Must-Read: David Glasner: Price Stickiness a Symptom Not a Cause

Posted on by Brad DeLong

Must-Read: David Glasner is a Clower/Leijonhufvud student. Listen to him. Mind you, I am not sure that the Clower/Leijonhufvud point-of-view is the best first approximation. But the argument made against it is never that it is a wrong approach, but always that it is difficult to do journeyman work in. Keynes was definitely very attracted to it, in some of his moods. For example:

Ricardian analysis… Marshall’s contribution…. Edgeworth and Professor Pigou and other later and contemporary writers have embroidered and improved… [while] still dealing with a system in which… At any given time facts and expectations were assumed to be given in a definite and calculable form; and risks… capable of an exact actuarial computation… probability… reducing uncertainty to the same calculable status as that of certainty itself….

There are two important sub-issues here that are often confused:

  1. At the individual level, Bayesian probability versus Knightian uncertainty.

  2. At the aggregate emergent-properties-of-systems level, the consistency of plans and expectations with respect to all of the missing futures markets:

David:

David Glasner: Price Stickiness a Symptom Not a Cause:

Nick [Rowe], following a broad consensus among economists, identifies price stickiness as a critical cause of fluctuations in employment and income….

The real problem is not that prices are sticky but that trading takes place at disequilibrium prices and there is no mechanism by which to discover what the equilibrium prices are. Modern macroeconomics solves this problem, in its characteristic fashion, by assuming it away…. Economists have allowed themselves to make this absurd assumption because they are in the habit of thinking that the simple rule of raising price when there is an excess demand and reducing the price when there is an excess supply inevitably causes convergence to equilibrium. This habitual way of thinking has been inculcated in economists by the intense, and largely beneficial, training they have been subjected to in Marshallian partial-equilibrium analysis…. But that analytic approach can only be justified under a very restrictive set of assumptions…. All partial equilibrium analysis involves a certain amount of hand-waving. Nor, even if we wanted to be careful and precise, could we actually dispense with the hand-waving; the hand-waving is built into the analysis…. I have often referred to these assumptions required for the partial-equilibrium analysis–the bread and butter microeconomic analysis of Econ 101–to be valid as the macroeconomic foundations of microeconomics….

So the assumption, derived from Modigliani’s 1944 paper that “price stickiness” is what prevents an economic system from moving automatically to a new equilibrium after being subjected to some shock or disturbance, reflects either a misunderstanding or a semantic confusion. It is not price stickiness that prevents the system from moving toward equilibrium, it is the fact that individuals are engaging in transactions at disequilibrium prices….

It is also a mistake to assume that in a world of incomplete markets, the missing markets being markets for the delivery of goods and the provision of services in the future, any set of price adjustments, however large, could by themselves ensure that equilibrium is restored. With an incomplete set of markets, economic agents base their decisions not just on actual prices in the existing markets; they base their decisions on prices for future goods and services which can only be guessed at. And it is only when individual expectations of those future prices are mutually consistent that equilibrium obtains…. So that’s why I regard the term “sticky prices” and other similar terms as very unhelpful and misleading; they are a kind of mental crutch that economists are too ready to rely on as a substitute for thinking about what are the actual causes of economic breakdowns, crises, recessions, and depressions…

Must-Read: John Maynard Keynes (1936): The General Theory of Employment, Interest and Money, Chapter 13

Posted on by Brad DeLong

Must-Read: John Maynard Keynes (1936): The General Theory of Employment, Interest and Money, Chapter 13:

The three divisions of liquidity-preference….

  1. the transactions-motive, i.e. the need of cash for the current transaction of personal and business exchanges;

  2. the precautionary-motive, i.e. the desire for security as to the future cash equivalent of a certain proportion of total resources; and

  3. the speculative-motive, i.e. the object of securing profit from knowing better than the market what the future will bring forth….

A highly organised market for dealing with debts presents us with a dilemma…. In the absence of an organised market, liquidity-preference due to the precautionary-motive would be greatly increased; whereas the existence of an organised market gives an opportunity for wide fluctuations in liquidity-preference due to the speculative-motive…. Circumstances can develop in which even a large increase in the quantity of money may exert a comparatively small influence on the rate of interest. For a large increase in the quantity of money may cause so much uncertainty about the future that liquidity-preferences due to the security-motive may be strengthened; whilst opinion about the future of the rate of interest may be so unanimous that a small change in present rates may cause a mass movement into cash. It is interesting that the stability of the system and its sensitiveness to changes in the quantity of money should be so dependent on the existence of a variety of opinion about what is uncertain. Best of all that we should know the future. But if not, then, if we are to control the activity of the economic system by changing the quantity of money, it is important that opinions should differ. Thus this method of control is more precarious in the United States, where everyone tends to hold the same opinion at the same time, than in England where differences of opinion are more usual….

