In conversation with Sandra Black

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, John Schmitt, then Equitable Growth’s research director, talks to Sandra Black, the Audre and Bernard Rapoport Centennial Chair in Economics and Public Affairs and professor of economics at The University of Texas at Austin. They talk about Black’s experience as a member of former President Barack Obama’s Council of Economic Advisers, her transition from academia to the policymaking world, and what she’ll take away from her time on the CEA.

John Schmitt: So you studied economics as an undergrad at the University of California, Berkeley, you got your Ph.D. in economics at Harvard. You went from assistant to full professor at the University of California, Los Angeles, before getting named a chair at UT-Austin. It’s, I think, fair to say that you are very steeped in academia and very successful as an academic economist! What made you decide to take a break from that world and come to Washington to work on economic policy on the Council of Economic Advisers?

Sandra Black: It was an unexpected change. I had been asked in the past if I was interested in working for the Department of Labor. But at that time I wasn’t interested, I think in part because I was really focused on the academic track and my research, and I didn’t feel like I could afford the time off. So this time, I got an email from [member of the CEA] Betsey Stevenson saying, “Do you have a minute to chat?” When we talked, she said, “I’m leaving the Council of Economic Advisers; might this be something that you were interested in?” And I had that moment of “Well, I’ve said ‘no’ in the past, but maybe now.”

It was actually not something that I had always thought I wanted to do. I really like doing research. I really like being a professor. I was quite happy with what I was doing. This seemed very scary in a lot of ways because it was so different and unfamiliar to me, having not done anything like this before. It felt like being thrown into the ocean and trying to learn to swim, not even the swimming pool. This is the ocean.

I decided to visit the CEA. I was going to give a talk in New York and decided to fly to DC to meet Jason Furman and other people at the CEA. I remember walking up to the Eisenhower Executive Office Building, wearing a suit that I had to buy for this very purpose and thinking that this was such a strange life that I could not imagine at all. And at the time, I met with [former Director of the National Economic Council] Jeff Zients; I met with [former Senior Adviser to the President] Valerie Jarrett; and I did not realize how influential they were because I was not part of that world at all. But it seemed so different, and it seemed like an opportunity that I couldn’t pass up. It felt really important.

So I said yes, and all of a sudden my life totally changed.

Schmitt: How so?

Black: It was really a shock, coming here. The whole transition was really overwhelming. There’s no sense of privacy. Someone is scheduling you every 15 minutes, and there are no bathroom breaks unless you ask them to schedule in a bathroom break. The tasks that you perform, even the lifestyle, are very different. Even the way you think is very different—you are thinking about 20 different projects all within one day, so you don’t get to think deeply about things. As an academic, we spend a lot of time focusing on one topic and try to become an expert on that topic. At the CEA, you don’t have the luxury to spend so much time on one topic. Instead, you have a more superficial knowledge about a lot of things. I would work late at night or in the early morning to try to expand my knowledge and process an issue so that I would be better prepared for a meeting the next day.

That’s a skill that I think academics may have, but we don’t exercise that muscle very much. It took me a while before I was comfortable going into a meeting without a deeper understanding of the topic, with only a basic understanding. A lot of policy involves basic economic principles or basic research. Interestingly, the transition back to academia has required undoing all that. And I found that hard. At the beginning, just sitting and thinking about one project for a whole day, it was hard for me to focus on one topic for so long. And it used to be that I was really good at that! That’s what I could do, and that’s what I liked. I was joking that it’s only been in the last three weeks that I can really sit for a day and just do research on one project.

So it’s been a really interesting transition in and transition out.

Schmitt: You described having a kind of broad set of things that you had to do each day and not the same depth that you might do in academics. But for people who are unfamiliar with the CEA, what is it that you do as an economist there? What kind of questions do you get asked? How much time do you have to answer them? And how do you answer them?

Black: There are a number of different tasks that we perform on the Council of Economic Advisers. One is if there is a policy process, where we discuss the pros and cons of different policy options. In this case, there would be meetings, and the CEA would have representatives at these meetings. And so someone like Greg Lieserson [then a senior economist at the CEA, now at Equitable Growth], who had been to a number of meetings on a topic, would come and talk to me and say, “This is where we are, this is what I think, here’s what you need to know,” and then I would go and represent the CEA at a meeting. Sometimes it would be a big picture meeting, where we were talking about the big picture of “What do we think about this policy?”, and other times it would be very detail-oriented on a specific policy.

Often, I was briefed by people on our staff who knew a lot of the details so that I would go in there knowing about the topic. This was really different from my life as an academic, where I do my own research and is something that I really like about being an academic. I like to look at the data so I know what’s going on, and then I feel comfortable standing up and talking about it. In the world of the CEA, someone is telling you “This is the research.” And sometimes you have time to actually look at the research, but a lot of times things are time-sensitive and you’re taking what they tell you and saying “Okay.” So you count on having good colleagues you can count on, which is really important and something I valued very much about being at the CEA.

