Must-Reads: October 20, 2016

Posted on by Brad DeLong

Should Reads:

What are the effects of cash transfers on U.S. workers across generations?

Posted on by Bridget Ansel
A man walks with two children in Fresno, Calif.

In yesterday’s New York Times, columnist Eduardo Porter explains why he advocates for a child allowance in the form of a universal cash transfer by the federal government to households with children. The idea of a child allowance is increasingly part of the policy conversation and dovetails with new thinking about increasing the use of direct cash transfers, such as a universal basic income guarantee for all workers. Yet research on these programs in the United States focuses almost entirely on the short-term effects of such programs, so policymakers aren’t sure how the recepients and their children are affected by these programs years down the line.

Earlier this week new research was released on the long-term effects a cash transfer program in the United States. The paper shines new light on the effects of cash transfers, but should be understood in light of what exactly it’s studying. So before exploring those findings, here’s some background.

In the 1960s and 1970s, the idea of unconditional cash transfers was very much in the policy mainstream, so much so that large-scale evaluations of the idea were implemented in the United States. The Seattle-Denver Income Maintenance Experiment, for example, was a randomized controlled-trial examination of the idea of a negative income tax. Unlike a universal basic income, in which every household would receive the same amount of money regardless of how much they work, a negative income tax reduces the amount of money households receive as their income increases. These “income maintenance” programs were studied at the time, but analysis of the long-term effects obviously had to wait.

A new paper by David J. Price of Stanford University and Jae Song of the Social Security Administration takes a look at those effects. Because the original program randomly assigned whether households were entered into the program or not, the two economists can be fairly certain they are looking at a causal effect of the program. They match up data from the experiments with Social Security Administration data that lets them see the long-run trajectory of earnings—not only of parents but the children as well.

For the adults, Price and Song find that the program did seem to reduce the labor supply of workers as it reduced the probability that a worker was working in a given year by about 3 percentage points. The program also seems to have had an effect on earnings, reducing them by about 7 percent of average annual earnings. These effects, however, are concentrated later in a workers’ life, at around 50 or 60 years of age. The researchers don’t have good evidence why workers in the program seems to encourage workers to exit the job market later in life.

When it comes to the children of the effected households, Price and Song don’t find much of an effect at all. Later in life, these now-adults don’t seem to change their engagement in the workforce or their earnings because of their parents’ involvement in this particular kind of cash transfer program. Now this might seem like a positive result, but it has to be taken in the context of other research that finds a positive effect of cash transfers on children’s adult outcomes. One case in point: a paper on the Mother’s Pension program, an unconditional cash transfer program to needy families, finds a large positive effect on the earnings of effected children later in their lives.

How do we rectify these results? As Price and Song point out, there are two big differences between the programs. First, the Mother’s Pension program was unconditional and didn’t discourage work by recipients. In contrast, the income maintenance program reduced its benefits as household income grew, creating an incentive for recipients not to work. Another difference: The income maintenance program was universal while the Mother’s Pension program was targeted to low-earning households.

So perhaps the effect of the maintenance program was positive for low-income recipients, but there were different effects for households earning more. Either way, this new research is useful for giving us more information on the long-term effects of programs that are now becoming a larger part of the U.S. policymaking conversation.

The Three Ways in Which the Post-Korean War Federal Reserve Reacts to/Leads Large Increases in the Unemployment Rate

Posted on by Brad DeLong
  • In “Eisenhower” episodes, the Federal Reserve cuts interest rates slowly and shallowly as the unemployment rises, trusting to the equilibrium-restoring self-stabilizing forces of the economy. It then raises interest rates as the economy recovers.
  • In “murder” episodes, the Federal Reserve kills the expansion in order to fight inflation. Interest rates start high when the unemployment rate starts rising, the Fed then cuts interest rates far and quickly as unemployment approaches its peak, after which it raises interest rates as the economy recovers.
  • In “financial crisis” episodes, a financial crisis (S&L 1990; dot-com 2000) sends the unemployment rate up, in response the Federal Reserve cuts interest rates substantially, and then raises them as the economy recovers.

    • Of course, post-2007 fits none of these patterns because of the zero lower bound…

    2016 10 04 Unemployment and Fed Funds Changes numbers 2016 10 04 Unemployment and Fed Funds Changes numbers 2016 10 04 Unemployment and Fed Funds Changes numbers

    Must-Read: Patrick Iber: How Academics Can Use Twitter

    Posted on by Brad DeLong

    Must-Read: Patrick Iber: How Academics Can Use Twitter: “Two of the most important debates we have been having in academe in the last few years center on the issues of contingent labor and public engagement…

    ..The contingent labor debate reflects the poor conditions of the tenure-track job market… The public engagement debate… [is] forms: 1) a perennial lament that academics are bad writers and 2) asking whether public engagement should count for tenure and promotion…. There may be much bad academic writing, but there is a flourishing ecosystem of public writing by academics…. There is an audience for erudite criticism and lively, timely and accessible academic work. Precarity helped create the new public scholar; in a twist of fate, the success of contingent voices in finding an audience for their work may have now helped to raise expectations for those occupying scarce tenure-track jobs….

    You can, of course, be a publicly engaged scholar in many ways, but the anxieties about Twitter seem particularly acute. It is sometimes reviled as a waste of time to be avoided. But it is most often treated with puzzlement…. You do not have to join…. When I became contingent, I decided I had nothing left to lose. Since then I have found it enormously helpful, both personally and professionally. I don’t need Twitter itself to count for anything, but it facilities activities that already count…. It allows academics and people in other knowledge industries to interact directly. Twitter is the preferred social network of journalists…. Twitter is the place where you can share what you know and try to find someone to let you write it up at greater length…. Academics… often live in isolation from other people who share their research interests. Twitter is a good way to find those people out there who do share them….

    What Should I Avoid Doing?

    Don’t, under any circumstances, complain about your students. Twitter is a public forum. They’re students; they’re learning. If you’re tenured or on the tenure track, don’t complain…. If you’re a graduate student or contingent, be careful…. Don’t complain about your employer…. Don’t try to be too cool….

    Second: don’t be horrible. Twitter is widely acknowledged to have a problem with abuse…. Don’t engage; block immediately…

    Must-Read: Jason Furman: Five Fiscal Policy Principles

    Posted on by Brad DeLong

    Must-Read: Jason Furman: Five Fiscal Policy Principles: “Nowhere is… recovery complete…

    …The eurozone has an unemployment rate of 10%…. Japan’s per-capita GDP… has… stalled. The US… still has more to do to eliminate labour market slack. Too many policymakers have abandoned expansionary fiscal policy as a tool for supporting growth, placing the burden on monetary policy. For their efforts, central bankers around the world were excoriated by many of the same legislators who to this day are also blocking sufficient fiscal support. Some objections to more fiscal expansion are based on an “old view” of fiscal policy advanced by many academic economists in the years before the crisis. This argues that discretionary stimulus is too rigid or ineffective or even counterproductive, and was at odds with the more fundamental problem of long-term debt. But the post-crisis experience, as well as research on the effects of fiscal policy, is establishing a “new view” grounded in five principles:

    1. At a time when conventional monetary policy faces limitations in a world of lower interest rates, fiscal policy can be a particularly effective complement….
    2. In today’s conditions fiscal policy may… “crowd in” private investment through stronger growth….
    3. [In] advanced economies… under today’s economic conditions effectively crafted investments could raise output by more than they raise debt–reducing the debt-to-GDP ratio….
    4. Prolonged lower interest rates and economies operating below potential suggest that fiscal expansion should be more sustained….
    5. Fiscal policy is even more beneficial if co-ordinated more across countries…

    Jason Furman: The New View of Fiscal Policy and Its Application:

    Are employees willing to forgo pay for better work schedules?

    Posted on by Bridget Ansel

    Workers in the United States have long lamented the grind of the 9-to-5 work day, evidenced through songs and movies, books, and self-help authorities who promise that freedom (and maybe even prosperity) await if only we could find a way to leave our jobs. But for a growing number of workers whose jobs are characterized by unpredictable schedules or require them to log hours at night and on the weekends, the Monday-through-Friday, 9-to-5 job may look relatively good. Unpredictable and non-standard schedules take a well-documented toll on workers and their families. That may explain why new research finds that many workers would be willing to forgo pay in order to preserve a standard, 9-to-5 schedule.

    In the paper, economists Alexandre Mas of Princeton University and Amanda Pallais of Harvard University used a real-life hiring process at a call center to determine how much workers value different kinds of working conditions, including flexible schedule options (such as a full, 40-hour work week with varied hours, or the ability to set one’s own hours), working from home, and positions that gave the employer discretion over scheduling. About 7,000 applicants were offered the choice between a job with traditional Monday-through-Friday, 9-to-5 work hours or a job with one of these alternative options (which were randomly assigned). The two job offers differed in hourly pay—anywhere between 25 cents to $5 an hour—and the researchers also varied which job offer paid more.

