Can we make growth more inclusive? A trans-Atlantic perspective

Posted on by Casey Schoeneberger

Heather Boushey, Executive Director and Chief Economist at the Washington Center for Equitable Growth, delivered remarks at the 13th Annual Raymond Aron Lecture on December 20, 2016, hosted by the Center on the United States and Europe (CUSE) at Brookings. She was joined by Philippe Aghion, Professor of Economics at Collège de France, as well as Brookings Vice President Bruce Jones, Visiting Fellow Philippe Le Corre, and Senior Fellow in Economic Studies David Wessel. The Raymond Aron lecture series, named after the renowned scholar of post-war France, annually features leading French and American personalities speaking on current issues affecting the trans-Atlantic relationship.

View the full transcript and video.

Rising U.S. business concentration and the decline in labor’s share of income

Posted on by Nick Bunker

A paper presented this past weekend at the annual meeting of the Allied Social Science Associations in Chicago offers a new take on an increasingly important economic policy question: What’s behind the decline in the U.S. share of income going to labor? The new research is by economists David Autor of the Massachusetts Institute of Technology, David Dorn of the University of Zurich, Lawrence Katz of Harvard University, and Christina Patterson and John Van Reenen of MIT.

The paper reveals an important fact about the labor share’s decline—if it were due to an overall change in the price of capital or labor then economists would expect to see workers’ share of income decline across all firms, but the five researchers find the average labor share of income for all firms has actually been constant since the early 1980s. This means that something must have changed with the distribution of income among the firms or within at least some of them to result in a decline in the aggregate labor share of income in the United States.

The economists look at firm-level data on the labor share of income to see what’s happening. Using firm-level data on sales and employee compensation, they find a strong correlation between increasing concentration of sales among firms and a lower share of income accruing to workers in the same industry. The five economists argue that competition within these industries is shifting income toward successful, less labor-intensive firms “superstar firms.”

Note that it’s not a lack of competition resulting in higher price markups that’s causing the decline in the labor share of income in these industries, as some other research has argued. Rather, this new paper emphasizes the role of competition in shifting sales toward firms with a lower share of income going to workers. The analysis of the data by the five authors shows that most of the decline is due to the shift in higher sales toward firms with low labor shares.

But as MIT economist Daron Acemoglu pointed out at the ASSA session where the research was discussed, the decomposition of the labor share’s decline that the authors used lump declines due to reallocation toward firms with declining labor shares in with declines due to reallocation to firms with low labor shares. In other words, concentration could be pushing income toward firms that already had low labor shares and/or pushing income toward firms with declining labor shares. This could mean that part of this reallocation is due to business concentrating among firms with rising markups. A determination of how much of a role this factor plays compared to just a movement toward superstar firms is something to look out for.

Was This the Greatest Failure of the Obama Administration?

Posted on by Brad DeLong
Preview of Was This the Greatest Failure of the Obama Administration

Not running the table in January 2009 to make a V-shaped recovery all but inevitable, but instead trusting to good luck and the accuracy of the forecast. An obvious mistake then. An obvious mistake now. And I have never heard a good account of why it was made–other than that Obama, Emmanuel, Plouffe, and Axelrod bonded with Geithner, and that Geithner is always “let’s do less”, no matter how strong the arguments to do more are:

Paul Krugman (2010-07-09): What Went Wrong?: “It’s now obvious that the stimulus was much too small…

…The administration has chosen to deal with this by… condemning Republicans, rightly, for obstructionism, while at the same time claiming, falsely, that we’re still on the right track. How did things end up this way? We’ll never know whether the administration could have passed a bigger plan; we do know that it didn’t try…. It looks as if top advisers convinced themselves that even in the absence of stimulus the slump would be nasty, brutish, but not too long…. [But] even before the severity of the financial crisis was fully apparent, the recent history of recessions suggested that the jobs picture would continue to worsen long after the recession was technically over. And by the winter of 2008-2009, it was obvious that this was the Big One…. Those concerns were what had me fairly frantic….

