A Brief History of (In)equality: No Longer So Fresh at Project Syndicate

Posted on by Brad DeLong
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No Longer Fresh at Project Syndicate: A Brief History of (In)equality: Here we have a very nice set of slides http://tinyurl.com/dl20160725a. It comes from a talk in Lisbon given by Barry Eichengreen, my sixth-floor office neighbor here at the Berkeley Economics Department. The slides have one of the great virtues of economic history: We, unlike other economists, are allowed to at least gesture at and even glory at the complexities of a situation. We are not forced, as other economists are, into ruthless oversimplification in pursuit of conceptual clarity—to be followed by the intellectually-faulty imperialism overloading more of an explanation of the world on a simple model then it can rightfully bear. Read MOAR at Project Syndicate

In Barry’s view, with respect to inequality there have been and are now ongoing six important first-order processes at work over the past two and a half centuries:

  1. The 1750-1850 pulling-apart of Britain’s income distribution, as the technologies and institutions of the British Industrial Revolution benefitted the urban bourgeoisie and the rural bourgeois gentry but neither the rural nor the urban proletariat http://amzn.to/2aFJAYz https://www.jstor.org/stable/2600061.

  2. The 1850-1914 great First Age of Globalization convergence of living standards and labor productivity levels in the Global North, as 50 million people left overcrowded agricultural Europe for resource-rich settler colonies and ex-colonies, and brought their institutions, their technologies, and their capital with them. Gaps of roughly 100% in wage levels between European sender and settler recipient economies shrank to 25% or so http://amzn.to/2a6aXz6.

  3. The 1750-1975 enormous pulling-apart of the global income distribution, as some parts of the world were able to take full or nearly full advantage of industrial and post industrial technologies, and others were not. Measured at purchasing power parity, America was twice as well off as China in 1800. By 1975 it was thirty times as well off http://tinyurl.com/dl20160725b.

  4. The 1870-1914 First Gilded Age rise of within-country inequality in the Global North, as entrepreneurship, industrialization, and rent seeking distributed the bulk of increases and productivity to the relatively well off and to the plutocracy http://tinyurl.com/dl20160725a.

  5. The 1930-1980 Social Democratic Age great compression of the earnings distribution in the Global North http://tinyurl.com/dl20160725c.

  6. The post 1980 divergence of outcomes within the Global North, as political economic choices lead to the coming of a Second Gilded Age to the Global North’s English-speaking portions.

I, however, think Barry’s talk is not economic-historiany enough. I would go further. I would start by adding five more first-order important factors and processes:

  1. The extraordinary post-1980 reduction in and yet stubborn persistence of remaining pools of absolute poverty. Inequality is a maldistribution of the opportunities for Isaiah Berlin’s positive liberty. But as my ex-colleague Ananya Roy points out, absolute poverty is a deprivation of Berlin’s negative liberty as well—it matters little when you are in a cage without any money whether you could theoretically buy a key http://amzn.to/2ac721f http://tinyurl.com/dl20160725d.

  2. The extraordinary nineteenth-century global shrinkage of slavery.

  3. The global reduction of other caste barriers—race, ethnicity, gender—which limit people’s opportunities to make use of whatever wealth they have.

  4. The post-1975 global-scale switch from increasing planet-wide divergence in wealth to convergence—although do note that, so far at least, all of the switch from the pre-1975 increasing divergence pattern is the result of two good growth generations in China, and one good growth generation in India.

  5. The dynamic of compound interest backed by political-economic rent-seeking identified by Thomas Piketty—with the caveat that Piketty’s logic applies not very much to our past, even our 1980-2015 past, but may well be an important part of our 2015-2100 future http://amzn.to/2ab4rSI.

Complicated, yes? A matter for careful adjustment of institutions by those with social science expertise directed by elected leaders who share the people’s value, yes?

And, most important, I would finish by adding, underlining, and emphasizing a twelfth process:

Populist mobilizations to try to deal with problems of inequality have had consequences we can call “checkered” only out of politeness. Populist mobilizations have been directed in France toward installing an Emperor, Napoleon III, and toward overthrowing democratic governments of the Third Republic. Populist mobilizations in America have been directed at excluding immigrants from China to California, at excluding immigrants from anywhere save northwest Europe, at enforcing Jim Crow. Populist mobilizations in central Europe were turned toward imperialism as the problem was redefined as that Germany and Italy were “proletarian nations” that needed bigger empires. And only Naziism could surpass in its consequences the populist mobilizations that were turned to entrenching in power Lenin’s “party of a new type” and all of its imitators. The constructive responses were fewer: Extending the franchise. Progressive income taxes. Social insurance. Building society’s physical and, more important, human capital. Opening economies. Prioritizing full employment. Encouraging migration to where ample resources and, more important, good institutions were already established. History teaches us that those have been the reactions to inequality that have made the world a better place.

Of course, history also tells us that we fail to learn what lessons history has to teach us.

