Should-Read: N. Gregory Mankiw and Lawrence H. Summers (1984): Are Tax Cuts Really Expansionary?

Posted on by Brad DeLong

Should-Read: N. Gregory Mankiw and Lawrence H. Summers (1984): Are Tax Cuts Really Expansionary?: “If consumer spending generates more money demand than other components of GNP…

…then tax cuts may… increasing the demand for money, [may] depress aggregate demand. We examine a variety of evidence and conclude that the necessary condition for contractionary tax cuts is probably satisfied for the U.S. economy.

Mankiw, N. Gregory Mankiw and Lawrence H. Summers. “Money Demand and the Effects of Fiscal Policies,” Journal of Money, Credit and Banking, Vol. 18 (November 1986): 415-429.

Money Demand a Function of Private Consumption Spending, Not Income

Posted on by Brad DeLong

Note to Self: I alway find it interesting that Friedman and the monetarists formulated money demand as a function of income rather than of private spending, or even of private consumption spending. You don’t need or want money when your income is high, unless you want to spend it.

And it seems highly likely that the ratio of desired money holdings to planned spending is much higher for consumption than investment. Money demand should therefore be a function of private sector consumption spending–and nominal interest rates–not a function of income. We thus have:

C = MV(i)/P

Y = C + I + G + (X-M)

And from this accounting framework it is very difficult indeed to make strong monetarist conclusions appear obvious facts of nature rather than weird and tendentious claims. Mankiw and Summers made this point back in 1982. And they were totally ignored—even though it was and is a very smart point…

Should-Read: Nick Rowe: AD/AS: A Suggested Interpretation

Posted on by Brad DeLong

Should-Read: A (mostly) smart piece by Nick Rowe. But it is not wrong to start with Knut Wicksell, as long as you get to Irving Fisher. And C+I+G+(X-M)=Y is a way of starting with Wicksell–that’s why John Hicks called it the “IS Curve”. Many might find it clearer to start with Fisher (I certainly do), but experience has taught me that that is really a matter of taste.

The rest of this, however, is excellent:

Nick Rowe: AD/AS: A Suggested Interpretation: “Many macroeconomists don’t like the Aggregate Demand/Aggregate Supply framework…. So I am going to explain it…

…You will see that it portrays a deep and realistic understanding of macroeconomics that is lost in more “sophisticated” models. If you don’t start with the AD/AS framework you are doing it wrong. The AD/AS framework is useful for thinking about monetary exchange economies…. There are two ways an individual can increase the stock of money in his pocket… he can increase the flow in; or he can decrease the flow out. But what is possible for each individual may not be possible for all individuals, because one person’s flow out is another person’s flow in. Because there are… a flow out and a flow in… two equilibrium conditions…. The economy… on the AD curve when the actual flow out equals the desired flow out [given prices, incomes, fiscal policy, and the monetary policy rule]. The economy is at a point on the AS curve when the actual flow in equals the desired flow in [given wages and the difficulties of job hunting]….

Exchange is voluntary, so that actual quantity traded is whichever is less… Y=min{Yd(on the AD curve);Ys(on the AS curve)}. And… prices are sticky, so if one of the curves shifts quickly the economy will be at a point off (at least) one of the two curves. And you might want to draw a third curve that illustrates price stickiness…. And remember that whether the economy ever actually approaches the AD/AS intersection (“full-employment equilibrium”) is an open question… and the answer to that question will depend on many things, the most important of which is the monetary system or monetary policy regime…. It is easy to imagine a monetary policy regime which makes the AD curve never cross the AS curve, or slope the wrong way….

Start… with MV=PY…. Then go on to make M and V endogenous, if you wish…. And if you don’t start with money, monetary exchange, and AD and AS, you are doing macro wrong. Because the only thing that makes macro different from micro general equilibrium theory is the fact that macro incorporates the fact of monetary exchange, which microeconomists ignore…

Weekend Reading: “Stop, children, what’s that sound?” edition

Posted on by Bridget Ansel

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

A new report put out late last month by the White House Council of Economic Advisors that finds national spending levels on children are lowest for children under five. This is a major problem considering the growing body of research that clearly shows children’s future contributions to the U.S. economy are largely shaped by their early environment.

Nick Bunker writes about a study that looks at how the increase in domestic outsourcing and the use of independent contractors in the United States and Germany has affected wages and the wage distribution.

A new working paper finds that family policies, especially investment in childcare and early learning programs, boosts women’s employment outcomes in the leading developed economies.

