Must-Read: Josh Barro (2012): Yes, the 1990 Budget Deal Spending Cuts Were Real

Posted on by Brad DeLong

Must-Read: This “mistake”—by Ryan Ellis of Americans for Tax Reform—is not the kind of “mistake” that one can make by accident:

Josh Barro (2012): Yes, the 1990 Budget Deal Spending Cuts Were Real https://www.bloomberg.com/view/articles/2012-12-27/yes-the-1990-budget-deal-spending-cuts-were-real: “When you talk with conservatives about why they resist deficit-cutting deals…

…a response you often hear is that these deals produce real tax increases and illusory spending cuts…. But the deal conservatives hate most, the Budget Enforcement Act of 1990 (the one where President George H.W. Bush broke his “no new taxes” pledge) really did cut spending as promised. The claims that it didn’t are based on bad math. Ryan Ellis of Americans for Tax Reform made the usual “fake spending cuts” case against the 1990 deal last year…. This is false! The CBO’s five-year projection for spending prior to the 1990 budget deal was not $7.07 trillion… [but] $7.28 trillion…. The CBO had forecast $7.07 trillion in spending over this period in January 1990; this is the figure Ellis cites. The Budget Enforcement Act wasn’t enacted until November. In the intervening period, two things happened. First, tax collections were weak, leading the CBO to cut its revenue projections over the following five years. Second, the apparent cost of the ongoing savings and loan bailout through the Resolution Trust Corporation greatly increased….

When the CBO looked back at the Budget Enforcement Act in 2003, it found that Congress had actually adhered closely to its discretionary spending caps all the way through 1998, never exceeding the caps by more than $10 billion. (See the table on page 115.) Congress lost discipline after that, probably because the budget moved into surplus and spending restraint no longer seemed necessary. Of course, that heady desire to spend (and cut taxes) persisted much longer than the surpluses did. You don’t have to like the outcome of the Budget Enforcement Act of 1990, particularly if your primary concern is keeping taxes low. But you can’t argue that its promised spending cuts didn’t materialize, unless you think $7.09 trillion is more than $7.09 trillion.

Should-Read: Matthew C Klein: Tarullo Exits Federal Reserve

Posted on by Brad DeLong

Should-Read: This strikes me as a very bad move indeed.

Dan Tarullo is a much better Governor of the Federal Reserve than anyone I can imagine Donald Trump nominating in his place.

So why is he leaving?

It’s not as though the fact that Federal Reserve Governors are notionally appointed to fourteen-year terms is a secret…

Matthew C Klein: Tarullo Exits Federal Reserve https://ftalphaville.ft.com/2017/02/10/2184358/tarullo-exits-federal-reserve/: “Daniel K. Tarullo submitted his resignation… as a member of the Board of Governors of the Federal Reserve System, effective on or around April 5, 2017…

…Tarullo, 64, was appointed to the Board by President Obama for an unexpired term ending January 31, 2022…. Tarullo was the Fed’s point man on financial regulatory issues, although he was never confirmed to the role of Vice Chairman for Supervision and was often undermined by the Fed’s far more powerful General Counsel, who, as it happens, is also leaving. His departure adds to the two open spots on the Federal Reserve Board, which in principle is supposed to have seven members.

Must- and Should-Reads: April 7, 2017

Posted on by Brad DeLong

Interesting Reads:

Should-Read: Neville Morley: Keep Lectures Live!

Posted on by Brad DeLong

Should-Read: Neville Morley: Keep Lectures Live! https://thesphinxblog.com/2017/03/03/keep-lectures-live/: “Sitting in silence, concentrating on the real-time exposition and exegesis of material and the development of arguments and analysis…

…a combination of preparation and spontaneity – and developing one’s own critical commentary alongside is a valuable exercise in itself (and not, as I tended to think when an undergraduate, a pointless exercise when one could read the book instead). Moreover, it makes learning a social activity, alongside the solitary work in the library: “classrooms are a community”, and taking away the structures and rhythms of that community will inevitably weaken and undermine it….

