offers a warning against simple morality-tale interpretations of state and municipal finances. Rising state and local debt is not a sign of fiscal profligacy. Whether we look at variations over time or across states, there is no reliable relationship between changes in the debt ratio and public spending.

Second and more broadly, it’s a warning against presuming that leverage or balance sheets reflect real activity. It’s easy to assume that rising debt equals higher borrowing equals more spending. But historically, this is often not the case. For state and local governments, as for other sectors, the evolution of balance sheet positions owes as much to purely financial and monetary factors as to shifts in real activity.

Third, we should pay more attention to the role of inflation in changes in debt ratios. During the decade of 1955 to 1964, the state and local debt ratio rose at an average of 0.4 percentage points per year. During the following 15 years, it fell at a bit over 0.1 percentage point per year. Yet borrowing was no lower in the second period than in the first. The difference between rising and stable debt ratios was entirely because inflation was higher in the late 1960s and 1970s than it was in the 1950s and early 1960s.

This should be a consideration in discussions of monetary policy. Since 2008, inflation has fallen short of the Federal Reserve Board’s 2 percent inflation target by a cumulative 4 percentage points. This has increased public and private debt ratios, just as higher deficits would have done. In the case of state and local governments, this lower inflation is the equivalent of $150 billion in additional spending. So to the extent that debt imposes constraints—real or perceived—on the budgets of these governments, this below-target inflation translates into less money for teachers, roads, firefighters, and other public services. To avoid raising the real burden of debt, the Fed needs to overshoot its target by as much as it undershoots it.

Fourth, for state and local governments in particular, we need to pay attention to assets as well as liabilities. Over the past 50 years, state and local government assets—both in pension funds and directly held—have grown more than twice as much as debt. If we consolidate pension funds with the sponsoring governments, the state and local sector is now a substantial net creditor in financial markets, as is every individual state. Even with pensions and other trust funds excluded, the state and local sector as a whole and most individual states still own financial assets in excess of their debt.

These large asset positions among state and local governments are one important reason why we shouldn’t assume that more credit-market borrowing equals less saving. A sector or unit that is adding to its asset position can increase borrowing and increase saving simultaneously, and this has often been the case for state and local governments.

—J.W. Mason is an assistant professor of economics at John Jay College, City University of New York, and a fellow at the Roosevelt Institute. 

In conversation with Robert Solow

Posted on by Nick Bunker

“Equitable Growth in Conversation” is a recurring series where we talk with economists and other social scientists to help us better understand whether and how economic inequality affects economic growth and stability.

In this installment, Equitable Growth’s Executive Director and Chief Economist Heather Boushey talks with Robert Solow, institute professor, emeritus, and professor of economics, emeritus, at the Massachusetts Institute of Technology; Nobel laureate in economics; and a member of Equitable Growth’s Steering Committee.

Boushey: Thanks so much for joining this conversation, Robert. My first question is: What do you see as the three most important issues for the U.S. economy right now?

Solow: I think that the first two are the inequality issue, and I say two because there’s the numerical inequality, meaning the inequality of size and distribution of income, and then there’s the size and distribution of wealth and what to do about that. Is there any prayer for a more progressive tax system? Our current system is becoming less progressive as we sit here and eat, and so, could we make the tax system more progressive?

The second issue, I think, is the broader concept of equality. One of the things I’ve learned from the election is the sheer disaffection of so many, so many people. And I think part of that is that a lot of people feel that they’re being treated like dirt and they’re disaffected. They feel no responsibility for the enterprise they work for. I saw a New Yorker cartoon, maybe 15 years ago, of a man behind a desk obviously interviewing a possible hire, and the man behind the desk says, “We offer no loyalty at all, but we don’t expect any.”

And that is one of the things, I think, we need to think about. I don’t know whether policymakers can think about this, but they ought to be thinking about it. How do we restore some kind of representation of labor in firms?

Do you recall what Clark Kerr said?

Boushey: A name I’ve heard, yes.

Solow: Clark Kerr used to speak of the main product of collective bargaining not being wages but being what he called a web of rules. Standards of behavior. Who could do what to whom and who couldn’t do what to whom. I’d like to find some way of enlarging and improving the way workers, wage earners, are represented in their firms. Unions used to do that, but even with the best will in the world, you could not restore the trade union movement. If it’s true, what we all think, that the nature of workers changed, that people who work for many employers in different industries, and different occupations, really have changed, then neither the craft union nor the industrial union is the right policy vehicle.

But of course, the online workers that everybody talks about are the prize case in this. They never have contacts with their employers, who change from day to day, and they have no contact with the other people who work for that employer.

Boushey: Yes. It’s hard to organize these kinds of workers.

Solow: There’s no shop floor, but for the online worker, it’s clear who the boss is. The boss is the one who pays, as usual.