The Upshot looked at the extent of wealth concentrated within certain elite colleges. They found that some colleges have more students from the top 1 percent than the bottom 60 percent. The feature was based on research done by a group of economists, including Equitable Growth Steering Committee members, Raj Chetty of Stanford University and Emmanuel Saez of University of California-Berkeley, as well as Equitable Growth grantee Danny Yagan of University of California-Berkeley.

Links from around the web

Dean Baker gives a good overview of the economics of Obamacare, arguing that those who want a replacement plan will have to deal with the same structural imbalances in the health care economy that the Affordable Care Act’s original authors faced. [inet economics]

Dhruv Khullar, a resident physician at Massachusetts General Hospital and Harvard Medical School, writes about the extent to which our health system is sustained by “overworked and underappreciated” family caregivers. New research finds that our reliance on this unpaid “workforce” is unsustainable, and lays out ways we can better support caregivers. [the upshot]

It’s not black and Latino people who are self-segregating into neighborhoods. Instead, sociologists find that it’s white residents, many of whom claim to want more diversity but end up looking for homes in less diverse neighborhoods, according to Alvin Chang. [vox]

With the new Trump administration being critical of certain labor regulations, Bourree Lam writes about how more people are looking to the states to protect employees from wage theft and other illegal practices. [the atlantic]

Rebecca Vallas and Katherine Gallagher Robbins give an overview of many scholars’ critical response to the controversial New York Times story claiming that soda is the No. 1 purchase by households that receive supplemental nutrition benefits. [talk poverty]

Friday figure

Figure from “Failing to invest in young kids is damaging the U.S. economy,” by Bridget Ansel.

Should-Read: Kevin Drum: Why Do Republicans Hate Obamacare?

Posted on by Brad DeLong

Should-Read: Kevin Drum: Why Do Republicans Hate Obamacare?: “Why the continued rabid opposition to Obamacare?…

…It’s not because the government has taken over the health care market. On the contrary, Obamacare affects only a tiny part of the health insurance market and mostly relies on taking advantage of existing market forces. It’s not because the benefits are too stingy. That’s because Democrats kept funding at modest levels, something Republicans approve of. It’s not because premiums are out of control. Republicans know perfectly well that premiums have simply caught up to CBO projections this year—and federal subsidies protect most people from increases anyway. It’s not because everyone hates what Obamacare does. Even Republicans mostly like it. The GOP leadership in Congress could pass a virtually identical bill under a different name and it would be wildly popular.

In the end, somehow, this really seems to be the answer:

Charles P. Pierce: @kdrum @CitizenCohn I watched it close up for a week. Sheer spite is a bigger part of it than I would’ve believed.

Republicans hate the idea that we’re spending money on the working class and the poor. They hate the idea that Barack Obama is responsible for a pretty successful program. They hate the idea that taxes on the wealthy went up a bit. They hate the idea that a social welfare program can do a lot of good for a lot of people at a fairly modest price.

What kind of person hates all these things?

Should-Read: Duncan Black: Conservative Health Care Plan

Posted on by Brad DeLong

Should-Read: Duncan Black: Conservative Health Care Plan: “Liberal Trump fanfic scenarios aside…

…the conservative plan for health care is “if you can’t pay for it, you suffer and then die.” This could be modified slightly to setting up a system by which your income is garnished for the rest of your life… or with a system that forces you to buy s—- health care insurance that you can’t afford and which won’t cover treatment anyway (ACA does this to some)…. That’s how it is, and anyone who pretends otherwise is stupid or lying. I suppose there’s some slight chance they’ll blackmail Democrats into supporting some plan which is only 90% as bad as this sounds, so that Republicans don’t get blamed for it, but otherwise that’s the only template for “replacement.

Must- and Should-Reads: January 19, 2017

Posted on by Brad DeLong

Interesting Reads:

Across developed countries, family policies help women

Posted on by Bridget Ansel

The rise of the female workforce alongside women’s increased education in high-income nations marks one of the most stunning economic transformations in recent history. Over the past 40 years, many of these countries have responded by implementing a host of family policies that make it easier for women to balance work and family life. But how effective have these policies been in narrowing the gender gap in wages and employment?

A new working paper by Claudia Olivetti of Boston College and Barbara Petrongolo of the London School of Economics examines family policy across Western, high-income European countries, the United States, and Canada to try and establish whether there is a cause-and-effect relationship between family polices, such as paid parental leave after the birth of a child and increased spending on childcare and early learning programs, and women’s employment outcomes.