The propensity of the public towards hoarding… determine[s] the rate of interest at which the aggregate desire to hoard becomes equal to the available cash. The habit of overlooking the relation of the rate of interest to hoarding may be a part of the explanation why interest has been usually regarded as the reward of not-spending, whereas in fact it is, the reward of not-hoarding…

Geographic mismatch might not be a big deal for U.S. unemployment

Posted on by Bridget Ansel
In this Tuesday, July 19, 2016 photo, a job applicant attends a job fair in Miami Lakes, Fla.

Unemployment rates vary quite a bit among U.S. states. In August, the unemployment rate in South Dakota was only 2.9 percent. Compare that to the unemployment rate of 6.8 percent in Alaska. With such a difference in unemployment, it’s worth considering why more people don’t move to areas with lower unemployment rates. Perhaps policymakers should try to influence people to move from areas with higher levels of unemployment to parts of the country where the job market seems to be in better shape. Such a policy would be quite successful if these geographic mismatches were very common in the U.S. labor market.

Certainly such mismatches are present in the United States, but a new paper casts doubts on how much eliminating geographic barriers to employment would reduce unemployment. In a new working paper, economists Ioana Marinescu of the University of Chicago and Roland Rathelot of the University of Warwick look at the geography of job seekers and open jobs in the United States. They look at the distribution of job openings and applications in data from the job board website CareerBuilder.com between April and June 2012. While the data set obviously doesn’t cover all vacancies and applications in the U.S. labor market, it is representative enough of the total population to be useful for this exercise.

Looking at job applications, Marinescu and Rathelot find that there is an aversion among workers to applying for jobs further away from their homes. Workers are 35 percent less likely to apply for a job that’s more than 10 miles away from the zip code where they live. This fits the geographic mismatch story, which means reducing that aversion could help improve job matches in the labor market.

But Marinescu and Rathelot also find that those long-distance applications aren’t that big of a deal in the labor market. Most applicants are already fairly close to job openings and therefore geographic mismatch isn’t much of a problem overall. The two economists use a model of job searching to understand how much unemployment would go down if job applicants were moved around in order to maximize the amount of hiring in the labor market. The result would be a level of unemployment that’s only about 5 percent lower than unemployment levels at the time.

A 5 percent reduction in the level of unemployment in spring of 2012 would have pushed the unemployment rate down to about 7.8 percent, compared to the actual 8.2 percent rate at the time. A 0.4 percentage point decline in the unemployment rate is nothing to scoff at. But remember, that reduction is from moving people around so that hiring is maximized and the downsides of moving for individual families and communities—such as having to change schools or church, and the costs associated with finding a new home—may be quite high. The geographic mismatch of jobs and jobs seekers did push up the unemployment rate a bit, but it wasn’t a major driver. Reducing geographic barriers to job hunting in the United States would likely be beneficial, but in many ways it might just be a sideshow.

Must-Reads: September 28, 2016

Posted on by Brad DeLong

Should Reads:

Must-Read: Emmanuel Saez and Stefanie Stantcheva: A Simpler Theory of Optimal Capital Taxation

Posted on by Brad DeLong

Must-Read: I have long thought that the right way to think about consumption vs. income taxes is that a consumption tax is like a labor income tax plus a one-time credibly-unrepeated initial capital levy. Since it taxes something in completely inelastic supply–the initial capital stock–that escapes income taxation, it has to be more “efficient” than an income tax. This has tended to make me a friend of progressive consumption taxes. But here we have Saez and Stantcheva making a powerful argument that we need capital taxation as well. I am going to have to think hard about this:

Emmanuel Saez and Stefanie Stantcheva: A Simpler Theory of Optimal Capital Taxation:

We derive formulas for optimal linear and nonlinear capital income taxation…

…expressed in terms of the elasticity of the supply of capital income… the shape of the capital income distribution, and the social welfare weights at each capital income level…. The social welfare criterion required to justify a pure labor tax (or equivalently a pure consumption tax) is that all inequalities in capital are fair, which is a very strong requirement…. If differences in capital are considered fully fair (i.e., the generalized social welfare weights are uncorrelated with capital and capital is not a tag) the optimal capital tax is zero…. Because capital income is much more concentrated than labor income, we find that the top tax rate on capital income should be higher than the top tax rate on labor income…

Must-Read: Scott Sumner: Who Is Peter Navarro?