And here we are. From a strictly economic point of view, we could still fix this: a second big stimulus, plus much more aggressive Fed policy. But politically, we’re stuck: even if the Democrats hold the House in November, they won’t have the votes to do anything major. I’d like to say something uplifting here; but right now I’m feeling pretty bleak.

Paul Krugman (2013-01-06): The Big Fail: “If you had polled… economists… meeting three years ago…

…most of them would surely have predicted that by now we’d be talking about how the great slump ended, not why it still continues. So what went wrong?… Mainly, is the triumph of bad ideas…. Standard [textbook] economics offered good answers, but political leaders—and all too many economists—chose to forget or ignore what they should have known…. A smaller financial shock, like the dot-com bust at the end of the 1990s, can be met by cutting interest rates. But the crisis of 2008 was far bigger, and even cutting rates all the way to zero wasn’t nearly enough. At that point governments needed to step in, spending to support their economies while the private sector regained its balance. And to some extent that did happen: revenue dropped sharply in the slump, but spending actually rose as programs like unemployment insurance expanded and temporary economic stimulus went into effect. Budget deficits rose, but this was actually a good thing, probably the most important reason we didn’t have a full replay of the Great Depression.

But it all went wrong in 2010…. Greece was taken, wrongly, as a sign that all governments had better slash spending and deficits right away…. The warnings of some (but not enough) economists that austerity would derail recovery were ignored. For example, the president of the European Central Bank confidently asserted that “the idea that austerity measures could trigger stagnation is incorrect.” Well, someone was incorrect, all right…. Blanchard and… Leigh… not just that austerity has a depressing effect on weak economies, but that the adverse effect is much stronger than previously believed. The premature turn to austerity, it turns out, was a terrible mistake…. The fund was actually less enthusiastic about austerity than other major players. To the extent that it says it was wrong, it’s also saying that everyone else (except those skeptical economists) was even more wrong. And it deserves credit for being willing to rethink its position in the light of evidence. The really bad news is how few other players are doing the same…. The truth is that we’ve just experienced a colossal failure of economic policy—and far too many of those responsible for that failure both retain power and refuse to learn from experience.

Must-Read: Mark Thoma: Why Trump Needs to Take the Economy More Seriously

Posted on by Brad DeLong

Must-Read: The first hint of what the Trump administration will be like is right now being provided by the health-care debate. It does not look at all pretty. I would have thought that Jared Kushner, at least, would understand that good technocratic policies have a higher chance of working, and that Trump desperately needs policies to work. But no…

Mark Thoma: Why Trump Needs to Take the Economy More Seriously: Trump’s habit of claiming more credit than he deserves stands in sharp contrast to President Obama’s inability to communicate all of the good things that have happened during his presidency…

…The Obama administration’s lack of effective communication with the public was a big mistake. When Bill Clinton was president, it seemed like you could hardly turn on the TV without seeing someone vigorously and effectively defending his administration, and there was certainly no shortage of people defending George Bush. But, at least as I see it, the Obama administration did not benefit as much as it should have from effective spokespeople in the media (and where were members of the House and Senate for the past 8 years, they dropped the ball too). There is a way in which the Obama administration communicated admirably, but unfortunately, it was mostly with policy wonks. What I will miss the most when Obama leaves office is the excellent work performed by his Council of Economic Advisers. The role of the CEA is to provide objective economic analysis that the president can use to make informed decisions….

What we seem to be getting from the Trump administration, which has floated Larry Kudlow as head of the CEA–he has no formal training in economics–is a slate of appointments that will provide political cover for whatever the administration wants to do. I find that distressing. One of the most important roles of the CEA is to shut down bad ideas, but it looks as if it will be transformed into a cheerleading agency for whatever Trump proposes…. There is a substantial body of both theoretical and empirical analysis of policies such as tax cuts for the rich, the imposition of tariffs, infrastructure spending, shutting down immigration, and the other things Trump has talked about. Even with policies I disagree with, there are good and bad ways to put them into place. Ignoring what economists have learned would be a big mistake. Even with policies I disagree with, there are good and bad ways to put them into place. Ignoring what economists have learned would be a big mistake.