Olivetti and Petrongolo show that spending on childcare and early childhood learning, whether through subsidized childcare or in-work benefits (such as the Earned Income Tax Credit in the United States), has a negative correlation with the employment gap between men and women and an even larger effect on the gender wage gap. They find that “by this same logic, this implies that wage gaps are predicted to shrink with childhood spending.” This research should be considered in light of the fact that in 2012, the United States ranked 33rd out of 36 nations in the terms of investing in early childhood care and education relative to their overall income, according to the Organisation for Economic Cooperation and Development.

The authors also look at how maternity leave policies affect women’s outcomes. Though the median combined paid and unpaid parental leave was 60 weeks for the countries in the analysis, Olivetti and Petrongolo find that maternity leave has a small, but positive, effect on women’s employment and earnings for up to 50 weeks. Leave that goes beyond 50 weeks can have a negative effect on women’s earnings and career trajectories. Considering that U.S. policymakers are considering a bill that would provide families with only 12 weeks paid leave, that means American women would see a benefit according to the author’s results.

Olivetti and Petrongolo note that once the results are broken down by education level, there is a much larger benefit for low-skilled workers, while paid leave may even be “detrimental” for college-educated women. This may be because many high-skilled jobs tend to require more face time and longer hours. Taking more than a year out of the workforce to care for a new child, as many women in some European countries do, could signal a lack of commitment in certain environments, and women may be “mommy tracked” or pushed out altogether.

It’s also important to consider that the study encompasses a time when paid leave policies were usually confined to women. The authors do admit that while many countries have begun implementing leave for fathers, albeit on a more modest scale compared to what is allotted for women, the recent time frame makes it hard to evaluate. Research shows, however, that policies that are limited to or only used by women can backfire, which may explain why the Olivetti and Petrongolo’s results are so modest.

The reason? Maternity leave policies, if not accompanied by leave for men, can lead to discrimination against young women and also lock-in gender norms within heterosexual couples trying to balance their work and home life. A carefully-designed, gender-neutral paid leave policy, however, can socialize men to help more at home and create a “large and persistent” impact on gender dynamics even years after the leave period has ended.

The extent to which the United States is an outlier in the adoption of family friendly work-life policies is remarkable. While U.S. women have caught up to men in terms of educational attainment and show high levels of labor force participation in their 20s, that number begins to drop off once they reach their 30s and 40s because of childcare responsibilities. That’s because, despite being wealthier than many of the countries in this study, the United States, as mentioned earlier, is the only country without any kind of paid leave policy and spends very little on young children, meaning that parents must pick up the slack. Many women do so by cutting back at work or dropping out altogether, to the detriment of their long-term financial security and the potential future growth of our national economy.

Outsourcing and rising wage inequality in the United States and Germany

Posted on by Bridget Ansel
Ayesha Tully, left, responds to call while Larryll Emerson, 20, waits for information pertaining to his next work assignment at the Staffmark temp agency in Cypress, Calif.

Talking or writing about the outsourcing of jobs can conjure up images of jobs moving abroad. Increasingly, however, economists are demonstrating the importance of the domestic outsourcing of jobs in the U.S. labor market. A recent paper by Lawrence Katz of Harvard University and Alan Krueger of Princeton University highlights the importance of the “offline” gig economy, such as the rise of independent contractors in the years since 2005, rather than the more talked about role of the online gig economy (think Uber) in domestic outsourcing. A book by David Weil, the outgoing Department of Labor Wage and Hour Administrator, also documents the “fissuring” of the U.S workplace as more and more work is outsourced by firms within the United States.

But how much is the increased domestic outsourcing of jobs affecting the wages of workers?

A recent paper offers an answer, at least for German workers. Deborah Goldschmidt and Johannes Schmeider of Boston University look at how the increase in domestic outsourcing has affected wages and the wage distribution in Germany. The two economists take data that records not just information about workers (wages, education level, age) but also information about the employers they work for (by industry, the wages of other workers at the firm, and other factors) These data allow Goldschmidt and Schmeider to see what happens to the wages of workers after outsourcing occurs.

The data don’t directly show when an individual worker is moved to a contractor firm despite doing the same work, so the authors of the paper create measures that let them determine if a worker has been outsourced. They then compare the wages of a worker who has been outsourced to a similar worker who stayed inside the original firm. Goldschmidt and Schmeider find that domestic outsourcing leads to wage reductions of about 10 percent.