    Mas and Pallais find that, on average, workers would be willing to forgo a remarkable 20 percent in wages—one fifth of their paycheck—in order to avoid jobs in which the jobs required irregular schedules with evening and weekend hours. Many of those surveyed also would give up pay in order to work from home: 25 percent of applicants were willing to give up at least 14 percent of their wages to avoid coming into the office.

    The authors, unsurprisingly, find some small gender differences. Women, on average, were more likely to favor these alternative work arrangements compared to men.  And while Mas and Pallais could not determine whether the workers in their experiment had children, they did look at data from the Understanding America Study, finding that women with children are willing to be paid significantly less to avoid irregular schedules in exchange for the ability to work from home.

    But what is more surprising, at least at first glance, is Mas and Pallais’ finding that the average worker does not value flexibility. That is, they are not willing to give up pay in exchange for the ability to set their own hours, or choose how many hours they work. In fact, many of those surveyed actively preferred a set schedule, saying they liked having somebody else set their own schedule because it held them accountable for working enough hours. But the authors caution that these results should not be interpreted to mean that all workers do not value flexibility. Looking only at the average masks about a quarter of those surveyed who value flexibility very much—and are willing to give up about 7 percent of their wages to obtain it.

    It is important to note this research by Mas and Pallais is looking at a very specific group of people—workers who are applying for a specific job at a call center. So while the results add to the body of literature dealing with worker schedules and alternative work arrangements, it is unclear how applicable they are to the entire workforce. What’s more, while this experiment sets up these options as a tradeoff—ideal work schedule versus pay—in order to determine how workers feel about different kinds of schedule arrangements, extending this mindset to the real work sets a dangerous precedent because of its implications for racial and gender equality.

    A great deal of evidence points out that firms who practice work-life not only help families, but also can reduce turnover and boost productivity (which means faster overall economic growth). This research highlights, however, that different workers need different things in order to do find the right work-life balance for themselves. Combining broad-based workplace rights such as paid leave and sick days with a more individualized approach to scheduling can help workers and employers across the country.

    Yellen poses important post-Great Recession macroeconomic questions

    Posted on by Bridget Ansel
    Federal Reserve Chair Janet Yellen smiles as she is introduced at an address at the Federal Reserve Bank of Boston in Boston, Friday, Oct. 14, 2016.

    Last week at a Federal Reserve Bank of Boston conference, Federal Reserve Chair Janet Yellen gave a speech on macroeconomics research in the wake of the Great Recession. She identifies several key areas for macroeconomics research in the future, particularly in areas that will be informative for U.S. policymakers. Yellen lists four areas for research, but let’s look more closely at the first two groups of questions that she elevates.

    The first is the influence of aggregate demand on aggregate supply. As Yellen notes, the traditional way of thinking about this relationship would be that demand, a short-run phenomenon, has no significant effect of aggregate supply, which determines long-run economic growth. The potential growth rate of an economy is determined by aggregate supply and the fluctuations around that long-term trend—recessions and expansions, according to this line of thinking. Basically, the ups and downs of the business cycle are determined by changes in aggregate demand. Yet the slow growth of the past several years has many economists rethinking this relationship.

    Yellen points to research that increasingly finds so called hysteresis effects in the macroeconomy. Hysteresis, a term borrowed from physics, is the idea that short-run shocks to the economy can alter its long-term trend. One example of hysteresis is workers who lose jobs in recessions and then aren’t drawn back into the labor market bur rather are permanently locked out, therefore increasing the long-run unemployment rate. Interesting new research argues that hysteresis may affect not just the labor supply but also the rate of productivity growth.

    If hysteresis is prevalent in the economy, then U.S. policymakers need to rethink their fiscal and monetary policy priorities. The effects of hysteresis may mean that economic recoveries need to run longer and hotter than previous thought in order to get workers back into the labor market or allow other resources to get back into full use.

    The other set of open research questions that Yellen raises is the influence of “heterogeneity” on aggregate demand. In many models of the macroeconomy, households are characterized by a representative agent, meaning that all households are assumed to be the same on average and therefore don’t consider differences in households and how they might react differently to different shocks. In short, they are assumed to be homogeneous. As Yellen notes in her speech, overall home equity remained positive after the bursting of the housing bubble, so a representative agent would have maintained positive equity in their home.

    Yet a wealth of research in the wake of the Great Recession finds that millions of households whose mortgages were “underwater” and didn’t have positive wealth—a big reason for the severity of the downturn. Ignoring this heterogeneity in the housing market and its effects on economic inequality seems like something modern macroeconomics needs to resolve. Economists are increasingly moving in this direction, but even more movement would very helpful.

    Yellen raises other areas of inquiry in her speech, including better understanding how the financial system is linked to the real economy and how the dynamics of inflation are determined. Perhaps it’s time for each of these questions to rise on the collective research list so that policymakers have better vantage points as they assess the effect of inequality on economic growth and stability. As Paul Krugman has noted several times over the past several years, the Great Recession doesn’t seem to have provoked the same rethink of macroeconomics compared to the Great Depression, which ushered in Keynesianism, and the stagflation of the 1970s, which led to the ascendance of new classical economics. The U.S. economy is similarly dealing with a “new normal.” Macroeconomics needs to respond this reality.

    Must-Read: Mohamed A. El-Erian: Toxic Politics Versus Better Economics

    Posted on by Brad DeLong

    Must-Read: More and more, it is sounding as though we are all Polanyiists now…

    Mohamed A. El-Erian: Toxic Politics Versus Better Economics: “Advanced-country politicians are locked in bizarre, often toxic, conflicts…

    …instead of acting on a growing economic consensus about how to escape a protracted period of low and unequal growth. This trend must be reversed, before it structurally cripples the advanced world and sweeps up the emerging economies, too…. Political infighting is nothing new. But, until recently, the expectation was that if professional economists achieved a technocratic consensus… political leaders would listen…. Incoming governments – particularly those led by non-traditional movements, which had risen to power on the back of domestic unease and frustration with mainstream parties – sometimes disagreed with the appropriateness and relevance…. But, as Brazilian President Luiz Inácio Lula da Silva demonstrated with his famous policy pivot in 2002, that consensus tended largely to prevail….

    But after years of unusually sluggish and strikingly non-inclusive growth, the consensus is breaking down. Advanced-country citizens are frustrated with an “establishment” – including economic “experts,” mainstream political leaders, and dominant multinational companies – which they increasingly blame…. [The] Brexit vote… directly defied the broad economic consensus that remaining within the European Union was in Britain’s best interest…. At the recent Conservative Party annual conference, speeches by Prime Minister Theresa May and members of her cabinet revealed an intention to pursue a “hard Brexit,” thereby dismantling trading arrangements that have served the economy well. They also included attacks on “international elites” and criticism of Bank of England policies that were instrumental in stabilizing the British economy in the referendum’s immediate aftermath – thus giving May’s new government time to formulate a coherent Brexit strategy….

    Make no mistake: solid and credible policy options are available…. As IMF Managing Director Christine Lagarde put it, “central banks cannot be the only game in town.” And yet they have been…. Countries need a more comprehensive policy approach, involving pro-growth structural reforms, more balanced demand management (including higher fiscal spending on infrastructure), and better cross-border policy coordination and architecture…. The emergence of a new consensus on these points is good news. But, in the current political environment, translating that consensus into action is likely to happen too slowly, at best…

    Must-Watch: Brown University Janus Forum: Inequality: Is America Becoming a Two-Tiered Society?

    Posted on by Brad DeLong

    Must-Watch: Well, I thought that went very well…

    Brown University Janus Forum: Inequality: Is America Becoming a Two-Tiered Society?: Monday, October 17 @ 5:30pm :: Brown Faculty Club Hunter Room…

    …James Bradford DeLong at University of California, Berkley, and Nicholas Gregory Mankiw, the Robert M. Beren Professor of Economics at Harvard University, will share their alternative readings and reactions to the recent top selling book “Capital in the Twenty-first Century” by Thomas Piketty. Is income inequality on the rise? What does the evidence say? How significantly does income inequality shape human welfare? Does economic growth help the poor?

    Must-Read: Edward L. Glaeser, Giacomo A.M. Ponzetto, and Andrei Shleifer: Securing Property Rights

    Posted on by Brad DeLong

    Must-Read: Edward L. Glaeser, Giacomo A.M. Ponzetto, and Andrei Shleifer: Securing Property Rights: “A central challenge in securing property rights is the subversion of justice…

    …through legal skill, bribery, or physical force by the strong—the state or its powerful citizens—against the weak. We present evidence that the less educated and poorer citizens in many countries feel their property rights are least secure. We then present a model of a farmer and a mine which can pollute his farm in a jurisdiction where the mine can subvert law enforcement. We show that, in this model, injunctions or other forms of property rules work better than compensation for damage or liability rules. The equivalences of the Coase Theorem break down in realistic ways. The case for injunctions is even stronger when parties can invest in power. Our approach sheds light on several controversies in law and economics, but also applies to practical problems in developing countries, such as low demand for formality, law enforcement under uncertain property rights, and unresolved conflicts between environmental damage and development.