Should-Reads: Brad DeLong: This Time, It Is Not Different: The Persistent Concerns of Financial Macroeconomics

Posted on by Brad DeLong

Should-Reads: Brad DeLong: This Time, It Is Not Different: The Persistent Concerns of Financial Macroeconomics: “When the Financial Times’s Martin Wolf asked former U.S. Treasury Secretary Lawrence Summers…

…what in economics had proved useful in understanding the financial crisis and the recession, Summers answered: “There is a lot about the recent financial crisis in Bagehot…”. “Bagehot” here is Walter Bagehot’s 1873 book, Lombard Street. How is it that a book written 150 years ago is still state-of-the- art in economists’ analysis of episodes like the one that we hope is just about to end? There are three reasons. The first is that modern academic economics has long possessed drives toward analyzing empirical issues that can be successfully treated statistically and theoretical issues that can be successfully modeled on the foundation of individual rationality. But those drives are disabilities in analyzing episodes like major financial crises that come too rarely for statistical tools to have much bite, and for which a major ex post question asked of wealth holders and their portfolios is: “just what were they thinking?”. The second is that even though the causes of financial collapses like the one we saw in 2007-9 are diverse, the transmission mechanism in the form of the flight to liquidity and/or safety in asset holdings and the consequences for the real economy in the freezing-up of the spending flow and its implications have always been very similar since at least the first proper industrial business cycle in 1825. Thus a nineteenth-century author like Walter Bagehot is in no wise at a disadvantage in analyzing the downward financial spiral. The third is that the proposed cures for current financial crises still bear a remarkable family resemblance to those proposed by Walter Bagehot. And so he is remarkably close to the best we can do, even today.

Must- and Should-Reads: December 12, 2016

Posted on by Brad DeLong
  • Tony Yates: The Perceived-Grievance-Wrong-Headed Sop Vortex: “A desire to respond to the perceived grievances of those who voted to give incumbent governments a kick…
  • Miriam Burstein: Two Cheers for Academic Blogging?: “The most important changes, it seems to me, have taken place outside individual university folds, not within…
  • Tony Judt (1994): The New Old Nationalism: “Québecois today have few of the grievances expressed thirty years ago, when the region was economically depressed and its language and culture in decline…

Interesting Reads:

For American men, the black-white wage gap is at levels last seen in the 1950s

Posted on by Bridget Ansel
Workers assemble Volkswagen Passat sedans at the automaker’s plant in Chattanooga, Tenn.

The median earnings gap between black and white men now stands at levels last seen more than 60 years ago, according to a new working paper by Patrick Bayer of Duke University and Kerwin Kofi Charles of University of Chicago. The finding represents a reversal of years of progress, with wage disparities similar to what they were in 1950—four years before the Brown v. Board of Education ruling, 14 years before the passage of the Civil Rights Act, and a time when Jim Crow still dominated much of the country.

The paper tracks the earnings gap for black and white men ages 25 to 54 from 1940 through 2014. Previous research suggested this gap shrunk substantially through the 1970s, before stagnating since then. Clearly, a wage gap that hasn’t budged since the 1970s is disturbing. But previous literature missed a major piece of the equation: The rise in incarceration and a general decline in working class jobs over the past three decades that devastated blue collar careers and resulted in a growing group of men who aren’t working whatsoever.

By including all men in the analysis, not just those who are working, Bayer and Charles found that the black-white wage gap for men hasn’t simply stagnated since the 1970s, it has gotten worse—much worse. Black men are earning less and also are less likely to be employed compared to their white counterparts. At the height of the Great Recession, for example, 37.8 percent of black men were not working vs. 18.6 percent of white men (compared to 18 percent for black men in 1960 versus 8 percent for white men).

This reversal in progress isn’t due to differences in education levels. Black men today are much better educated than they were in 1950s. The rising level of education among black men was a significant driver of the initial narrowing of the racial wage gap in the 1950s and 1970s. While black men today have slightly less education than their white counterparts (about a year less), the discrepancy is much smaller than it was 70 years ago.

But in today’s economy, one’s level of education is more important than ever in determining whether you have a job, and whether that job is high quality. So even though the black-white gap in educational attainment today is narrow, any gap that exists matters much more for earnings. In fact, had black men not made such large gains in education, the earnings gap would have been even larger. Other research points out that factors such as the decline in unions, the failure to raise the minimum wage, and the failure to enforce anti-discrimination laws also played a role.

