Must-Read: Noah Smith: An Econ Theory, Falsified

Posted on by Brad DeLong

Must-Read: Edward Hastings Chamberlain wrote his Theory of Monopolistic Competition and Joan Robinson wrote her Economics of Imperfect Competition back in 1933. The enterprise of building the tools to help us understand such markets is now 84 years old. And yet…

Noah Smith: An Econ Theory, Falsified: “Almost every theory is falsifiable to some degree… since almost every theory is just an approximation…

…What falsification really means… is that a theory is shown to not work as well as we’d like it to under a well-known set of conditions…. There are some pretty clear-cut cases. One of them is the “Econ 101” theory of the labor market… one labor supply curve and one labor demand curve, one undifferentiated type of labor and one single wage…. Here are two stylized facts…

  1. A surge of immigration does not have a big immediate negative impact on wages.
  2. Modest minimum wage hikes do not have a big immediate negative impact on employment.

George Borjas disputes the first of these, but he’s just wrong. A few economists (and MANY pundits dispute the second, but the consensus among academic economists is pretty solid.

The first… alone does not falsify… Econ 101…. It could… that short-run labor demand is simply very elastic…. BUT, this is impossible to reconcile with the second stylized fact. If labor demand is very elastic, minimum wage should have big noticeable negative effects on employment. By the same token, if you try to explain the second stylized fact by making both labor supply and demand very inelastic, then you contradict the first stylized fact. You just can’t explain both of these facts at the same time with this theory. It cannot be done. So the Econ 101 theory of labor supply and labor demand has been falsified. It’s just not a useful theory… in the short term… not a good approximation… doesn’t give good qualitative intuition… is especially bad for explaining the market for low-wage labor….

If econ pundits, policy advisors, and other public-facing econ folks were scientifically minded, we’d stop using this model in our discussions of labor markets. We’d stop casually throwing out terms like “labor demand” without first thinking very carefully…. We’d stop using this framework to think about other policies…. Sadly, though… we will continue using this falsified theory to “organize our thoughts”–i.e., we’ll keep treating it as if it were true… [and] continue to make highly questionable policy recommendations….

That’s what James Kwak calls “economism”, and I call “101ism”. Whatever it’s called, it’s not very scientific.

Weekend Reading: “Are the kids alright?” 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

Over the past two and a half decades, the U.S. female labor participation rate has stagnated and then declined just as the cost of childcare began to rise. Are the two trends related? It seems like it:  New research estimates that rising childcare expenditures resulted in a 5 percent decline in the total employment of women, and a 13 percent decline in the employment of mothers with kids under the age of five.

Speaking of childcare, Equitable Growth released an issue brief examining the Child Tax Credit, which is currently the second-largest provision in the U.S. tax code benefiting families with kids (after the Earned Income Tax Credit). We demonstrate that the CTC is progressive across the income distribution except for one large hole: The tax credit doesn’t provide any benefits to the poorest families (and provides less than full benefits for low-income families).

We take a closer look at President-elect Trump’s paid leave proposal. While it is a step up from current federal policy (which is limited to 12 weeks of unpaid leave), it excludes men and non-parental caregivers, both of which could worsen the gender pay gap and hurt families that depend on women’s pay.

The U.S. bureau of Labor Statistic released new data on the U.S. labor market during the month of November. We compiled five graphs highlighting trends in the data.

Links from around the web

The New York Federal Reserve is warning that rising delinquency rates for subprime auto loans pose a “significant concern.” Subprime auto debt continues to grow, and today six million individuals are at least 90 days late on their auto loan payments. [liberty street economics]

The wealth discrepancy between black and white families is the highest it has been since the 1980s, but things are even worse in U.S. cities, writes Gillian B. White of The Atlantic. In Washington, D.C., the median white family has 81 times as much wealth as the median black family. [atlantic]

As we consider the potential impact of the repatriation of U.S. corporate profits held abroad, Alexandra Scaggs provides some clarification on what that means—and what really matters—for domestic and foreign markets. [ft alphaville]

Does lower pay mean smaller raises? Not necessarily. The Atlanta Fed’s John Robertson looks at wage growth across the income spectrum. [macroblog]

Economists usually assume that supporting institutions within advanced economies do not change over time, especially in response to economic shifts. But the past decade has taught policymakers that the legitimacy of institutions matter. Ryan Avent writes that the dismal science must come to grips with how little it understands society. [free exchange]

Friday Figure

From “A Child Tax Credit primer.”

Should-Read: Izabella Kaminska: The Taxi Unicorn’s New Clothes

Posted on by Brad DeLong

Should-Read: I would say “investor naivete” is currently a larger factor than “driver naivete”. But that’s just a guess…

Izabella Kaminska: The Taxi Unicorn’s New Clothes: “[Hubert Horan:] ‘For the year ending September 2015, Uber had GAAP losses of $2 billion…

…on revenue of $1.4 billion, a negative 143% profit margin. Thus Uber’s current operations depend on $2 billion in subsidies, funded out of the $13 billion in cash its investors have provided.