Differentiating the actual lecture from the live recording is a bit trickier, but not impossible. It’s about making the experience something that students – or at least most of them – will value and so pay more for (at least by investing time and effort in getting out of the house, finding their way to the lecture theatre etc.). It’s a chance (not of course the only chance) to ask me questions, as well as to meet one another, but more importantly – at least in my view – there is the stuff that doesn’t get into the recording. You have to be there, above all for the sections that are not simply me talking…

Must-Read: Kevin O’Rourke and Jeffrey Williamson: The spread of modern manufacturing to the poor periphery

Posted on by Brad DeLong

Must-Read: Kevin O’Rourke and Jeffrey Williamson: The spread of modern manufacturing to the poor periphery http://voxeu.org/article/spread-modern-manufacturing-poor-periphery: “Factor endowments: had a profound impact…

…Labour-abundant and resource-scarce countries could enter at the bottom of the ladder, producing and exporting labour-intensive products (e.g. East Asia). Labour-scarce and high-wage periphery countries could not exploit that strategy, and thus relied on a tariff-protected domestic market (e.g. Latin America). Where the labour-scarce economy had only a small domestic market (e.g. Southeast Asia), industrial growth was difficult…. Sub-Saharan Africa, Latin America, and Southeast Asia… resource-abundant and labour-scarce… commodity export processing, and later import substituting industrialisation, were the typical routes….

The supply of educated labour seems to have been just as important as the supply of overall labour in improving the ability of poor countries to develop modern manufacturing. When modern manufacturing began its spread to the periphery, a lack of skills was often an important constraint…. European colonisers damaged their colonies: it was not until their colonies achieved independence that major progress was made towards providing universal primary (and later secondary) education. After independence, a literacy revolution took place almost everywhere around the periphery.

It was easier to overcome a shortage of financial and physical capital than human capital…. Financial capital was borrowed from abroad… in the first global century up to WWI for Imperial Russia, colonial India, and Latin America. But borrowing from abroad was only possible when international capital markets were functioning properly, and this was not the case during the de-globalising years from the 1920s to the 1970s. Even more important than financial capital inflows were imports of equipment and machinery, which embodied up-to-date technology. These imports were crucial…. They had to be paid for with export earnings when international borrowing was difficult. Otherwise, balance-of-payments constraints suppressed investment…. Governments attempted to relax these constraints in various ways….

International context and luck:… World commodity price trends and their volatility were central to local manufacturing profitability and performance…. Since world markets for manufactured exports mattered, so did geography…. Regional agglomerations… linked to trade connections with the rest of the world: port cities offered access to foreign capital, cheap raw material imports, entrepreneurship, and modern technology, or access to foreign markets…. Finally, luck mattered…. Latin America dropped its trade barriers in the late 1970s only to have China flood world markets with manufactures…. Southeast Asia started its miracle in the 1970s when Japan shifted from labour-intensive to capital-intensive technologies and used FDI to move their older technologies to Malaysia, Thailand, and other Southeast Asian countries. The region was again favoured by a booming Chinese market starting in the 1980s….

Policy:… Tariffs spurred the growth of import-competing manufacturing, but they hampered the growth of export-oriented commodity processing, and early on this was the most important modern industrial activity in resource-abundant and labour-scarce regions…. In labour-abundant countries, labour-intensive manufacturing had at least a chance of getting off the ground without the artificial stimulus of tariffs…. In labour-scarce countries, however, protection was probably going to be required if labour-intensive manufacturing was to get off the ground: industrialisation in peripheral Europe and Latin America typically originated behind tariff barriers… [but] when these countries liberalised in the 1980s and 1990s, many lost a good deal of the industry that had been built up under protection….

The impact of policy was particularly dramatic in those economies which turned to Communism…. All promoted capital-intensive heavy industry for ideological reasons…. The experience following liberalisation in the 1980s or 1990s has differed greatly…. Chinese central planners helped lay the foundation for the subsequent growth miracle, by changing factor endowments, importing technology, and providing a manufacturing base that would become much more efficient. East European countries have deindustrialised since 1989, while even Russia has reverted to more resource-exporting. India, which also pursued capital-intensive industrialisation strategies, saw its service sector expand dramatically after liberalisation…

Equitable Growth’s Jobs Day Graphs: March 2017 Report Edition

Posted on by Austin Clemens

Earlier this morning, The U.S. Bureau of Labor Statistics released new data on the U.S. labor market during the month of March. Below are five graphs compiled by Equitable Growth staff highlighting important trends in the data.