Posted on by Brad DeLong

Must-Read:: Scott Sumner is surprised at how unprofessional Peter Navarro of U.C. Irvine is. So am I. I had always thought of him as interesting but flaky–but here it looks as though he does not even know that he has homework to do:

Scott Sumner: Who Is Peter Navarro?:

Tyler Cowen linked to a paper by Peter Navarro…. It’s a complete mess…

Here are just a few examples:

Under WTO rules, any foreign company that manufactures domestically and exports goods to America (or elsewhere) receives a rebate on the VAT it has paid…. turn[ing] the VAT into an… export subsidy. At the same time, the VAT is imposed on all goods that are imported… turn[ing] the VAT into an implicit tariff on US exporters…. Thus, under the WTO system, American corporations suffer a “triple whammy”: foreign exports into the US market get VAT relief, US exports into foreign markets must pay the VAT, and US exporters get no relief on any US income taxes paid… giv[ing] our major trading partners a 15% to 25% unfair tax advantage in international transactions.

This is a very basic error…. A VAT is neutral with respect to trade. An across the board 10% import tax, combined with a 10% export subsidy… convert the tax from a production tax to a consumption tax.. that applies equally to all goods, whether made domestically, or imported. This is not even a tiny bit controversial.

What’s the optimal tax for capital income?

Posted on by Bridget Ansel
The Internal Revenue Service Building, Wednesday, Aug. 19, 2015, in Washington.

How much should U.S. policymakers tax capital? It’s not a simple question. In fact, for some time there was a debate within the economics profession as to whether there should be a tax at all. A famous result from the Chamley-Judd model and other results led many economists to believe that the optimal tax rate on capital income was zero. The argument by these economists was that placing any tax on capital gains from investments would be incredibly distortionary and would come at a major cost to the overall efficiency of the economy.

Recent research, however, shows that changing the (in some cases very unrealistic) assumptions underpinning these earlier models pointing to a zero optimal tax rate result in findings that there is a positive optimal tax rate on capital. A new paper might help policymakers understand this new way of thinking about taxing capital.

The new working paper from the National Bureau of Economic Research is by University of California-Berkeley economist Emmanuel Saez and Harvard University economist Stefanie Stantcheva. In their paper, they try to do for capital taxation what economists have done for labor income taxation: build a simple model of optimal taxation. More specifically they are using a “sufficient statistics” approach, which allows them to feed a few specific parameters derived from empirical papers into a model to help get a broader understanding of the U.S. economy.

First, the two economists build a model of the economy in which people aren’t going to live forever and don’t have perfect foresight—two obviously unrealistic assumptions in the prior models. That plus the new assumption they add to their model—that people like wealth for wealth’s sake, not just as a way to fund consumption—results in people who won’t stop saving as soon as capital is taxed. This is important as the prevailing view among economists who believe in an optimal zero tax rate is that higher tax rates result in very large changes in savings.

Saez and Stantcheva find that the three “sufficient statistics” for determining the optimal tax on capital are:

  • How readily savings will respond to a change to the rate of return after taxes
  • How unequal is the distribution of capital income
  • How society views wealth

Feeding data from U.S. tax returns into their model, Saez and Stantcheva find that the optimal capital income tax rate is definitely higher than zero.

In fact, it appears that the optimal capital income tax rate is higher than the labor income tax rate. If individuals are equally likely to change how much they work or how much they save due to a change in taxes, then capital income will always have a higher optimal rate than labor income. That’s because capital income is much more unequally distributed. Saez and Stantcheva also point out that the tax rate on capital income will increase if people think that wealth inequality is unfair and want to redistribute to those with less wealth.

The question posed at the very beginning of this article still stands. As useful as Saez and Stantcheva’s simpler model may be, it’s just part of a broader conversation about whether and how to tax capital and at what levels.