So what’s the correct, valid form of representation they could have? How could we do something about their voice and about the web of rules in which they operate? Or something about retirement for people who don’t have a single employer for any length of time? What is the right form of representation? I don’t really think it’s having someone on the board of a corporation. It might matter, but it can’t be the whole thing. I think that you need some kind of substitute. Maybe you need a substitute for the shop floor. How can you be part of a group that you never see, never communicate with or anything like that?

It’s that part of the inequality issue that I think doesn’t attract enough thought, and I don’t know how to go about encouraging that. Who would be good at it? Or what happens in other countries?

Boushey: I think it would be interesting to see how economists think about a labor market in the absence of unions. Is there any way to really make the argument for why this is important? It would be interesting to see more research that helps set that stage.

Solow: Maybe. But maybe it’s sociologists or social psychologists, though I do think the economics of this is important because the object here is not merely to make people feel good but to make them feel effective and be effective in pursuing their own interests.

So that, to me, is part of the inequality issue. It’s not so much a quantitative inequality, it’s a fact that the relationship between the boss and the bossed is getting more and more biased toward the boss, and that makes people feel unhappy.

Boushey: The test is really whether or not you are forced to laugh at the boss’s joke.

(LAUGHTER)

Solow: That’s good.

Boushey: Right?

Solow: That’s sort of the test about whether or not you have any freedom.

Boushey: Yes. It kind of sums up how I think people feel. If you don’t even have the right to not laugh at the boss’s jokes, it’s because you just don’t have any power.

Solow: And you have no status. You’re a replaceable object and, of course, the laws and statutes are now full of regulations and legislation that work against the organization of workers in firms. And the other thing that makes me think this is important is that business firms react or overreact to the possibility of union organization. You may remember a couple of years ago, the UAW proposed to try to organize a Volkswagen plant in Kentucky. And the Volkswagen people said, “Well, we won’t resist. Go ahead and see what you can do.” And you could hear a sharp intake of breath all over the business world in this country. What are these people saying?

I was once on the board of a for-profit organization, and when the possibility of a union came up, they panicked. They absolutely panicked. They thought that two days later they would lose all control of the firm, which can’t be right because we lived for some years with unions in this country, and companies made pretty good profits through much of that time.

Boushey: People still got rich.

Solow: So I think that there’s a real problem here, but maybe it’s more of an intellectual problem than a policy problem at the moment. But policymakers could at least relax some of the ridiculous regulations that stand in the way of employees acting on their own and in their own interests that would be worth trying.

Boushey: What’s the third most important issue for the U.S. economy right now?

Solow: Well, those are the two that really engage me. I think the third thing is nothing new. I think we’re simply ignoring the climate change issue too much. It’s so silly talking about this since it’s all going the other way, you know?

Boushey: The politics?

Solow: The politics. Not only the politics, but the policy. I read in The New York Times this morning—I don’t have a cell phone, so I don’t get my news that way—that the Environmental Protection Agency is firing scientists from its Science Advisory Committee and proposes to replace them with representatives of the industries being regulated.

Boushey: States need to just keep working at it. California, New York, they have to be at the forefront.

Solow: Changing the subject, economists are now having discussions every day about whether we’re at full employment in the economy now. When is the last time you ever saw a really tight labor market, where employers were scrambling to get workers rather than workers scrambling to get jobs? I do not know what the distribution consequences would be if we had a seller’s labor market. Now, I’m as alert as anybody to all the possible inflationary consequences and what-not, but there could be a good couple of years in there anyhow of more full employment.

Boushey: Yes. What we saw in the late 1990s. Incomes rose at the bottom. And we didn’t have inflation.

Solow: We were lucky in the ‘90s. There were a lot of accidental things helping to keep down inflation, such as health maintenance organizations that were holding down health costs and some other costs as well. But today, it would be so interesting to try for real full employment again. But it’s so amazing to me, the asymmetry of it. As soon as any firm says, “We’re having trouble finding skilled machinists,” that hits the newspapers. But if a skilled machinist says, “I’m having trouble finding a job,” that doesn’t seem newsworthy at all.

Boushey: That’s a very good point. I was on an email thread this week about full employment with a bunch of economists debating whether we’re there and how close we are, and yet the employment rate is still low. It’s great to be having this debate. Are we there yet? How close?

Solow: Yes, except that I’m afraid the answer will be “yes.”

Boushey: Bob, thanks so much for sharing lunch with me and covering all of these topics today. It was very stimulating.

Solow: You’re welcome, Heather, and thanks for lunch.