Bayer and Charles also find that there is growing inequality among black men themselves. While there has been a remarkable lack of progress and even a relapse in terms of closing the earnings gaps between middle- and lower-class black men, black men in the top quarter of the earnings distribution have made sizeable gains—and continue to see an increase in their earnings both in absolute terms as well as relative to their white male peers. The two researchers suggest that this could be due to more equal access to certain high-skilled occupations and universities.

Recent media attention has tended to focus on the plight of the white working class, whose financial security has been shattered over the past 30 years. There is no doubt that the experiences of the white working class should be a cause for concern, but we must acknowledge that the same economic forces affecting all working-class men—rising inequality, the decline of unions, the greater risk of unemployment, and the rise in incarceration—have been especially destructive for black men and have all but reversed years of progress.

Are we better off than our parents?

The data that underscores the fading “American dream”

Posted on by David Evans

Every parent hopes that their children will have a better standard of living than their own: it is a defining feature of the American Dream. Yet this opportunity is fading for many Americans. New research by Raj Chetty, David Grusky, and Maximillian Hell (Stanford University), Nathaniel Hendren and Robert Manduca (Harvard University), and Jimmy Narang (University of California-Berkeley) shows that “absolute income mobility”—the fraction of children that are earning more than their parents—has declined over the past half century due to rising inequality. Here are some key facts from their analysis.1

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Absolute income mobility has declined for Americans across the entire income spectrum

Rates of absolute income mobility in the United States have fallen sharply since 1940. Ninety-two percent of children born in 1940 earned more than their parents in inflation-adjusted terms. In contrast, only 50 percent of children born in 1984 earned more than their parents. (See Figure 1.) The downward trend in absolute mobility persists when using alternate inflation adjustments, accounting for taxes and transfers, measuring income at later ages, and adjusting for changes in household size.

Figure 1

The middle class saw the largest rate of decline. Absolute income mobility fell across the entire income spectrum, but the middle class experienced the largest declines in the likelihood of children earning more than their parents.

The largest declines are concentrated in Rust Belt states. Absolute income mobility fell in all 50 states and the District of Columbia, but the largest declines were concentrated in the Rust Belt states, such as Michigan and Indiana (which registered 49 and 46 percentage-point declines, respectively). The smallest declines occurred in Massachusetts, New York, and Montana, which recorded absolute mobility declines of approximately 35 percentage points. (See Figure 2 and table, below.)

Figure 2

Men’s economic prospects declined dramatically. Ninety-five percent of men born in 1940 earned more than their fathers compared to 41 percent in 1984 (a 54 percentage-point decline). The fraction of daughters earning more than their fathers fell from 43 percent of women born in 1940 to 26 percent of women born in 1984.

In order to revive the American dream, we must address inequality

The decline in absolute mobility is driven by inequality and the unequal distribution of economic growth. Children born in 1980 experienced lower growth in gross domestic product, the broadest measure of economic growth, compared to those in the 1940s and 1950s, but the authors find that the decline is absolute income mobility was driven primarily by the increasingly unequal distribution of GDP growth rather than by the slowdown in aggregate economic growth.

Higher growth rates alone are insufficient to restore absolute mobility. Because a large fraction of economic growth goes to a smaller fraction of high-income households today compared to the 1940s and 1950s, higher GDP growth does not automatically increase the number of children who earn more than their parents.

  • Restoring GDP growth rates to the levels experienced in the 1940s and 1950s while distributing GDP across income groups as it is distributed today (much more unequally) would increase the likelihood of children earning more than their parents to only 62 percent, reversing less than one-third of the reduction in mobility relative to what in was for children born in 1940 (92 percent).

    • Maintaining GDP growth at its current level but distributing it as it was distributed for children born in the 1940s would increase the likelihood that children earn more than their parents to 80 percent, thereby reversing more than two-thirds of the decline in absolute mobility.

    Must-Read: Tony Judt (1994): The New Old Nationalism

    Posted on by Brad DeLong

    Must-Read: Tony Judt (1994): The New Old Nationalism: “Québecois today have few of the grievances expressed thirty years ago, when the region was economically depressed and its language and culture in decline…

    …The educated francophone population is no longer so afraid of losing its children to an English-speaking world…. And yet nationalism in Quebec is a very real thing, drawing on past grievances that, as Ignatieff writes, “do not cease to be actual, just because they are in the past.” Everywhere he goes, at least within the nationalist orbit, people tell him the same thing: “We just want to be at home, with ourselves… a majority in our own place.” If that is what nationalism means in a French-speaking province of federal Canada, one of the world’s more fortunate places and with little to fear, then the prospects for nonterritorial, state-sharing, overlapping cultural nationalisms of a liberal (or any other) kind seem slim indeed. If the electors of the Italian Northern League don’t feel “at home in their own place” with Sicilians, what hope is there for Greeks and Macedonians, Slovaks and Hungarians, Estonians and Russians, Armenians and Azerbaijanis, Israelis and Palestinians?

    In the words of Daniel Bell, “Nationalism is potent because it recapitulates psychologically the family structure. There is authority for protection and there is identification and warmth.” If this is so, then it is here to stay…. There is no reassuringly convergent relationship between international economic trends and domestic political practices. The liberal interlude of the past two centuries has been confined to a few fortunate peoples and places. That interlude, the world of the European Enlightenment, rested upon an optimistic universalism which bequeathed us both liberalism and socialism, competing versions of a progressive, emancipatory project. The demise of socialism is for many people a cause for optimism; but it is also a reminder that liberalism, too, may be mortal.

    As Michael Ignatieff notes, it may be that liberal civilization “runs deeply against the human grain and is only achieved and sustained by the most unremitting struggle against human nature.” If that is true, and if nationalist particularism is the more familiar mold into which most human beings pour themselves, then we need to learn not only how to understand it but also when and by what criteria to encourage or curtail its aspirations. Some multinational states will continue to survive and thrive, their citizens finding security not in common ethnic affinities but in the rule of law and its recognition and enforcement of individual rights and duties. This will probably be the case for Great Britain, Switzerland, Spain, Belgium, and others besides. However, these may not be readily exportable models….

    The one option that scholars and diplomats alike do not now have is to ignore the problem of nationalism, or call it something else and pass by on the other side. For many people today, nationalism tells the most convincing story about their condition—more realistic than socialism, more immediately reassuring than liberalism. One reason for this is that nationalists acknowledge, indeed thrive upon, the apparent incompatibility of competing claims and values…. The unequal and conflicted division of the world into nations and peoples is not about to wither and shrivel or be overcome by goodwill or progress. The revolutions of 1789 and 1917 were born of the benevolent illusion that such untidy and unpleasing features of our world are transient and of secondary importance in the great scheme of things. The revolutions of 1989 and their aftermath offer a timely opportunity to think again.

    Should-Read: Miriam Burstein: Two Cheers for Academic Blogging?

    Posted on by Brad DeLong

    Should-Read: Miriam Burstein: Two Cheers for Academic Blogging?: “The most important changes, it seems to me, have taken place outside individual university folds, not within…

    …Blogging has helped some academics loosen up their clogged prose… facilitated networking… promoted public outreach…. The flip side of such popular appeal, of course, is that it may bring the university what we might politely call “unwanted attention,” from all political sides…. Institutions do love their publicity, except when they find it inconvenient, at which point they don’t…. Research universities… have not shown much in the way of similar fondness for anything that carries the faintest whiff of “the popular.”… Teaching-centered campuses… want to know [where] is… the guardian at the academic gate?…

    European Fiscal Policy: And All Does Not Go Merry as a Marriage Bell

    Posted on by Brad DeLong

    I find myself thinking of Ludger Schuknecht’s very powerful and apposite comments about just what, even if you believe–as I do–that there are substantial spillovers for Germany and for the world for Germany to use its fiscal space for expansionary policies right now, it is supposed to use its fiscal space for…

    The fiscal space is in Germany. The infrastructure needs are in Sicily. This is in the end the political and also the political-economic dealbreaker. It does speak to necessary reforms of the European Union so that things like this do not happen again.

    I remember Maury Obstfeld saying once that at the start of the 1990s California and New York had no problem using the United States’s fiscal space to transfer 25% of a year’s Texas GDP to Texas to clean up the Savings and Loan financial crisis mess. This just was not an issue in American politics or political economy. Texas had bet wrongly on the real estate sector via lax regulation–both at the federal and state level–and financial engineering. It was regarded as a proper use of America’s fiscal space to spend money on this and pull Texas out of what was a shallow national but would have been a very deep regional recession.

    The fact that the Chair of the Senate Finance Committee at the time was from Texas may, however, have had something to do with it.

    The American institutions then were, somehow, a better set of institutions for dealing with this kind of crisis. That there was an alignment of interests, and that the prosperity of each would redound to the prosperity of all in the long even if not always in the short run was taken for granted.

    In fact, perhaps, Europe’s institutions today are inferior along some aspects of this dimension than Europe’s institutions in the past. Back in 1200, say, the question of how Germany should use its fiscal space, if in fact the desired location of spending was in Sicily, was finessed. A Germany Hohenstaufen princeling would be married to a Viking-Sicilian princess, and she would then bring Sicily along with her into the Holy Roman Empire as her dowry, and Germany–at least Germany’s rulers–would have an obvious interest in upgrading Sicily’s infrastructure.