Beating America’s Health-Care Monopolists: Fresh at Project Syndicate

Posted on by Brad DeLong

J. Bradford DeLong and Michael M. DeLong: Beating America’s Health-Care Monopolists: BERKELEY – The United States’ Affordable Care Act (ACA), President Barack Obama’s signature 2010 health-care reform, has significantly increased the need for effective antitrust enforcement in health-insurance markets. Despite recent good news on this front, the odds remain stacked against consumers.

As Berkeley economics professor Aaron Edlin has pointed out, consumer abstention is the ultimate competitor. Companies cannot purchase or contrive a solution to consumers who say, “I’m just not going to buy this.” But the ACA requires individuals to purchase health insurance, thus creating a vertical demand curve for potential monopolists. Under these conditions, profits – and consumer abuse – can be maximized through collusion. Read MOAR at Project Syndicate

Must-Read: Hans-Werner Sinn: Secular Stagnation or Self-Inflicted Malaise?

Posted on by Brad DeLong

Must-Read: WTF!?!? Hans-Werner Sinn appears simply to have failed to understand what the modern “secular stagnation” argument is. The facts that a very large credit bubble in the mid-2000s did not produce a high-pressure rising-inflation economy and that ultra-low interest rates today do not produce full recover are arguments for the secular stagnation hypothesis, not against it:

Hans-Werner Sinn: Secular Stagnation or Self-Inflicted Malaise?:

Some economists believe that this is evidence of “secular stagnation”….

The natural real interest rate has continued to fall. Stabilizing the economy thus is possible only by an equivalent decline in policy interest rates.In view of the huge credit bubble that preceded the crisis in Japan, the United States, and southern Europe, and the aggressive policies pursued by central banks over the last few years, I doubt that this theory is correct…

All work and no pay for many women around the globe

Posted on by Ed Paisley

A young woman entering the job market today anywhere around the globe can expect to work on average four years more than her male counterpart over a lifetime, according to a new report by the U.K.-based anti-poverty organization ActionAid. The report, presented at the United Nations General Assembly last week, points out that women’s extra labor is not necessarily driven by logging more hours of paid employment. The bulk of the extra labor—an average of one month per year globally—is unpaid work such as caring for children and elderly or performing domestic duties.

This unpaid work is essential to any nation’s economy’s ability to function. Throughout history, nonemployed women tended to be responsible for domestic duties and round-the-clock care of family members, rendering their value invisible in an economic system where work is predominantly measured in wages. Today, even as more women have entered the paid workforce, the report highlights how the higher burden of domestic duties limits women’s opportunity to earn money, participate in political activities, and take days off.

While wealthier countries tend to have a smaller gender gap in unpaid work, a sizeable difference still exists even in the United States. Arlie Hochschild’s seminal 1989 book, “The Second Shift,” detailed the way working women in the United States essentially performed two jobs: punching out at work only to come home to care for the family. More than 25 years later, men are pitching in more domestically, but things are still far from equal: Women in the United States still perform almost double the amount of housework and childcare as their male partners. Studies show that many women offset the heavier burden at home by reducing the time they spend in paid employment (which means less overall income), especially in jobs that reward long hours at the office.

The failure to value unpaid domestic and care work also has broader implications for the U.S. economy. While the value of unpaid work affects economic activity, it is not currently captured by gross domestic product statistics. Care work, for example, is the foundation of what many economists call “human infrastructure.” Just as we depend on the bridges, roads, and railways that make up our physical infrastructure for society to function, we rely on the support of those caring for the elderly and nurturing the young. Investing in the care of our children today ensures a productive workforce tomorrow. Being able to arrange sufficient proper care for a child or ailing parent affects what kind of job you can take and how productive you’ll be once you get there.

That is why gender equality and women’s time is not just an issue of fairness. Women make up nearly half of the working-age population in the United States. Globally, a recent report by the McKinsey Global Institute finds that advancing women’s equality could add $12 trillion to global growth. In the United States alone, that number amounts to $2.1 trillion in 2025.

The issue of time spent outside of the (paid) workplace tends to be overlooked in debates around gender equality, but what happens at home has ripple effects throughout society. Policymakers can help close the time gap by redistributing some of the unpaid work to men. After all, men who have access to paid leave after the birth of a child spend more time on household labor and childcare even years later. But in an era in which men and women are both in the labor force, redistribution isn’t enough as it just means that everyone will struggle to reconcile work and family life. Policies such as flexible working arrangements, affordable care for children and the elderly, and affordable healthcare can support men and women alike and strengthen society and the economy as well.