Should-Read: Christina Romer and David Romer (2009): Do Tax Cuts Starve the Beast? The Effect of Tax Changes on Government Spending

Posted on by Brad DeLong

Should-Read: Christina Romer and David Romer (2009): Do Tax Cuts Starve the Beast? The Effect of Tax Changes on Government Spending: “The hypothesis that decreases in taxes reduce future government
spending is often cited as a reason for cutting taxes… https://www.brookings.edu/bpea-articles/do-tax-cuts-starve-the-beast-the-effect-of-tax-changes-on-government-spending/

…This paper examines the behavior of government expenditure following legislated tax changes that narrative sources suggest are largely uncorrelated with other factors affecting spending. The results provide no support for the hypothesis that tax cuts restrain government spending; indeed, the point estimates suggest that tax cuts increase spending. The results also indicate that the main effect of tax cuts on the government budget is to induce subsequent legislated tax increases. Examination of four episodes of major tax cuts reinforces these conclusions…

Must-Read: Mark Thoma: Here’s Why We’re Not Prepared for the Next Recession

Posted on by Brad DeLong

Must-Read: To leave their successors half a cable off of a lee shore in hurricane season may well turn out to have been the biggest failure of the Bernanke-Yellen Federal Reserve:

Mark Thoma: Here’s Why We’re Not Prepared for the Next Recession: “When will the next recession hit?… http://www.thefiscaltimes.com/Columns/2017/07/17/Here-s-Why-We-re-Not-Prepared-Next-Recession

…Will monetary and fiscal policymakers have the ability to respond effectively?… This is not a prediction that a recession is just around the corner…. It’s a warning that we need to be ready in case a recession does hit relatively soon, as it well could. The problem is, we aren’t ready. Even a year or so from now, the Fed’s target interest rate won’t be high enough to leave much room for cuts in response to an economic downturn….

Criticism from the right over the Fed’s quantitative easing policies… related to fears of inflation that never materialized, was loud and widespread on the political right. Without much room to cut interest rates, and without support from the Trump Fed for other stimulative measures, there’s little the Fed will be willing and able to do in response to economic problems. As for fiscal policy, when the recession does hit the economy keep your fingers crossed that Congressional gridlock stops Republicans from making things worse. During the Great Recession, Republicans made it very clear how they will respond when millions and millions of people lose their jobs and need help. First, they will use the recession as an opportunity to argue for their favorite policy, tax cuts for the wealthy… [and] austerity–cuts to government programs. In a recession, spending on social services goes up as more people are in need, and tax revenues fall due to lower incomes, both of which cause a temporary increase in the government deficit….

Our best hope is that the economy remains at full employment long enough for the Fed to restore its ability to cut rates and that Congress is gridlocked when the downturn comes…. It would be hard to be less prepared for a recession than we are right now.

Must-Read: Noah Smith (2011): Noahpinion: The liberty of local bullies

Posted on by Brad DeLong

Must-Read: A promos of Nancy MacLean’s Democracy in Chains http://amzn.to/2tGUUeN: My view is that Brown v. Board of Education was not the major cause of James Buchanan’s decision to try and U VA President Colgate Darden’s decision to fund the “Virginia School of Political Economy”—Public Choice as a discipline that had only one wing, a right one, and that would, as the late Mancur Olson liked to say, “never be healthy until its left wing was as strong as its right, and it was no longer an ideological movement masquerading as an academic sub discipline”. But it was certainly a trigger, and support was always very welcome from those whose concerns about appropriate governmental decentralization, limited powers, and checks and balances started and ended with preserving white supremacy.

Noah Smith was on the case back in 2011:

Noah Smith (2011): Noahpinion: The liberty of local bullies: “I have not been surprised by any of the quotes that have recently come to light from Ron Paul’s racist newsletters. I grew up in Texas, remember… http://noahpinionblog.blogspot.jp/2011/12/liberty-of-local-bullies.html

…If you talk to a hardcore Paul supporter for a reasonable length of time, these sorts of ideas are more likely than not to come up. So does this mean that Ron Paul’s libertarianism is merely a thin veneer covering a bedrock of tribalist white-supremacist paleoconservatism? Well, no, I don’t think so. Sure, the tribalist white-supremacist paleoconservatism is there. I just don’t think it’s incompatible with libertarianism….

Libertarianism… [in] its modern American manifestation… is not really about increasing liberty…. An ideal libertarian society would leave the vast majority of people feeling profoundly constrained in many ways…. Freedom… can be curtailed… by a large variety of intermediate powers like work bosses, neighborhood associations, self-organized ethnic movements, organized religions, tough violent men, or social conventions…. There is plenty of room for people to be oppressed by… “local bullies”. The modern American libertarian ideology does not deal with the issue…. [To] Nozick, Hayek, Rand, and other foundational thinkers… if your freedom is not being taken away by the biggest bully that exists, your freedom is not being taken away at all….