What’s behind this decline in wages? Well, workers who get outsourced are missing out on the “rent” (essentially excess profits) that the firm is sharing with the rest of the workers. Work on the rise of wage inequality in both Germany and the United States points to the importance of inequality within firms. By siphoning off “non-core” workers into contracted firms, management at the original firm is denying access to the wage benefits of working at the firm. Such a firm effect is a good sign that firms have the power to set wages—rather than the commonplace belief that wages are set by perfectly competitive labor markets.

Godlschmidt and Schmeider’s results are specific to the German experience and can’t directly speak to the U.S. labor market. But research on outsourcing in the United States also finds significant declines in wages for outsourced workers. An analysis similar to the German one could be done for the United States by accessing data from sources such as Longitudinal Employer-House Dynamics program or the Social Security Administration. Research on inequality in the United States using social security data points toward increasing “wage segregation” as a source of rising interfirm inequality. Yet given the rising attention toward outsourcing it would be good to have more concrete estimates of its impact on affected workers’ wages by tapping both data sets.

Failing to invest in young kids is damaging the U.S. economy

Posted on by Bridget Ansel
Eric Grant takes his three-year-old daughter Makayla to preschool in Philadelphia, Friday, Jan. 6, 2017.

Over the past 200 years, the federal government and individual states developed a slate of programs to improve the education and care for children. These investments, most notably Kindergarten-through-12th grade education as well as pre- and after-school care, nutrition, and health aimed at helping children, were designed not only to boost individual welfare but also create a higher-skilled workforce and thus a stronger economy. But historically, our spending has focused on older children. And this continues to be true: A new report put out late last month by the White House Council of Economic Advisors finds that national spending levels are lowest for children under the age of five. This is a major problem considering that a growing body of research clearly shows that children’s future contributions to the U.S. economy are largely shaped by their early environments.

Today, federal, state, and local governments combined spend a average of $14,000 annually per child on education, care, nutrition, and health, among other things. But that average masks the upward trajectory of spending as children get older. Government spending is about $16,600 annually for children ages 6 to 11 (and slightly less for kids ages 12 to 18), but only $10,220 for 3- to 5-year-olds, and a meager $8820 for 0- to 2-year-olds. (See Figure 1.)

Figure 1

The lack of focus on early childhood education and care is due in part to an outdated system built on the assumption that mothers still stay home with a young child while fathers go to work—even though this post-WWII ideal was never the reality for many women, especially women of color. What’s more, other countries among the nation’s developed and rapidly developing peers have caught up. The United States today spends less than almost every other of these nations on early childhood education and care. In 2012, the United States ranked 33rd out of 36 nations in terms of investment in early childhood education relative to their overall income, according to the Organization for Economic Cooperation and Development.

Unlike the United States, these other OECD countries are reaping the benefits shown by the large body of research showing the benefits of high-quality early childhood care and education programs. Studies show these programs are one of the best ways to reduce economic inequality and improve individual outcomes later in life. That’s because the brain is more “flexible” and responds to its environment more than that of older kids. When investment in younger children is implemented on a national scale, research shows that helps create a more productive workforce and provides a boost to the overall economy.

The lack of investment in young kids is compounded by the fact that it occurs at a time when most families lack the means to invest as heavily as they should in their young children’s education. Compared to parents of older children and teenagers, those who have young children in the United States tend to have lower-than-average salaries, savings levels, and less access to credit compared to European countries, where incomes actually go up at this period in families’ lives. On top of that, the financial burden of childcare and early-education programs in the United States is well documented, largely due to the need of younger kids for more attention. That means public funds in the United States that are available may not go as far in terms of hours in a care or a good educational setting.

The report by the Council of Economic Advisers finds that 47 percent of children under the age of five are in some kind of publicly financed program (compared to 89 percent of 12-year-old children), yet these programs only amount to about five hours a week, which means that working parents have to make other arrangements for the rest of the time. The report focuses on the longer-term economic effects of increasing investment in young children, but there also would be more immediate benefits. Investing more in early childhood programs could free up time for parents to work, increasing household income and also spurring demand.

Because of the short- and long-run effects of investing in young kids, there is a very good argument that early childcare and early education programs should be included in our definition of infrastructure. Just as investing in the bridges, roads, and ports that make up our physical infrastructure produces an economic return, so too does investing in a greater “care infrastructure,” as this report highlights.  As the debate over infrastructure comes before Congress as a new presidential administration comes to power, policymakers should keep this research in mind as they think about ways to best strengthen and grow the U.S. economy over the next few years and over the long term.