    Admittedly, the German Emperor might then decide that he would rather spend time in his palace in Palermo than in Burg Hohenstaufen twenty miles east of Stuttgart.

    Somehow, national borders and national communities constrain us in Europe in ways that are not the wisest today…

    Fiscal Policy in the New Normal: IMF Panel

    Weekend reading: “Distributional national accounts and declining mobility” edition

    Posted on by Nick Bunker

    This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth published this week and the second is the work we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.

    Equitable Growth round-up

    Did minimum wage increases during the Great Recession reduce employment for low-wage workers? A new paper by Ben Zipperer at the Economic Policy Institute argues that they did not and previous studies looking at this question have a flawed research design.

    Economists Thomas Piketty, Emmanuel Saez, and Gabriel Zucman released new groundbreaking data on income trends in the United States. This new dataset, the Distributional National Accounts, allows researchers to look at trends in both pre-tax and post-tax incomes.

    Heather Boushey argues that the Distributional National Accounts could do for our understanding of economic growth in the 21st century what the National Income and Product Accounts—the source of GDP—did for the 20th century.

    The U.S. labor market is on its way toward full employment. But how close is it? A look at new data on quitting, job openings, and hiring gives some more information on how much stronger the labor market can get.

    New research by a team of researchers from Stanford University, Harvard University, and the University of California-Berkeley shows a precipitous decline in U.S. income mobility. The authors summarize their results for Equitable Growth.

    This research also shows something interesting about the relationship between U.S. absolute and relative mobility. Income growth was so strong and broad-based from 1940 to 1970 that the amount of relative mobility didn’t matter: Absolute mobility was going to be very high.

    Links from around the web

    The loss of manufacturing jobs became a central part of U.S. politics over the past year and even more so after the presidential election. How much of the job loss can be attributed to more foreign competition? Matt Klein works out an estimate of about half of all lost jobs scine 1990. [ft alphaville]

    In 2011, Wisconsin enacted a law that reduced the bargaining power of public sector unions. What was the result? According to a new study, an 8 percent drop in compensation for public school teachers. Alana Semuels writes up the impact of declining union power on wages. [the atlantic]

    The sectors that increasingly provide jobs in the U.S. labor market are in the service sector and are traditionally dominated by women. Betsey Stevenson argues that men need to be more willing to take “girly” jobs. [bloomberg view]

    How much would it cost to boost the incomes of low-income American families directly so that they had shared in economic growth since 1979? Neil Irwin asked some budget experts and they came up with a price: $1 trillion over 10 years. [the upshot]

    Martin Sandbu makes the optimistic case for policy to boost economic growth in the short term, pointing to business investment, fiscal policy, and potential increases in labor supply. [free lunch]

    Friday figure

    Figure from “How tight is the U.S. labor market? And how tight do we want it?” by Nick Bunker

    Must-Read: Tony Yates: The Perceived-Grievance-Wrong-Headed Sop Vortex

    Posted on by Brad DeLong

    Must-Read: Tony Yates: The Perceived-Grievance-Wrong-Headed Sop Vortex: “A desire to respond to the perceived grievances of those who voted to give incumbent governments a kick…

    …But in so far as these grievances are not genuine, responding to them in ways that harm everyone and don’t address the economy’s underlying problems sets us all up for a vortex of ever diminishing prosperity and more spiteful policies and politics…. The UK is embarked on Brexit, voted for by the older, less educated, less skilled… likely to pitch us into a protracted period of weak growth or recession to which we are ill-placed to respond. Both… will be disproportionately felt by those at the bottom of the pile whose Brexit vote got us here… will not benefit those who voted for Brexit, except in their imaginations. In fact the process of reallocation may well, if past such experiences are to be repeated, hit hardest those who are oldest, and have least time or aptitude to retrain, or are least able to relocate….

    Several risks…. The policy response shrinks the aggregate… pie… does not help the aggrieved constituency.  In the next round, the wounded group takes aim at a new component of the status quo, dismantling our wealth creating machine even further. Another risk is that responding legitimises unfounded prejudice…. Yet another risk of the unfounded-sop response to the perceived grievance is that it rewards dishonest political opportunism….

    Is there a way out of this?… Our state capacity should focus on the real problems: improving its insurance functions… redistributing to the young… addressing the housing and planning problem… doubling down on the functions where there is a comparative advantage and need, like health and education… [recognize] that migration, whatever focus groups and opinion polls say, is almost entirely beneficial…