1.

The share of workers in their prime working years jumped up to a new high of 78.5 percent for this recovery. But the prime-age employment rate still has a way to go to match the 2007 peak of about 80 percent, never mind the 2001 levels of around 82 percent.

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2.

The U-6 rate, a broader measure of labor market slack than the unemployment rate, declined in March, but still is above pre-recession levels.

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3.

Nominal wage growth is increasing for all workers but it declined to an annual 2.3 percent rate in March for production and nonsupervisory employees from 2.5 percent in February. And this is happening as headline inflation is increasing.

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4.

Manufacturing jobs, a focus of much policy conversation, still have not recovered from the Great Recession and growth rates are slow. In contrast, education and health services have been steadily growing for the last decade.

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5.

The overall unemployment rate fell to 4.5 percent in March, but let’s not forget the significant variation in unemployment by educational levels.

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Evidence of ongoing gender discrimination in the U.S. labor market

Posted on by Emilie Openchowski
Traders works on the floor of the New York Stock Exchange.

In his 1957 book, The Economics of Discrimination, the late Nobel Prize-winning economist Gary Becker argued that well-functioning markets work inexorably to eliminate racial, and other forms of, discrimination.

By Becker’s reasoning, if an employer, for example, had an ingrained prejudice against workers from a particular group, then that employer would be at a competitive disadvantage relative to employers who did not have the same prejudice. If, say, an employer believes—incorrectly—that workers from one group are inherently less productive, then he or she will offer members of that group lower wages. Meanwhile, his or her competitors who do not hold the same prejudice will offer members of the same group higher wages that are commensurate with their actual level of productivity.

Oversimplifying somewhat, Becker argued that in the long run, nondiscriminating employers will attract more productive workers and will grow, while those employers who discriminate will see their businesses wither and eventually die. This kind of theoretical argument has led many economists over the years to doubt the existence and especially the persistence of labor-market discrimination based on race, gender, religion, and other characteristics. A new paper by Mark Egan of the University of Minnesota, Gregor Matvos of the University of Chicago, and Amit Seru of Stanford University, however, joins a large body of more empirically oriented research that strongly suggests that discrimination remains an important feature of contemporary labor markets.

Egan, Matvos, and Seru have constructed a unique dataset containing information on all of the 1.2 million registered financial advisors operating in the United States between 2005 and 2015. Their data include information on each advisor’s gender, employment history, assets under management, professional licenses held, and industry exams passed, as well as records of any formally reported customer disputes and related disciplinary actions. Misconduct, as measured by the authors of the paper, included churning accounts, breaches of fiduciary duty, fraud, negligence, risky investments, and other forms of financial wrongdoing. Each year, about 0.7 percent of male advisors and about 0.3 percent of female advisors were involved in these forms of misconduct.

The three researchers use the new dataset to ask whether firms treat male and female financial advisors differently after they have been accused of misconduct. The data point solidly in the direction of employer discrimination against female financial advisors. Relative to male advisors, female advisors were less likely to engage in any kind of reported financial misconduct, were less likely to be repeat offenders, and when women did engage in misconduct, the infractions were less costly to the firms where they worked.

Yet women who engaged in misconduct were, on average, subject to much harsher punishments. After engaging in misconduct, female advisors were 20 percent more likely than male advisors to lose their jobs and were 30 percent less likely to be hired subsequently by another financial firm. Women who did manage to land a new job as a financial adviser took significantly longer than their male counterparts to find their new job.

Egan, Matvos, and Seru painstakingly eliminate a host of alternative explanations for these results. Maybe the female advisors were less productive than their male counterparts? The results hold even after controlling for three reasonable proxies for advisors’ productivity: assets brought to the firm, value of assets under management, and an independent, proprietary quality assessment available for a large subset of their sample. Maybe the women have less experience or more career interruptions? Again, the results hold even after controlling for on-the-job experience. Maybe the female advisors have fewer formal qualifications or certifications? No, not the case.

Their analysis leads the researchers to conclude that there are “large and pervasive differences in the treatment of male and female advisers” and the “financial advisory industry is willing to give male advisers a second chance, while female advisers are likely to be cast from the industry.”

Must- and Should-Reads: April 5, 2017

Posted on by Brad DeLong

Interesting Reads:

Artificial Intelligence and Artificial Problems

Posted on by Brad DeLong

Over at Project Syndicate: Former U.S. Treasury Secretary Larry Summers is fencing with current U.S. Treasury Secretary Steve Mnuchin about “artificial intelligence”–AI–and related topics.

Most of their differences are differences of emphasis.

Mnuchin is drawing the issue narrowly: the particular technologies called “Artificial Intelligence taking over American jobs”. And he is, at least as I read him, is elliptically criticizing high stock market values for “unicorns”: companies with valuations above a billion dollars and yet no past record or clear future path to producing revenues to justify such valuations. **Read MOAR Over at Project Syndicate

Time for an inflation rethink?

Posted on by Emilie Openchowski
Federal Reserve Board Chair Janet Yellen testifies on Capitol Hill in Washington before the House Financial Services Committee.

Has the time come for central bankers to rethink their policy goals for inflation? In the Wall Street Journal earlier this week, David Harrison writes that just such a reconsideration may be afoot. With the Federal Reserve’s preferred measure of inflation bumping over the central bank’s 2 percent target in February, now seems as good a time as any to think about what level of inflation is necessary and proper in today’s economy. The central bank consensus around low and stable inflation was forged in a different time, and a rethink for our current situation should be welcome.

Harrison’s article mentions a new paper by economists Michael T. Kiley and John M. Roberts of the Board of Governors of the Federal Reserve system. The paper, recently released by the Brookings Institution, serves as a good jumping off point for why central banks should be thinking about their inflation goals. It looks at the conduct of monetary policy in a world where the interest rate that gets the U.S. economy to full employment and also hits the central bank’s inflation target (the natural rate of interest) is quite low.

Kiley and Roberts build a model of the U.S. economy where, given an inflation-adjusted natural rate of interest of 1 percent, monetary policy hits the zero lower bound quite often. Monetary policy gets “constrained” (can’t do more to boost economic growth) about 40 percent of the time in their model, compared to more than half that rate in other models. (Other models had assumed central banks would be ultra loose with monetary policy and that monetary policy could be constrained for only up to 4 years.) In the model, given the low natural rate of interest and a 2 percent inflation target, the central bank can’t get interest rates low enough to give the economy the full amount of stimulus it needs.

There’s one straightforward solution to this problem: Central banks can increase their inflation target. If the Federal Reserve increased its target to, say, 4 percent, then it would reduce the bind on monetary policy. The concerns about raising the target are due to the potential longer-term costs of higher inflation—though some of those costs may not be as large as many think. Remember that the Federal Reserve’s mandate is to keep prices stable. The 2 percent target, officially declared five years ago, is a choice the central bank made for itself.

But if monetary policymakers don’t want to increase their inflation target, then they might want to make it more flexible. In Kiley and Roberts’s model, hitting a 2 percent inflation target over the long term requires letting inflation rise higher than 2 percent at times. In their model, inflation ideally would need to run at about 3 percent when monetary policy wasn’t constrained. In other words, to get to 2 percent over the long run, central banks would need 3 percent inflation during good times to make up for below 2 percent inflation in bad times.

If this idea of overshooting in the good times sounds familiar, that’s because it’s at the heart of policies that would target either the level of prices or the nominal output of the economy. Kiley and Roberts describe a rule for the Federal Reserve that would have policymakers hold interest rates low until their estimate of the short-term natural rate matches the current rate. But as John Williams, president of the Federal Reserve Bank of San Francisco, points out, price-level targeting and nominal GDP targeting rules would deliver similar results.

Whether an increase in the targeted inflation rate or a change to targeting the level is needed, a change in thinking about inflation seems warranted. In a world of low interest rates, the price of not doing so may be too high.