Must-Read: Ruddier Bachmann and Eric Sims: Confidence and the Transmission of Government Spending Shocks

Posted on by Brad DeLong

Must-Read: Ruddier Bachmann and Eric Sims: Confidence and the Transmission of Government Spending Shocks:

In a standard structural VAR, an empirical measure of confidence does not significantly react to spending shocks and output multipliers are around one…

In a non-linear VAR, confidence rises following an increase in spending during periods of economic slack and multipliers are much larger. The systematic response of confidence is irrelevant for the output multiplier during normal times, but is critical during recessions. Spending shocks during downturns predict productivity improvements through a persistent increase in government investment relative to consumption, which is reflected in higher confidence.

Why Do We Talk About “Helicopter Money”?

Posted on by Brad DeLong

Why do we talk about “helicopter money”? We talk about helicopter money because we seek a tool for managing aggregate demand–for nudging the level of spending in an economy up to but not above the economy’s current sustainable productive potential–that is all of:

  1. Effective and successful–even in the very low interest rate world we appear to be in.
  2. Does not excite fears of an outsized central bank balance sheet–with its vague but truly-feared risks.
  3. Does not excite fears of an outsized government interest-bearing debt–with its very real and costly amortization burdens should interest rates rise.
  4. Keeps what ought to be a technocratic problem of public administration out of the mishegas that is modern partisan politics.

Right now the modal projection by participants in the Federal Reserve’s Open Market Committee meetings is that the U.S. Treasury Bill rate will top out at 3% this business cycle. It would be a brave meeting participant who would be confident that we would get there–if we would get there–with high probability before 2020. That does not provide enough room for the Federal Reserve to loosen policy by even the average amount of loosening seen in post-World War II recessions. Odds are standard open market operation-based interest rate tools will not be able to do the macroeconomic policy stabilization job when the next adverse shock hits the economy.

The last decade has taught us that quantitative easing on a scale large enough to rapidly return economies to full employment is one bridge if not more too far for central banks as they are currently constituted–if, that is, it is possible at all. The last decade has taught us that bond-funded expansionary fiscal policy on a scale large enough to rapidly return economies to full employment is at least several bridges too far for our political systems, at least as they are currently constituted.

If we do not now start planning for how to implement helicopter money when the next adverse shock comes, what will our plan be? As a candidate for a tool capable of doing all four of these things, helicopter money–giving the central bank the additional policy tool of printing up extra money and either mailing it out to households as checks or getting it into the hands of the public by buying extra useful stuff–is our last hope, and, if it is not our best hope, then I do not know what our best hope might be.

Must-Read: Gabriel Chodorow-Reich and Johannes Wieland: Secular Labor Reallocation and Business Cycles

Posted on by Brad DeLong

Must-Read: Gabriel Chodorow-Reich and Johannes Wieland: Secular Labor Reallocation and Business Cycles:

We study how economies respond to idiosyncratic shocks which induce reallocation of labor across industries….

We find sharp evidence of reallocation contributing to worse employment outcomes if it occurs coincident with a national recession, but little difference in outcomes if it occurs during an expansion. We repeat our empirical exercise in a multi-area, multi-sector search and matching model of the labor market. The model reproduces the empirical asymmetry subject to inclusion of two key frictions: imperfect mobility across industries, and downward nominal wage rigidity. Combining the empirical and model results, we conclude that reallocation can generate substantial amplification and persistence of business cycles at both the local and the aggregate level.

How U.S. consumption behavior changes during recessions

Posted on by Nick Bunker

Understanding the marginal propensities to consume of American households is important for economic policymaking, particularly when the U.S. economy slides into recession. Knowing how readily different households will consume an extra dollar of income helps policymakers design programs that could help the economy bounce back more quickly from recessions.

Differences in the marginal propensity to consume among U.S. households is fairly well acknowledged at this point, but their consumption patterns can change over the course of a business cycle. A new study shows how the marginal propensity to consume changes as the economy enters into a recession. The new paper, released as a National Bureau of Economic Research working paper, is by economists Tal Gross of Columbia University, Matthew Notowidigdo of Northwestern University, and Jialan Wang of the University of Illinois at Urban-Champaign. It looks at how a consumer’s propensity to consume changes as the economy goes from expansion to recession.

Specifically, the economists look at the difference in how much individuals who just had their “bankruptcy flag” taken off their credit records consume because of their increased access to credit. All the individuals in their sample had previously filed for bankruptcy and the flag on their credit records were removed after 10 years. The fact that the flag disappeared 10 years after going through bankruptcy lets the authors show that access to credit was sudden and outside the control of the individual.

Perhaps unsurprisingly, Gross, Notowidigdo, and Wang find that marginal propensities to consume were higher for these individuals emerging from bankruptcy during the Great Recession. These individuals’ average marginal propensity to consume was 20 percent to 30 percent higher during that sharp downturn in 2007-2009 than it was for those who had their bankruptcy flag removed during the subsequent recovery up through 2011. Importantly, the three authors show that the higher consumption rate wasn’t due to a change in the kind of people who were having their bankruptcy flag taken off. Instead, it appears to have been due to changes in their access to credit.