Uber passengers were paying only 41% of the actual cost of their trips; Uber was using these massive subsidies to undercut the fares and provide more capacity than the competitors who had to cover 100% of their costs out of passenger fares….

Silicon Valley elites justify the subsidies in the name of monopolistic growth expectations and the building of “eco-systems”. They believe if monopoly status is achieved, profitability will follow naturally from that point. Yet, as FT Alphaville has long maintained, there is no reason to assume Uber’s obliteration of local competition across the planet will create a sustainable business in the long term. Costs are costs…. As long as people have cheaper alternatives (public transport, legs), they will defect if the break-even price is higher than their inconvenience-tolerance threshold. The fact Silicon Valley thinks otherwise is sadly symptomatic of the emperor’s new clothes groupthink dominating the sector….

We recently spoke to one of Uber’s earliest London drivers…. To survive he had to forge a driver syndicate which collectively owns the underlying car capital… cars can be fully utilised 24 hours a day improving the return on capital…. To economise further, the drivers take turns with shifts, step-in for each other if and when they need leave and recruit temporary staff if and when they find themselves under staffed. They also mutualise the costs and the insurance. Yet, even then, he said “it’s really hard to make the economics work” and that “when Uber increased its margin from 20 per cent to 28 per cent it knocked our profitability in half”… If a quasi professional corporate structure like this can’t make ends meet within the Uber network, what hope does any single driver have? Uber is surviving on plain old worker naivete.

Equitable Growth’s Jobs Day Graphs: November 2016 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 November. Below are five graphs compiled by Equitable Growth staff highlighting important trends in the data.

1.

The share of prime-age workers has been climbing in recent months, but still has a ways to go before it hits its pre-recession level.

a

2.

The overall unemployment rate dropped to 4.6 percent in November and the black unemployment rate hit its lowest level for this expansion.

a

3.

Workers with a college degree had an unemployment rate of 2.3 percent in November, compared to 4.9 percent for high-school graduates.

a

4.

Long-term unemployment dropped considerably in November, but it’s still elevated as a share of overall unemployment.

a

5.

As the labor market recovers, fewer workers are unemployed because they lost a job while more are unemployed because they are confident enough to quit their job and find a new one.

a

Should-Read: Richard Mayhew: The Core of the Fight

Posted on by Brad DeLong

Should-Read: Richard Mayhew: The Core of the Fight: “Actuarial value and subsidy level is the core element of the coming fight on Medicare…

…The delivery mechanism through which that value is transferred is window dressing. Andrew Sprung…. ‘What precisely is the Medicare guarantee?… For 95% of seniors, the federal government will pay about 85% of the premiums for insurance that covers a bit more than 80% of the average user’s medical costs…. Low income beneficiaries have all or part of their premiums and out-of-pocket costs paid by Medicaid….’ And here is he is on the ACA: ‘For 8.8 million current enrollees in the ACA marketplace (as of June 31 30), subsidies cover an average of 73% of the premium for plans with a weighted average actuarial value of 80%…. On average, then, the ACA marketplace covers about 58% of enrollees’ costs–though that average is very uneven…. For another 12 million people whom the ACA rendered eligible for Medicaid, federal and state government cover close to 100% of costs….’

That is the the essence of the upcoming healthcare fights. Everything else is window dressing or mechanics to shift blame for large benefit cuts.

Must- and Should-Read: December 2, 2016

Posted on by Brad DeLong

 

Interesting Reads:

Must-Read: Sandra Black, Jason Furman, Laura Giuliano and Wilson Powell: Minimum Wage Increases and Earnings in Low-Wage Jobs

Posted on by Brad DeLong

Must-Read: Back when Card and Krueger first suggested that there was substantial effective monopsony power in the low-wage labor market and thus that there would be no disemployment effect from (modest) increases in the minimum wage to make it binding, I said: “Clever, but nahhh.” The reason for their findings, I thought, was that labor demand is just inelastic in the short and perhaps the medium run–but maybe not in the long run.

I confess that I think I have to change my mind. Economists do not fail to find disemployment effects from (modest) increases in the minimum wage that make it binding because labor demand is inelastic and statistical power is insufficient. Employers actually do have substantial monopsony power in the low-wage labor market–even though they shouldn’t. And the minimum wage is best thought of as an anti-monopsony rate-regulation policy that raises low-wage employment, raises average low-wage earnings, and brings the market closer to its competitive equilibrium:

Sandra Black, Jason Furman, Laura Giuliano and Wilson Powell: Minimum Wage Increases and Earnings in Low-Wage Jobs: “18 states plus the District of Columbia have implemented minimum wage increases…

…joining ten other states that have raised their minimum wages at least once since… 2009…. A comparison with states with no minimum wage increase since 2009 suggests that the recent legislation contributed to substantial wage increases with no discernible impact on employment levels or hours worked…. Employment in the leisure and hospitality industry follows virtually identical trends in states that did and did not raise their minimum wage. Moreover, employment in this low-wage industry grew somewhat more quickly than employment in the private sector overall. This finding is consistent with a well-established empirical literature in which minimum wage increases are often found to have no discernible impact on employment (Card and Krueger 2016, Belman and Wolfson 2014)….

Economists and policymakers are increasingly recognising that employers often have some degree of monopsony power in labour markets. And a recent CEA report discusses some reasons to think that such wage-setting power may be on the rise–including a long-run decline in labour mobility and a similar decline labour’s share of national income. To the extent this is true, it makes the case for a higher Federal minimum wage all the more compelling. Raising the wages and incomes of working Americans is one of the country’s greatest policy challenges, and it has been a central goal of many of the Obama Administration’s initiatives and proposals…

The “Short” vs. the “Long” Twentieth Century…

Posted on by Brad DeLong

Ah. I see that Branko Milanovic has found the first draft of my opening lecture for Econ 115 next semester… https://twitter.com/BrankoMilan/status/804205835543019520 https://t.co/lK82RVQudb

I think whether it is more useful to do the tell of 20th century economic history as the “short” 1914-1989 (as Hobsbswm does) or the “long” 1870-2012 (as I want to) rests on two analytical judgments:

The first judgment that leads you to the “short” century is the judgment that Kuznetsian modern economic growth was implicit in the steam engine, the spinning Jenny, and the iron horse. The belief is that, after that breakthrough, more than two centuries of 1.5%/year frontier-economy TFP growth plus the full demographic transition were largely baked in the cake.

By contrast, the judgment that leads to the “long” century is the judgment that there were three big game-changers. The first was the British Industrial Revolution jump from 0.07%/year to 0.35%/year global TFP growth. The second was the subsequent jump to 1.7%/year. The third was that the world became rich enough and literate enough and feminist enough for the demographic transition to take hold. A world with TFP growth ebbing or even continuing at 0.35%/year is still a semi-Malthusian world. It is a world in which the demographic transition would have had a hard time taking hold. And that world would be a very different world than ours.

That world is very close to ours in some multiverse-timelines sense. As of 1870 and even as of 1919 the Malthusian Devil was still very visible in the mind’s eye. Recall J.S. Mill writing in 1871 in his Principles of Political Economy about the British Industrial Revolution:

Hitherto it is questionable if all the mechanical inventions yet made have lightened the day’s toil of any human being. They have enabled a greater population to live the same life of drudgery and imprisonment, and an increased number of manufacturers and others to make fortunes. They have increased the comforts of the middle classes. But they have not yet begun to effect those great changes in human destiny, which it is in their nature and in their futurity to accomplish. Only when, in addition to just institutions, the increase of mankind shall be under the deliberate guidance of judicious foresight, can the conquests made from the powers of nature by the intellect and energy of scientific discoverers become the common property of the species, and the means of improving and elevating the universal lot…

You can say that Mill wrote that in 1848 and–carelessly–did not revise it for even the 7th edition of 1870. But he did not revise it. And Mill’s Principles of Political Economy was still the Oxford textbook in 1919.

Recall John Maynard Keynes writing in 1919 in The Economic Consequences of the Peace:

After 1870 there was developed on a large scale an unprecedented situation, and the economic condition of Europe became during the next fifty years unstable and peculiar…. In this economic Eldorado, in this economic Utopia, as the earlier economists would have deemed it, most of us were brought up. That happy age [had] lost sight of a view of the world which filled with deep-seated melancholy the founders of our Political Economy. Before the eighteenth century mankind entertained no false hopes. To lay the illusions which grew popular at that age’s latter end, Malthus disclosed a Devil. For half a century all serious economical writings held that Devil in clear prospect. For the next half century he was chained up and out of sight. Now perhaps we have loosed him again…

The second judgment that leads you to the short century is the judgment that the big story is that of Leninism as the century’s tragic hero: confidently dreaming of utopia, confidently albeit brutally attempting to build utopia, exhausting itself saving the world from the monstrous dystopia of the Nazi abattoir, and then expiring in “a vast bureaucratic incompetence”. I agree that if you are going to do that tell, 1914-1989 is the 20th century that tells it. (And if you know ex ante that 1914-1989 is the 20th century, then that is the natural story that suggests itself.) But I believe that if you start thinking that the 20th century is 1900-2000, the natural story–the important story–is the more complex one that I want to tell. Then the natural thing to do is not to shorten the century but to extend it, and to extend it to 1870-2012.

Why did Hobsbawm write about the short century in his Age of Extremes? Three reasons:

  1. He was writing in the early 1990s.
  2. He had already written Age of Empire 1870-1914.
  3. There was no way in Heaven, in Hell, or here on God’s Green Earth that Eric Hobsbawm was going to write a triumphalist Fukuyamaesque “end of history” book about the triumph of liberal capitalist democracy. He has chosen his side in Germany in the 1920s. And a British gentleman did not turn his coat and change his side under any circumstances–even if it meant one had to spend a lifetime in bed with and making excuses for Josef Vissarionovich…

References:

Eric Hobsbawm (1987): The Age of Empire http://amzn.to/2gYsn2A
Eric Hobsbawm (1995): The Age of Extremes http://amzn.to/2fOZYqt
John Maynard Keynes (1919): The Economic Consequences of the Peace http://amzn.to/2gJE24B
John Stuart Mill (1871): Principles of Political Economy http://amzn.to/2gLSJSw

Trump’s paid leave proposal could backfire on women and families

Posted on by Bridget Ansel
By excluding men and non-parental caregivers, Trump’s paid leave policy could worsen the pay gap and harm families’ economic security.

It’s no secret that the United States remains the only developed country that has failed to provide paid leave for parents, many of whom are forced to return to work soon after the birth of a child or face the financial consequences of taking unpaid time off. Citing a need to help working women, President-elect Donald Trump’s campaign proposed that he would try to pass a maternity leave policy that provides new mothers with six weeks of paid time off following the birth of a child. Considering that current U.S. federal law is limited to 12 weeks of unpaid leave through the Family Medical and Leave Act, Trump’s proposal would expand our current national policies.  A deeper examination of his proposal, however, reveals it to be lacking in multiple ways that could potentially backfire for women, families, and the U.S. economy.

First, the level of pay Trump proposes is insufficient to keep families afloat at a time when household expenses go up to care for a new child. Trump plan calls to “enhance” unemployment insurance to include six weeks of paid leave to new mothers (although there are questions about whether this is legal). How much these payments are in total depends on the state, but Trump’s proposal claims that it would be about $300 per week on average. That’s less than half of women’s current median weekly earnings of $751 per week. This would leave families with too little income considering that having a child is expensive, and the level of household income during infancy has a sizeable effect on children’s long-term health and well-being. And a plan that slashes pay by more than half might still mean that mothers would have to return to work earlier than they would otherwise.

Then there is the fact that Trump’s proposal only applies to new mothers who have given birth. Of course, women need time to physically recover from childbirth. But providing leave only to new mothers excludes fathers and parents that adopt or have a child via a surrogate, as well as the lesbian, gay, bisexual, and transgender community, and non-parental caregivers. Even in heterosexual families, a mother-only policy reinforces the assumption that women are the only ones responsible for caretaking while men act as the breadwinner. This notion is woefully out of touch with how families currently look: Today, women are the breadwinners in 40 percent of families with children under 18, while men are taking on a larger share of the domestic and care work. And for many communities, women have always worked.

Excluding men is problematic for pay equity as well. The research shows that giving leave to men as well as women is an important tool in fighting the gender pay gap, which continues to threaten women’s long-term financial security and hurts the majority of families who depend on women’s earnings. At work, there is evidence that work-family policies that are limited to or only used by women can lead employers to single out young women (even those without children) for discrimination, affecting their long term pay and advancement. In contrast, a 2015 report by the World Economic Forum finds that countries that have more gender-neutral paid leave policies are making more strides toward closing the gender wage gap, and have stronger economies because of women’s increased earnings due to their participation in the labor market.

Addressing the gender wage gap also means addressing what happens at home, and giving fathers family leave can make a difference. After the birth of a child, women tend to take on more of the childcare duties, limiting the kinds of jobs they can take and how much they can actually work. But a carefully designed, gender-neutral paid leave policy can help socialize men to help more at home, freeing up time for women if they want to work. One study by Ankita Patnaik of Mathematica Policy Research finds that Quebec’s use-it-or-lose-it “daddy quota” had a “large and persistent impact on gender dynamics within households even years after the leave period ended,” creating a more equal distribution of labor at home and raising the likelihood that a woman was employed full-time. Other researchers show similar findings.

Families today, operating in an era defined by rising income inequality and stagnant wages, increasingly need two incomes to stay afloat. President-elect Trump’s proposal was put forth during the campaign, and there are no guarantees that any eventual policy will resemble the original proposal. But if his new administration is serious about helping women and families—and the economy as well—a policy that lessens women’s earning potential is not the best way to proceed.