So that’s the policy process. Another aspect of my job was representing the CEA on public panels, talking about the policies that we were promoting. And that, to me, again involved a very different set of skills because that’s very public-facing. At the CEA, I was representing the Obama administration, not just Sandy Black. I needed to be prepped in terms of how to respond to questions, which was very strange to me because, as an academic, you’re very used to just kind of saying whatever’s on your mind. You can see that that might not always be a good strategy if you are representing the administration.

When I started at the CEA, my first presentation was at the Brookings Institution on the research the CEA had done surrounding the updating of the College Scorecard. I was presenting a paper that the CEA had produced, and it was an excellent document, but I was actually not there when they had done most of the work. Going and presenting something that was not my own work was really challenging. And again, I think I got better over time, but these are all skills that you don’t go in necessarily having.

We also would do internal analysis, keeping the administration up to date on what the research is saying, or what’s going on with the economy, writing memos for the president or for the other principals. I think this was something I was most comfortable with because that’s really using the expertise that I felt I already had.

Schmitt: You talk about the internal policy process, about representing the CEA and the administration, and about keeping the administration up to date on what the research is saying. What role does research play across these three areas? Does it help? Does it hurt? Is it beside the point?

Black: I was really heartened by the fact that people value research—I did not know if that would be the case when I arrived. There were a number of good surprises that I discovered early on. One was that I really felt like the people working for the Obama administration genuinely wanted to help people. We may not always have agreed on what the best way to do that was, but I always felt like people were coming from a good place, which was really nice. As an outsider, I did not think that was necessarily what I was going to find. And I really liked working with them.

The other thing that was a really nice surprise was that people did value research, even when the research didn’t support the policy they wanted. They would say, “Okay, this new research may provide information about a specific policy, and it is good to know this. Do we still want to support that policy?” Policies can have some negative consequences and still be overall good policies, so you then want to try to mitigate these negative consequences. But it’s important to know what the consequences are, right? You’re always better off knowing what might happen than not knowing.

And so I really feel like the policymakers that I met and worked with seemed to really value that approach to research. I don’t know that it’s a universal quality, but it was certainly something that was gratifying as an academic and made me feel like that’s something I’d like to continue, making the link between academic research and disseminating it more broadly to policymakers.

Schmitt: Which leads to a natural question: Have you learned things here that will help in your teaching or in your research when you go back into academia?

Black: I think it definitely spills over. I mean, I can show students pictures of me with the president.

(LAUGHTER)

I think it will definitely help with my teaching, in that people like real-world examples and now I have them. Now I can say, “And then President Obama said this,” and how can you not believe that a topic is important when you know that it’s something that the president was thinking about? I think it makes the topics more relatable. And I teach undergrad econometrics, usually, which is not a super-hot topic, which makes my ability to use real-world examples even more important, highlighting the econometrics we use when making suggestions for the president.

Schmitt: Did [former president Obama] follow econometrics?

Black: He’s really smart. I’m just going to put that out there. [Former member of the CEA] Jay Shambaugh and I once sat down and talked to the president about skill-biased technological change and the academic research on that topic. It was the most amazing conversation—the president was so smart, and so informed, and so genuinely interested. When we walked out of the Oval Office, we turned to each other and said, “That was cool.” That was a really cool experience.

In terms of my research, I think that it will change. I now know a lot more about macroeconomics and the link between macro and micro, whereas before I was very micro-focused. Now that I have better big picture understanding of this relationship, I’m going to want to do more macro labor. And the questions that I’m interested in thinking about going forward are different. I want to think about topics such as worker bargaining power, and rents, and rent sharing, and where firms’ profits are going in. Those are topics that, three years ago, I probably wouldn’t have had any interest in. Now, I think they’re really important.

Schmitt: Do you have any advice for economists who are in academia now about whether they should go into the policy world? And if so, what should they do when they get there?

Black: I think it gives you really useful perspective for your research, if that’s what you’re interested in, especially if your research is empirical and you want to see how empirical research is used. I think it’s a worthwhile endeavor, certainly. It’s very humbling. You go from being the expert on your topic into an environment where you are discussing policies you don’t know very well, and some of the people around you may have been working on that specific policy or program for the last 10 years, and it is very humbling.

I also think it really does change your perspective on what’s important. I hope, going forward, that institutions such as the Washington Center for Equitable Growth can help researchers make their work more accessible because that is something that is really challenging and not something they teach you in grad school. And it is very hard, especially as an assistant professor. Even tenured faculty don’t typically have the experience and the network to make sure their research reaches the policy world.

I think as more places help facilitate the translation of academic work to the policy world, people will also want to become more involved. I think there’s too much of a disconnect right now between academia and the policy world. There are certainly academics who are very involved in policy, but that’s definitely the exception more than the rule. My hope going forward is places like your organization will help bring in academics and say, “What can we learn broadly from this research agenda?” And then you can work with the academics to help translate their work in a way that is useful to those making the policies. I think a lot of academics have a hard time making that link.

Why enforcing U.S. labor standards may be more important than ever

Posted on by Meghan Miller
People look at their respective computer screens during a resume writing class in Dallas, March 2017.