Must- and Should-Reads: January 10, 2017

Posted on by Brad DeLong

Interesting Reads:

Should-Read: Nils Gilman: The Twin Insurgency]

Posted on by Brad DeLong

Should-Read: Nils Gilman: The Twin Insurgency: “By the 1970s,… the social modernist states were increasingly failing to deliver

…In the West, inflation eroded the technical foundations of the Bretton Woods financial order, and economic stagnation undermined the technocratic consensus in favor of Keynesian demand management and the political consensus in favor of sharing productivity gains between labor and capital. In the East, centrally planned economies were revealing themselves not only as politically repressive but also as economically inefficient and environmentally catastrophic. In the “Global South”… industrialization by means of import substitution failed to sustain growth, and the debt crisis of the early 1980s put to rest any dreams of a new international economic order….

It wasn’t just that the state “retreated” from the “commanding heights” of the economy, to use Daniel Yergin’s terms, but also that the very ambition of the state receded. Many states stopped even pretending they wanted to create a more egalitarian society and instead sought to legitimate themselves by claiming they were maximizing individual opportunity. For proponents of this perspective, the rise of new plutocrats counted not as a defeat, but as a success for the new model of governance…. Fukuyama proposed… universal agreement that liberal, democratic capitalism was… the only reasonable form of socio-political-economic organization…. Williamson… [a] “post-historical” policy consensus… [of] fiscal discipline, the redirection of public spending away from subsidies, the rollback of progressive tax codes, the floating of currencies, the liberalization of trade and cross-border investment, the privatization of state enterprises and deregulation of private ones, and above all the sanctification of private property rights…. The programs associated with the Washington Consensus—above all, the privatization of national industrial assets (especially of state-owned firms and utilities) and deregulation (especially of financial firms)—soon became the model…. As Dani Rodrik concluded, “‘Stabilize, privatize, and liberalize’ became the mantra of a generation of technocrats who cut their teeth in the developing world and of the political leaders they counseled.”

This transformation of the role of the state in the wake of the Cold War has dramatically increased the precariousness of the lives of the middle classes within most societies…

Must-Read: Christopher Boone et al.: Unemployment Insurance and Employment

Posted on by Brad DeLong

Must-Read: Christopher Boone et al.: Unemployment Insurance and Employment: “The Unemployment Insurance programme in the US was significantly expanded during between 2008 and 2014…

…This column examines the effect of unemployment insurance duration on aggregate employment during the Great Recession using state-level expansions and contractions in insurance generosity. It finds a positive but not statistically significant employment impact of expanding the insurance. This suggests that the substantial insurance value of the extensions during the Great Recession was not offset in any meaningful way by any costs from weaker job growth.  

Should-Read: Yair Field et al.: Detection of human adaptation during the past 2000 years

Posted on by Brad DeLong

Should-Read: Blond hair and blue eyes driven by connections with Vitamin D uptake, or sexual selection–but where would that come from? Spending more energy and sophistication in the MHC driven by increased vulnerability to diseases as we crowd together? The evolution of lactose tolerance is the only one that seems intuitive to me…

Yair Field et al.: Detection of human adaptation during the past 2000 years: “in the ancestors of modern Britons during the past ~2,000-3,000 years…

…we see strong signals of selection at lactase and the MHC, and in favor of blond hair and blue eyes. For polygenic adaptation we find that recent selection for increased height has driven allele frequency shifts across most of the genome. Moreover, we identify shifts associated with other complex traits, suggesting that polygenic adaptation has played a pervasive role in shaping genotypic and phenotypic variation in modern humans.

Must- and Should-Reads: January 9, 2017

Posted on by Brad DeLong

Interesting Reads: