Should-Read: Paul Samuelson (1962): On Karl Marx

Posted on by Brad DeLong

Should-Read: Paul Samuelson (1962): On Karl Marx: “Marx, like any man of keen intellect, liked a good problem; but he did not labor over a labor theory of value in order to give us moderns scope to use matrix theory on the “transformation” problem…

…He wanted to have a theory of exploitation, and a basis for his prediction that capitalism would in some sense impoverish the workers and pave the way for revolution into a new stage of society. As the optimism of the American economist Henry Carey shows, a labor theory of value when combined with technological change is, on all but the most extreme assumptions, going to lead to a great increase in real wages and standards of living. So the element of exploitation had to be worked hard…. Marx might have emphasized the monopoly elements of distribution…. Marx might have kept wages dismal by virtue of biological conditions of labor supply…. [But he] tried to demonstrate the same dramatic minimum character of real wages by means of his concept of the “reserve army of the unemployed”

Here is the real Achilles’ heel of the Marxian theory of distribution and its implied prophecies of immiserization of the working classes. Under perfect competition, technical change will raise real wages unless the changes are so labor-saving as to raise the rate of maintainable profit immensely; Joan Robinson and others have pointed out how contradictory is Marx’s notion that both profit rates and real wages can fall once Marx jettisons Ricardo’s emphasis on the scarcity of land and the law of diminishing returns…

Must-Read: Martin Wolf: Too Big, Too Leninist: A China Crisis Is a Matter of Time

Posted on by Brad DeLong

Must-Read: Martin Wolf: Too Big, Too Leninist: A China Crisis Is a Matter of Time: As Minxin Pei notes in a brilliant book, China’s Crony Capitalism…

… it is all too easy for a would-be strongman to use the charge of corruption as a cudgel against rivals. Yet it is so effective precisely because it is plausible…. Collusive corruption is pervasive… distorts the economy, degrades administration and robs the party of its social legitimacy…. Yet it did not strike by accident. The explosion of corruption since the early 1990s is the downside of successful reform:

The emergence and entrenchment of crony capitalism in China’s political economy, in retrospect, is the logical outcome of Deng Xiaoping’s authoritarian model of economic modernisation because elites in control of unconstrained power cannot resist using it to loot the wealth generated by economic growth.

Corruption is the progeny of the marriage between the party-state and the market. It spreads by enticement, coercion and imitation. Once corruption becomes normal, the system risks reaching a tipping point…. When control over property is a privilege, not a right, as in China, those with the political power have the ability to make themselves (and those they favour) vastly rich. That is just what they have done….

The question, however, is whether much can be done beyond putting a vast number of people in prison. Mr Xi’s answers seem to be more Leninism and more markets. Yet this is a highly problematic combination…. The Leninist party-state cannot give a solution to the problem of governance. Yet it can offer no solution to the economic problem either. If a market economy is to be combined with reasonably non-corrupt government, economic agents need legal rights protected by independent courts. But that is precisely what a Leninist party-state cannot provide…. Mr Xi has embarked on his present course for good reasons. Whether he has good solutions is quite another matter.

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What could boost U.S. business investment?

Posted on by Bridget Ansel
Traders work in a booth on the floor of the New York Stock Exchange.

Is everything alright with the state of business investment in the United States? Weak investment growth in the years since the Great Recession—both here and abroad—raises questions. Is it because expected growth is low and investment will pick up once overall economic growth does? (This is the so called “accelerator” view of what determines business investment.) Yet weak growth predates the Great Recession, when expectations of growth were higher and amid a period of high profits—a sign that investment should have been booming. Is something else going on? A new paper argues that the increased concentration of companies and changes to corporate governance are behind more than a decade of “investment-less growth,” a threat not just to short-term growth but long-term prosperity as well.

The paper, released as a National Bureau of Economic Research working paper last week, is by economists German Gutierrez and Thomas Philippon of New York University. The two authors try to uncover why business investment, measured as a share of a firm’s operating returns, has been so lackluster since the turn of the 21st century. Gutierrez and Philippon try to understand the change in this behavior by using a model of investment called “Tobin’s Q.”

Briefly, Tobin’s Q tries to understand how companies change their investments based on the ratio of an individual company’s market value to the cost of buying all the capital stock of that company, with this ratio being called “Q.” If Q is higher than 1 then the market thinks the firm is worth more than its constituent parts, implying the company should invest more. If Q is less than 1 then it implies the market doesn’t think the firm is worth the capital investment put into it and should shrink.

The Q for overall business investment in the United States is, on average, signaling that business investment should be much higher than it has been so far this century. Gutierrez and Philippon show that investment has been weak since 2000 and note the trend can’t be explained by higher rates of depreciation as they haven’t increased much since 2000.  The authors then go through several hypotheses for their breakdown of trends that may be contributing to higher Q ratios, using data on investments from the Federal Reserve’s Flow of Funds data and the Compustat dataset of public corporations. They don’t find any evidence that firms lack of access financing is prohibiting them from using their profits to invest, though they do find some evidence that Q is higher because of the greater economic importance of “intangible assets” such as intellectual property.

But the biggest explanatory factors—accounting for roughly 80 percent of the difference between actual business investment and predicted investment—is the increasing concentration of companies within industries and increased “common ownership” of companies by large investment firms. These “commonly owned” companies not only don’t invest as much as we might expect given their Qs but instead use these their funds to finance share buybacks and other shareholder payouts. The high profitability of these companies isn’t reinvested in these firms but instead flows to predominantly wealthy shareholders.

If this research holds up, then policymakers will need to question whether institutional financial factors are holding back higher and more productive business investment. If Gutierrez and Philippon are right, higher overall economic growth doesn’t necessarily lead to more business investment. Their results also indicate that letting firms gain access to overseas profits at a low tax rate for investment in the United States wouldn’t boost investment, but instead shareholders’ bank accounts. Of course, previous experience shows that as well.

Policymakers interested in boosting business investment growth should perhaps spend less time focusing on taxes and more time on the increasing concentration of businesses within industries.

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?…