Despite President Donald Trump’s promise “to stand up for the American worker,” his administration has already taken major steps to roll back worker protections. In March, Trump proposed eliminating and the Republican-controlled Congress did eliminate rules discouraging the awarding of federal contracts to companies with a history of stealing their employees’ wages, violating workplace safety standards, and/or illegally discriminating in hiring and pay. The president’s “skinny budget” then proposed a 21 percent cut for the U.S. Department of Labor, and last month, the Office of Management and Budget directed agencies to begin the process of reorganizing, raising concerns that the administration intended to consolidate enforcement and oversight.

The administration’s full budget proposal for fiscal year 2018 only heightens these concerns about worker protections. That’s why it is worth keeping in mind the consequences of budget cuts and consolidation of enforcement responsibilities for workers in the United States. Because of fundamental shifts in the way the U.S. labor market is organized, regulatory oversight is arguably more important now than ever.

Department of Labor agencies such as the Wage and Hour Division, the Occupational Safety and Health Administration, the Mine Safety and Health Administration, and the Office of Federal Contract Compliance Programs all play key roles in enforcing basic employment protections for American workers. The Wage and Hour Division, for example, ensures that employers abide by the Fair Labor Standards Act’s minimum wage, overtime, child labor, and nursing mothers’ break-time provisions, in addition to enforcing the job protections under the Family and Medical Leave Act and other critical labor standards designed to provide protections to workers.

Effective enforcement of basic labor standards is key for functional capitalism. A growing body of research suggests that labor standards improve productivity and economic performance. For instance, wage and work-time regulations can translate into greater worker productivity and lower employee turnover. Safety standards can reduce costly accidents and health care costs. And employment protection—including job-protected family leave—can encourage labor force participation and spur innovation.

Four key structural changes to the U.S. labor market make rigorous “strategic enforcement” of worker protections especially critical.

First, as Boston University economist and former Department of Labor Wage and Hour Division Administrator David Weil demonstates in his recent book, the U.S. labor market has “fissured,” and employer-employee relationships are more complex than ever before. Employers have contracted out, subcontracted, outsourced, and devolved many functions that were once accomplished in-house. Fissuring can occur because a business is motivated to focus on core competencies, but it can also result from a business’s desire to shift labor costs and liabilities to small-business or third-party intermediaries such as temp agencies. Multiple studies document the increasing incidence of employee misclassification—identification of employees as subcontractors—in order to subvert compliance with labor policies ranging from payroll tax, workers’ compensation, and other related taxes. Because most existing workforce regulations assume a straightforward relationship between employer and employee, fissuring creates significant challenges for effective enforcement of existing labor standards.

Second, the decline of union density increases the importance of government enforcement of worker protections. The private-sector union membership rate declined from 16.8 percent in 1983 to 6.7 percent in 2015, the last year for which complete data are available. Unions have typically played a critical role in implementing workforce policies, not only through political leverage but also due to their key role in assisting workers in exercising their statutory rights. A decline in unionization therefore reduces the ability of regulators to oversee the workforce effectively.

Third, America’s New Deal-era regulatory framework is out of sync with current structures of industrial organization. Most of our workforce protection regulations were designed at a time when the typical business entity was a manufacturing company such as General Motors Corp., a large workplace establishment with a stable workforce, expectations for career-long employment, fixed facilities, and clear structures of employment responsibility and liability. The fissuring of the U.S. workplace has changed all of this, but the shifts in industrial organization are due not only to fissuring but also to fundamental shifts in the composition of the U.S. economy. Today, employment is no longer primarily in manufacturing but rather in services such as health care, retail, and other sectors characterized by substantial shares of low-wage, lower-skill workers and a very different set of economic and competitive factors than the manufacturing economy of the 20th century. Production and work is organized very differently in childcare and health care, for instance. These changes now apply to small employers and larger employers alike. The largest private-sector employer in the United States today is Wal-Mart Stores Inc., which is organized very differently from the General Motors of the 1950s.

Finally, technological change is rapidly changing the kinds of jobs available and the organizational design of those jobs, creating a new set of risks of worker abuse that pose real oversight challenges. For instance, an increasing share of work is done at home via computer after the close of normal business hours, rendering the tracking and enforcement of hours regulations increasingly complicated. How should work hours be tracked for an employee of multiple employers that sometimes operate as one entity but sometimes operate as independent entities?

These four fundamental characteristics of the contemporary labor market—a fissured workplace, weak labor unions, new forms of industrial organization in the economy’s dominant sectors, and technological change—come together to make effective, strategic enforcement of labor protections more important than ever before. Workers in the industries with the lowest levels of compliance are the least likely to trigger complaint-driven investigations, making agency-directed investigations all the more important. This is one reason why rumors of a merging of the Department of Labor’s Office of Federal Contract Compliance Programs with the Equal Employment Opportunity Commission has generated significant concern from multiple stakeholders. The OFCCP conducts investigations of federal contractors that primarily are initiated by the agency—rather than complaint-based—to deter discrimination against women, minorities, and veterans, while the EEOC is primarily an individual-complaint-based body designed to uphold civil rights protections.

Much has been made of the current administration’s new policy ideas, budget cuts to existing benefits programs, and rollbacks of regulatory statutes. Yet in light of the character of the contemporary labor market, it is important to remember that nonenforcement of existing law is a fundamental problem for millions of workers in the United States.

A Few Notes on the CUNY “After Piketty” Panel…

Posted on by Brad DeLong
Cursor and After Piketty

After Piketty: The Agenda for Economics and Inequality http://amzn.to/2q0TevJ

Themes worth noting from the After Piketty CUNY launch event—that I missed, being on the wrong coast.

But having been on the wrong coast, I can now add, in a l’esprit d’escalier sense, what I would have said if I had been there, had been thinking very quickly, and had the last word:

(1) “Capital” vs. “Wealth” in PIketty’s Capital in the 21st Century

Branko Milanovic: Not a confusion, but the use of “capital” for wealth was criticized because for economists “capital” is productive capital: the input into the production function in the theory of growth, and so on. But “wealth”, for people who work on income distribution like myself, includes all other things, including real estate, and other things which are even not necessarily immediately marketable. Although, obviously, real estate is. So there is a little bit of a difference between the two. In the book… the two are really conflated…

Paul Krugman: The place where I think is closest to him being—wrong is not quite the right word—where there is a really serious critique from the economists’ point of view—I defer the historical social issues to other people–he makes a lot about the rising ratio of capital to income. That we’ve been accumulating capital in a way. That we had a lot of capital destroyed by the by the wars of the 20th century. Then we restore it and we get a much more capital. He talks about this as a story of there’s more and more capital out there and that this given certain parameters whatever it tends to raise the capital share of income even as it reduces the rate of return. The thing that has become clear is that an awful lot of that rise in the value of capital is real estate. A lot of the Piketty book is written as if there’s capital and there’s labor. That is true. But an awful lot of the capital by value turns out to be housing. That does change your picture significantly. It doesn’t mean that the underlying thesis is wrong, but it means that that it’s a little harder to make his case than might otherwise have seemed to be the case…

Brad DeLong: If “capital” in Piketty is taken to mean what neoclassical economists typically mean by “capital”—the argument K in some aggregate production function, produced means of production elastically produced under constant returns to scale and valued at their replacement cost—then Piketty’s argument does appear to have a major problem. We then face what Keynes called the euthanasia of the rentier as the capital stock-annual output ratio rises: the observed technical elasticity of substitution between capital and labor strongly suggests that the rate of profit falls more in relative terms than the capital stock-annual output ratio rises, and so the wealthier superrich receive a smaller share of society’s income over time.

But it was never Piketty’s intention for “capital” in his book to mean only he argument K in some aggregate production function, produced means of production elastically produced under constant returns to scale and valued at their replacement cost. As Thomas writes in his contribution to After Piketty:

Had I believed that the one-dimensional neoclassical model of capital accumulation (based upon the so-called production function Y = F(K,L) and the assumption of perfect competition) provided an adequate description of economic structures and property relations, then my book would have been 30 pages long rather than 800 pages long. The central reason my book is so long is that I try to describe the multidimensional transformations of capital and the complex power patterns and property relations that come with these metamorphoses (as the examples given above illustrate). I should probably have been more explicit about this issue, and I am grateful to Suresh for giving me the opportunity to clarify this important point…

Piketty’s intention was always to, in Suresh Naidu’s terms, be “wild Piketty” rather than “domesticated Piketty”. The book is about all of those assets that are claims on society’s income—monopoly rents, spoils of rent-seeking, real estate, brands, control over value chains, as well as productive physical capital receiving its marginal product.

You can claim that Piketty invited this confusion by titling his book Capital in the 21st Century rather than Wealth in the 21st Century. But you would not have to read far in the book to get a sense that it was, indeed, not 30 pages long but 800. IMHO, many critics of Piketty did not read far. What Ryan Avent said of Clive Crook can, I think, stand as an evaluation of a great deal of Piketty criticism:

Why, for instance, doesn’t Mr Piketty say that r must be significantly above g to generate the expected divergence, Mr Crook complains. This, after literally hundreds of pages in which Mr Piketty has walked through when and how the capital-income ratio has been pushed away from its long-run trend rate. You don’t even have to read hundreds of pages to get the qualification Mr Crook wants; you can start with the page on which r>g is first mentioned: “If, moreover, the rate of return on capital remains significantly above the growth rate for an extended period of time (which is more likely when the growth rate is low, though not automatic), then the risk of divergence in the distribution of wealth is very high.” Emphasis mine. I suppose if you only read the book’s conclusion you could miss these details, but who would do that?…

(2) “Patrimonial Capitalism”

Paul Krugman: We still have… an 80s frame of mind… visualize… self-made men, whether it’s Steve Jobs or Gordon Gekko depending upon… your take on the goodness or badness…. [But] increasingly now we are looking at patrimonial capitalism—inherited fortunes. Don’t think Steve Jobs. Think Koch brothers. Piketty makes an argument that that’s increasingly going to be the case[:]… Don’t think “Gilded Age”, which is America and which is an era of self-made men. Instead, think more “Belle Epoque”: late 19th century France, which is very much a dynastic inherited wealth thing….

To date most of the explosion of income concentration at the very top has… been… compensation… bonuses and executive pay. There’s a lot of interesting discussion of that in Capital in the 21st Century. But that is not nearly at the level of rigor of explanation, because it’s hard when nobody really fully understands….

I don’t think it’s a problem of us mislabelling what is truly “capital income”. If you look at what a hedge fund manager or a Fortune 500 CEO receives, he—and almost always he—because of the inherited wealth that he brought to the table. It is associated with the job. whether it’s “earned” in a social sense is a whole different question. What is true is that the way that income comes for such people is very different from the way it comes from an ordinary wage or salary worker. It’s not that there’s a job and there’s pay. It’s that you do something. You climb. It comes in the form of stock options—although those are actually a lot less tied in reality to the price of the stock than people think. The basis tends to get adjusted. In the finance industry it comes from however much profit you’ve managed to make.

What’s odd is that argument is used sometimes to defend preferential tax treatment. And we have the “carried interest” loophole, which lets people in the finance industry pay much lower tax rates. The argument is: well, yes, they’re working hard and all this stuff, but the returns to that labor are highly uncertain, so you don’t want to treat it as normal income. To that, some of us say: you know, I’m writing a book in which you put often an awful lot of work, and then you have no idea how much if any money you’re going to make at the end. And somehow or other I’m paying a full rate.

There’s something going on. To a large extent this is a category of income that must have always existed. John D. Rockefeller, the original John D. Rockefeller, did not inherit his wealth. For most of his life he presumably was making most of his money through the profits of his enterprises rather than as return on his accumulated capital. But it seems to be much more prevalent now than it was before. That is a bit of a problem for the Piketty argument. He is saying: inherited wealth will go back to becoming much more central. But I don’t think it’s a fundamental category error.

Salvatore Morelli: The original Piketty and Saez studies on top incomes in the U.S. were showing that, relatively speaking, labor income was much more prevalent at the top—if we exclude the top 0.001%, of course. But it’s also true that that study in particular was based on tax statistics, so on tax returns. The problem is that not all the capital income is reported in the tax returns. Importantly, a growing share of capital income is not reported. This led Thomas Piketty and Emmanuel Saez and Gabriel Zucman to do a follow-up study, which is now part of the DINA Project—Distributional Income National Accounts. What they did is to take the national account income and distribute it back to the population so that it does not suffer from the tax-reporting bias. When you do that, it’s actually surprising to see how capital income rises across the distribution. Even at the bottom of the distribution you have a lot of capital income—most of capital income from tax-exempt savings accounts was not reported in tax statistics. When you get to even the top 10% people are earning more income from capital and not from labor. The research question is still open. But I wanted to point that out.

Paul Krugman: Returns and profits—dividends and capital gains—which are popping up in your account in the Bahamas are just not going to be in the original Piketty-Saez data. That means that we actually are more like the 19th century than we think we are, yes.

Branko Milanovic: There is an analysis based on the French data only, because that’s the only country which apparently has the data, which shows what percentage of people would inherit what amount of money which would allow them, given improving life expectancy, to with that money live at a medium level of income for that country. That is, actually, a very impressive statistic. When you think that if I inherit something that would actually allow me to live at the mean income level of my country until I die, it is really a very strong sort of inequality that brings back the role of inheritance very strongly….

Brad DeLong: In the old days you would not get stock options—you would simply be handed the stock in a corporate organization or reorganization. Rather than showing up in the income statistics at its option value when your stock options were granted you and then at the difference between market value and strike price when you exercised your options, they would not show up in the income statistics at all. Thus even leaving to one side all of the tax-avoidance, tax-evasion, and data-quality issues, it is somewhat misleading to say that the superrich get much much more of their income from “labor” now than they used to.

And, of course, calling it “labor” and invoking marginal product theory is totally misleading. The most that the ideologues of the right seeking to justify the superrich will say is that “tournaments” are effective effort-elicitation mechanisms: that because of the cognitive biases and deficits of the CEO-financier-entrepreneurial class, you elicit an enormous amount of effort from many people relatively cheaply by offering a few really big prizes.

But the societal benefits of all of this enormous effort are missing. Corporate control is no better than it was in the 1950s. CEOs are no better than in the 1950s. Economic growth is certainly worse than in the 1950s. And as for risk management—ha!

(3) Politics: Belle Époque France and Progressive Era America

Paul Krugman: One piece that really impressed me in Piketty was the discussion of the Third French Republic, which is “liberte, egalite, fraternite”, and yet politics is dominated by vast inherited wealth dynasties. A point he makes is that the intellectual domination—that the fact that inherited wealth in effect managed to set the terms of discussion and to define what was responsible, what you could do. You
can easily see that looking at a lot of things are going on in America now. How that happens we can talk about. We can talk about foundations. We can talk about influence. We can talk about all of those things…. A countervailing thing… [is] the United States in the Progressive Era… a vastly unequal society… in which it was quite common for people—often people who were themselves very much on the top—to express ideas that would be regarded as radically left-wing today… to talk about the dangers of vast wealth… the importance of high inheritance taxes to prevent concentration… people—I believe including Theodore Roosevelt—saying things like: we would want to tax this wealth even aside from the revenue we raise, for we want to make sure that these great fortunes do not accumulate. For anyone to try to say that now you would be accused of being a radical Marxist. Maybe the dominance of patrimonial wealth is not—the intellectual dominance is not necessarily as large as we might imagine…

Brad DeLong Andrew Carnegie’s “he who dies rich dies disgraced”… The transformation to what we have today is very interesting… I remember a panel I did at Rice University with R. Glenn Hubbard. The two-step was something like: financial inheritance really does not matter because the truly valuable things our children inherit from us is the good values we inculcate in them—therefore, because they have good values, they deserve to inherit our money too. It did not seem to me to make much sense.

(4) Stakeholders

Paul Krugman: The last thing I want to say is: countervailing institutions…. Maybe my imagination is limited, but it’s hard for me to think of anything that I know in my history that is comparable to the historical but now largely vanished role, at least in this country, of unions. Organized labor has always been the huge counterweight to organized wealth. That diminution—if you ask me what would be the one thing that I would want to see happen to get us back, it would be somehow rather to restore the role of a substantial effective labor movement….

I almost hate to use the language of responsibility, not out of any personal moral aversion but because I don’t think they care. The point was that they did in fact. In the America I grew up in, there were large corporations viewed themselves as representing a variety of stakeholders—not simply not simply the stock investors. That included labor. That was partly either because they were unionized or because they knew there were unions out there, and knew that they knew would become unionized if they did not represent all stakeholders. Thus there is certainly a way in which the private sector can play a role in being an institution for equality. That is in fact the way America was for about 40 years after WWII. So it can happen here. Whether and how we get to make that happen now—I don’t know. Think about a corporate executive who has various interests. He wants to be rich. He wants to not have this employees hate him. If there’s a ninety-one percent marginal tax rate, as there was in the in the 50s, he’s probably going to pay more attention to the to the personal non-pecuniary aspects of the job. Part of the explosion of top incomes probably does reflect the fact that we’ve made it possible for people to keep whatever they get by making life harder for other people…

Brad DeLong: How much soft compensation did CEOs receive in the era of social democracy anyway?

The big countervailing institution is supposed to be the government: we are supposed to vote for progressive taxes, on the grounds that most of what produces the superrich is good luck, and good luck is a very good thing to tax—we would all agree to very high taxes on good luck if we were to make decisions back behind the veil of ignorance.

The Trump minority coalition—and the right-wing coalition generally—have been running, ever since the late-nineteenth century breaking of real American Populism on the anvil of racism, on the claim that the superrich are worthy because they are people like us while progressive taxes are illegitimate because the benefits flow to them, and they are not people like us. Obamaphones!

Alexis de Tocqueville had something very interesting to say about this, back at the end of the 1840s, in the very brief interregnum between Orleanist Monarchy and Second French Bonapartist Empire that was the Second French Republic:

I was at once struck by a spectacle that both astonished and charmed me. A certain demagogic agitation reigned, it is true, among the workmen in the towns ; but in the country all the landed proprietors, whatever their origin, antecedents, education or means, had come together, and seemed to form but one class: all former political hatred and rivalry of caste or fortune had disappeared from view. There was no more jealousy or pride displayed between the peasant and the squire, the nobleman and the commoner ; instead, I found mutual confidence, reciprocal friendliness, and regard. Property had become, with all those who owned it, a sort of badge of fraternity. The wealthy were the elder, the less endowed the younger brothers ; but all considered themselves members of one family, having the same interest in defending the common inheritance. As the French Revolution had infinitely increased the number of land-owners, the whole population seemed to belong to that vast family. I had never seen anything like it, nor had anyone in France within the memory of man….

[During the June insurrection,] I returned from my round convinced that we should come out victorious ; and what I saw on nearing the Assembly confirmed my opinion. Thousands of men were hastening to our aid from every part of France, and entering the city by all the roads not commanded by the insurgents. Thanks to the railroads, some had already come from fifty leagues’ distance, although the fighting had only begun the night before. On the next and the subsequent days, they came from distances of a hundred and two hundred leagues. These men belonged indiscriminately to every class of society ; among them were many peasants, many shopkeepers, many landlords and nobles, all mingled together in the same ranks. They were armed in an irregular and insufficient manner, but they rushed into Paris with unequalled ardour : a spectacle as strange and unprecedented in our revolutionary annals as that offered by the insurrection itself. It was evident from that moment that we should end by gaining the day, for the insurgents received no reinforcements, whereas we had all France for reserves.

On the Place Louis XV, I met, surrounded by the armed inhabitants of his canton, my kinsman Lepelletier d’Aunay, who was Vice-President of the Chamber of Deputies during the last days of the Monarchy. He wore neither uniform nor musket, but only a little silver-hiked sword which he had slung at his side over his coat by a narrow white linen bandolier. I was touched to tears on seeing this venerable white-haired man thus accoutred. “Won’t you come and dine with us this evening?”

“No, no,” he replied ; ” what would these good folk who are with me, and who know that I have more to lose than they by the victory of the insurrection — what would they say if they saw me leaving them to take it easy ? No, I will share their repast and sleep here at their bivouac. The only thing I would beg you is, if possible, to hurry the despatch of the provision of bread promised us, for we have had no food since morning”…

(5) Politics

Paul Krugman: The issue polling is interesting because for the most part as I read it it says that likely voters basically have center-left views—that the center-left movement that we say is dying is in fact, on by the issues, almost all of them, what people support. People believe in guaranteed health care. People believe in most of the strong social safety net. They want all of these things.

The most recent polling obviously has the United States has been on two things. Health care, where people just absolutely hate what’s being proposed. They suddenly discover that they love Obamacare now that it’s maybe its way out.

What was interesting—and this is maybe the last word—is the poll that came out I think this morning—Quinnipiac—showed people with very center-left views on almost everything. The one piece of the current administration’s tax agenda that people do approve of is abolition of the estate tax.

So it turns out that people want a strong welfare state, a strong middle class, and patrimonial capitalism…

Brad DeLong: As Heather Boushey said: go figure.

Should-Read: Branko Milanovic: Liberation from the Shackles of Space

Posted on by Brad DeLong

Should-Read: Branko Milanovic: Liberation from the Shackles of Space: “A couple of things are worth noticing regarding the second unbundling… http://glineq.blogspot.ch/2016/12/liberation-from-shackles-of-space.html

…First, huge importance of institutions…. When the production is delocalized, the quality of institutions, infrastructure or politics  in the recipient country matters enormously to the center. If designs are stolen, produced goods impounded, travel of people between the center and the offshore location made difficult, the entire production structure of the company collapses. For the center, the quality of institutions in the offshore location becomes  almost as important as the quality of institutions locally.

Second… while in the past developing countries were trying to induce foreign investors to share their know-how, now the center (mother company) has all incentives to make sure the best technology is used because the offshore location has become an integral part of the center’s production chain.  This is an enormous change: rather than begging or incentivizing the rich country’s company to transfer technology, now the owner of that technology is herself keen to transfer to the offshore location as much of it as possible.

The great convergence from which the book takes its title, that is the remarkably fast growth of Asia, can thus be understood to have been made possible by an improvement in institutions and much greater transfer of technological know-how. And with both being directly related to the second unbundling. To put it simply: Asia grew thanks to globalization…

Must-Read: Larry Summers: A warning on Trump’s budget: “You cannot use the growth benefits of tax cuts once to justify an optimistic baseline and then again to claim that the tax cuts do not cost revenue…

Posted on by Brad DeLong

Larry Summers: A warning on Trump’s budget: “You cannot use the growth benefits of tax cuts once to justify an optimistic baseline and then again to claim that the tax cuts do not cost revenue… https://www.ft.com/content/2ae4722a-f82f-3bbe-aba1-5b89dd8ac314

…This… is akin to buying a company assuming that you can make investments that will raise profits, but then, in calculating the increased profits, counting the higher revenues while failing to account for the fact that the investments would actually cost some money to make…. The investment has a cost that must be included in the accounting. This is a mistake no serious business person would make. It appears to be the most egregious accounting error in a presidential budget in the nearly 40 years I have been tracking them…

Even non-serious people don’t make this mistake, Larry. This is a grift pure and simple.

Should-Read: James D. Hamilton: Why You Should Never Use the Hodrick-Prescott Filter

Posted on by Brad DeLong

Should-Read: Perhaps the most remarkable thing is that neither Robert Hodrick nor Ed Prescott ever came up with any arguments for why the filter was something you ought to use. Never. Not one:

James D. Hamilton: Why You Should Never Use the Hodrick-Prescott Filter: “Here’s why. (1) The HP filter produces series with spurious dynamic relations that have no basis in the underlying data-generating process… http://www.nber.org/papers/w23429#fromrss

…(2) Filtered values at the end of the sample are very different from those in the middle, and are also characterized by spurious dynamics. (3) A statistical formalization of the problem typically produces values for the smoothing parameter vastly at odds with common practice, e.g., a value for λ far below 1600 for quarterly data. (4) There’s a better alternative. A regression of the variable at date t+h on the four most recent values as of date t offers a robust approach to detrending that achieves all the objectives sought by users of the HP filter with none of its drawbacks…

U.S. over-education and underemployment over the course of a lifetime

Posted on by Meghan Miller
A woman looks at job postings at the New York State Department of Labor, July 2009.

As newly minted college graduates start to enter the labor force in the coming weeks and months, the specter of underemployment hangs over some graduation ceremonies. Concern about having to take a job that doesn’t require a college degree is down from when the labor market earlier this decade was much weaker, but it’s still there. This sort of job mismatch is usually thought of as a concern for young workers. Yet as much as we think of underemployment as a problem for young workers, some new research shows that it may be more prevalent for older workers.

In a new working paper released today by the Washington Center for Equitable Growth, Georgetown University doctoral candidate Ammar Farooq looks at “over-education” over the course of a lifetime. Using data on the educational requirements of occupations and employment data during the 2000s, Farooq can see what shares of college-educated workers at different ages are in jobs that don’t require a degree. The result is a U-shaped relationship as workers age—a relationship that shows college graduates are more likely to start off in jobs for which they are overqualified, then work themselves into positions more in line with their educational attainment as they approach middle age, only to reverse course as they grow older. (see Figure 1)

Figure 1

What accounts for this U-shaped curve? Looking at data on the transition between over-education and being in a properly matched job, Farooq finds that as college-educated workers age, they are increasingly likely to move into a job that doesn’t require a degree and are less likely to move into a job that does require one.