Not surprisingly, this gigantic loophole has made modern American libertarianism the favorite philosophy of a vast array of local bullies…. The curtailment of government legitimacy, in the name of “liberty,” allows abusive bosses to abuse workers, racists to curtail opportunities for minorities, polluters to pollute without cost, religious groups to make religious minorities feel excluded, etc…. I see no real conflict between Ron Paul’s libertarianism and his support for the agenda of racists. It’s just part and parcel of the whole movement… as it in fact exists.

Recessions, recoveries, and racial employment gaps in the United States

Posted on by Meghan Miller
Unemployed workers fill out applications during a jobs fair sponsored by Scott Lee Cohen, independent candidate for governor of Illinois, October 2010, in Rockford, Illinois.

This past Friday, the U.S. Bureau of Labor Statistics released data that show that in June, the gap between the unemployment rate for black Americans and white Americans fell to the lowest level on record. The gap stood at 3.3 percentage points and has been on a downward trend for several years as the U.S. economy has recovered. (see Figure 1) This closing gap hitting historical lows is something to cheer, but let’s not forget that the gap remains. Looking at some of the reasons the gap exists will be helpful for thinking about how to eliminate it.

Figure 1

A recent paper by staff economists at the Board of Governors of the Federal Reserve System—Tomaz Cajner, Tyler Radler, David Ratner, and Ivan Vidangos—digs into the data on racial disparities in not only the unemployment rate but also the labor force participation rate; part-time employment; and the flows among employment, unemployment, and being out of the labor force.

The four economists look at what might explain the differences in unemployment broken down by race and gender. They compare unemployment for black men and Hispanic men to unemployment for white men and unemployment for black women and Hispanic women to unemployment for white women. The technique they use breaks out how much of the difference can be attributed to observable variables—age, education level, marital status, and state of residence—and how much is “unexplained.”

The results show that the unemployment gap between black and white workers, both men and women, is almost entirely “unexplained,” meaning that none of the observable characteristics explain the gap. In other words, the gap can’t be explained by black Americans having lower levels of education or differences in demographics. The unexplained portion—in this case almost all of the gap—is likely due to either direct discrimination and bias in the labor market or unequal access to resources such as education.

The authors take another path to seeing what’s causing unemployment gaps. They see how the unemployment rate would be different for different groups by changing certain labor market flows—for example, from employment to unemployment or from not in the labor force to employment—to see how much the unemployment rate changes. What they find is that the job-separation rate—moving from employment to unemployment—is the biggest driver of the racial differences in the unemployment rate and accounts for the increases in the gap during recessions.

The importance of the job-separation rate would mean that a strong labor market reduces the racial unemployment gap not because it’s boosting hiring rates disproportionately more for black workers but rather because it’s preventing the disproportionate firing that black workers experience during recessions.

Historically, the importance of a tight labor market and full employment to reducing racial disparities has been well-acknowledged. Policymakers would be well-served to remember this as they debate how much tighter the labor market can get.

Must-Read: Maarten de Ridder and Coen Teulings: Endogenous growth and lack of recovery from the Global Crisis

Posted on by Brad DeLong

Must-Read: Maarten de Ridder and Coen Teulings: Endogenous growth and lack of recovery from the Global Crisis: “The crisis [is] a quasi-natural experiment to test the endogenous growth hypothesis… http://voxeu.org/article/endogenous-growth-and-lack-recovery-global-crisis

…suggests that output has not recovered because the crisis affected the rate of technological progress. Firms that preferred a bank that was more severely affected by the crisis experienced a large fall in R&D investment and a persistent fall in output in subsequent years. This suggests a direct link between R&D and future productivity, as predicted by endogenous growth models…

Posted in Uncategorized

Should-Read: Christian Odendahl: The Hartz Myth

Posted on by Brad DeLong

Should-Read: Christian Odendahl: The Hartz Myth: “Germany’s labour market and welfare reforms of the early 2000s have gained an outsized importance over time… http://www.cer.eu/sites/default/files/pbrief_german_labour_10.7.17.pdf

…For some, these reforms put an end to Germany’s social market economy and pushed millions into insecure, low wage jobs. For others, notably many international observers, these ‘Hartz reforms’ are one if not the main reason why Germany–formerly known as the ‘sick man of Europe’–is now Europe’s export powerhouse and strongest economy…. A sober look at the German reforms shows that their economic impact was modest. They targeted weaknesses in Germany’s labour market and benefits system… combined unemployment and social assistance into a single system, to help more people find jobs or retrain; curbed incentives to ‘retire early’ by preventing people from claiming generous unemployment
benefits… made job search, training and job centres more efficient, which helped to reduce unemployment… and provided more incentives to take up work, which increased temporary and marginal employment. There were fewer negative side effects than are commonly attributed to the reforms…. But the number of people in insecure jobs and at risk of poverty increased after the reforms. The effect on income inequality is ambiguous…

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