Interestingly, Farooq also finds that almost half of the moves into underemployment—defined as having a job for which one is overqualified—don’t happen after workers with college degrees become unemployed. Instead, about half the moves happen when these workers are already employed but shifting into positions that require less than a college education, peaking at around 60 percent of all moves during ages 40 to 45. This means that transitions aren’t all about unemployment forcing workers into jobs for which they may be overqualified. And while working part time increases the probability of being overemployed, after controlling for this and other characteristics, the trend is still U-shaped over time.

Furthermore, when workers are moving into jobs that don’t require a degree, they aren’t moving into jobs that require lots of experience. Those job moves also result in wage declines for the worker.

Whatever the cause of this particular U.S. labor market trend, these trends indicate that the “cruel game of musical chairs” in the job market isn’t exclusively a problem for the young. College-educated workers later in life are likely to move into jobs they are seemingly overqualified for. It seems like chairs are being pulled out from under more workers than previously thought.

Should-Read: Michael Clemens: What the Mariel Boatlift of Cuban Refugees Can Teach Us about the Economics of Immigration: An Explainer and a Revelation

Posted on by Brad DeLong

Should-Read: Yes. The invariable rule is that results George Borjas reports on immigration should be handled with tongs and asbestos mitts. Why do you ask? https://www.cgdev.org/blog/what-mariel-boatlift-cuban-refugees-can-teach-us-about-economics-immigration

Michael Clemens: What the Mariel Boatlift of Cuban Refugees Can Teach Us about the Economics of Immigration: An Explainer and a Revelation: “The Borjas study had a critical flaw that makes the finding spurious…

…That flaw is explained in a new research paper that I co-authored with Jennifer Hunt, who is the James G. Cullen Professor of economics at Rutgers University. In this blogpost, I explain the flaw and why it reinforces earlier findings that the Mariel Boatlift influx of Cuban immigrants did not reduce wages of Miami workers…. The study focuses on a small group within that larger sample, a group where the sample shifted to include a lot more black male workers with relatively low wages—simultaneously with the Boatlift. This has the effect of sharply reducing the average wage of people in the sample, but this had nothing to do with the Cuban influx…

Must-Read: Nicholas Bagley: Taking the Nuclear Option Off the Table

Posted on by Brad DeLong

Must-Read: I am now hopelessly confused.

I get that it Trump drops the appeal—and if states have not intervened—that the executive is thereafter enjoined from paying the cost-sharing payments.

But I did not think that the executive was required to pay the cost-sharing payments. It was simply not required not to pay the payments. If the Justice Department decides that the House is right as a matter of law, what stops Trump from accepting that legal advice and stopping the cost-sharing payments?

I would have thought that the states would not only have to intervene, but to obtain an injunction requiring Trump to continue to pay the cost-sharing payments until final adjudication is attained.

So I am hopelessly confused here…

Nicholas Bagley: Taking the Nuclear Option Off the Table: “Last Thursday, fifteen states and the District of Columbia moved to intervene in House v. Price… http://theincidentaleconomist.com/wordpress/taking-the-nuclear-option-off-the-table/

…This is a bigger deal than it may seem, and could offer some comfort to insurers that are in desperate need of it. Apologies for the long post, but the law here is complex and uncertain…. The district court sided with the House and entered an injunction prohibiting the payments. The court, however, puts its injunction on hold to allow for an appeal. The Trump administration has now inherited the lawsuit…. If Trump drops the appeal, which he has threatened to do, the injunction would spring into effect and the cost-sharing payments would cease immediately, destabilizing insurance markets across the country. It’s the nuclear option.

If the states are allowed to intervene, however, they could pursue the appeal even if Trump decides to drop it. With the appeal in place, the injunction couldn’t take effect until the case is heard and decided…

Should-Read: Stan Collender: This Week’s Rollout Of Trump 2018 Budget Could Be His Biggest Failure Yet

Posted on by Brad DeLong

Should-Read: Stan Collender: This Week’s Rollout Of Trump 2018 Budget Could Be His Biggest Failure Yet: “There was no Trump speech to… Congress last week at which his budget was featured… https://www.forbes.com/sites/stancollender/2017/05/21/due-tuesday-2018-budget-could-be-trumps-biggest-failure-yet/

…The president won’t even be in the country (or even in a U.S. time zone) when his budget is released…. [No] budget-related press conference… [or] victory lap… The White House will be stepping on the budget story big time… Neither OMB Director Mulvaney nor any other Trump economic official is scheduled to be on… talk shows…. Mulvaney’s first testimony… virtually certain to get much less attention… [than] the Congressional Budget Office[‘s]… estimates of the impact of the House-passed American Health Care Act…. The Republican leadership let it be known that the House might have to vote on the bill a second time because, as reported, it might not satisfy all of the Senate’s Byrd rule requirements….

Given how poorly the rollout of the Trump 2018 budget is being planned, it could easily disappear from view and be ignored before the end of the week. At best it will be a missed opportunity for the Trump White House. At worst, it will be one of the Trump administration’s worst policy and governing failures…