There are limitations to this paper. The three economists only look at the changes in marginal propensities to consume among people who just came out of bankruptcy. So these specific results are probably most applicable for individuals with low credit scores. Whether there are such significant variations for wealthier individuals or individuals with higher credits scores is a question for future research.

But if these results hold up and are valid for a larger section of the population then it should inform policymakers’ design of fiscal stimulus measures once a recession hits. Policymakers also should consider this research when setting policy for so called automatic stabilizers, such as unemployment insurance or the Supplemental Nutritional Assistance Program. Higher marginal propensities to consume during recessions may mean that targeted programs could be more effective than previously thought at boosting demand to turn around a slumping economy.

Must-Read: Ruixue Jia (2014): The Legacies of Forced Freedom: China’s Treaty Ports

Posted on by Brad DeLong

Must-Read: Ruixue Jia (2014): The Legacies of Forced Freedom: China’s Treaty Ports:

This paper investigates the long-run development of China’s treaty ports from the mid-eighteenth century until today. Focusing on a sample of prefectures on the coast or on the Yangtze River, I document the dynamic development paths of treaty ports and their neighbors in alternate phases of closedness and openness. I also provide suggestive evidence on migration and sector-wise growth to understand the advantage of treaty ports in the long run.

Must-Read: Mark Thoma: Why We Need a Fiscal Policy Commission

Posted on by Brad DeLong

Must-Read: Mark Thoma looks back and marvels at his naivete with respect to macroeconomic policy:

Mark Thoma: Why We Need a Fiscal Policy Commission:

During the Great Recession, monetary policymakers were aggressive and creative….

I wish they had been even more aggressive…. They were a bit slow to react due to excessive fear of inflation and the tendency to see recovery just around the corner…. [But] monetary policy alone was far from enough…. Fiscal policy was needed too…. Fiscal policymakers let us down….

I was a bit naïve. I would never have guessed that politics would come before helping millions of people. But Republicans were more interested in making sure that Obama would not get credit for anything good that might happen than in helping people struggling to find jobs or suffering other consequences of the economic downturn…. Fiscal policy is too important to be stymied by political gridlock. The next time a big recession hits, we must find a way to bring fiscal policy into play as a viable policy option….

If Congress is too dysfunctional to do the job… it’s time to create a new institution… something along the lines of the Federal Reserve but for fiscal policy. How could such an institution be structured? A politically independent fiscal policy commission would be devoted to providing countercyclical stabilization for the economy…. Oversight of a fiscal policy commission could be provided by a group modeled after the Board of Governors of the Federal Reserve…. It would also be important for the committee to consult regularly with the Federal Reserve….

I understand that there is no chance of this happening in the present political climate. But it’s essential for people to recognize the importance of fiscal policy during deep downturns and the extent to which fiscal policymakers failed us during the Great Recession. If voters don’t hold members of Congress accountable and begin to demand change, the next time a deep recession hits we will once again be without the most effective policy tool we have for putting people back to work.

Retiring in the United States amid low interest rates

Posted on by Ed Paisley

Consistently low interest rates are bedeviling monetary and fiscal policymakers these days, but they are not alone in their frustration. As John Authers and Robin Wigglesworth note in the first in a series of articles published in the Financial Times earlier this week, low interest rates are causing significant problems for pension fund managers and ultimately retirees in the United States.

One way to think about interest rates is that the rate is the price of taking money from the future and accessing it today. A positive, inflation-adjusted interest rate means a dollar now is worth more than a dollar in the future, thus the need to pay a fee to get access to that money in the present. It also means that putting down less than a dollar now can get a full dollar in the future. The higher the rate, the less required to hit a target of a certain amount of dollars in the future.

So when interest rates are low, it’s going to require saving more money in the immediate future to meet a target, such as enough money to provide an adequate standard of living in retirement. That’s one of the issues causing problems for the managers of traditional, employer-provided defined-benefit pension plans and employer-sponsored defined-contribution plans alike. Lower interest rates lead to bonds with lower yields and a lower rate of return on equity investments due to higher current values for stocks.

But interest rates aren’t the only thing that determine how easy it is for an economy to support retirees. There are, as Bloomberg View’s Matt Levine points out, productivity growth and population growth. “If there are more working people than retired people, and if the working people are producing ever more stuff, they can make enough stuff to provide the retired people with a high standard of living,” he writes. The problem today is that both population growth and productivity growth are quite slow in high-income countries including the United States.

These conditions—often referred to collectively as secular stagnation—clearly pose problems for many of the ways that employers currently provide retirement security in the United States. Thankfully, there is one retirement program in the country that would actually be easier to finance during an era of low-interest rates: Social Security.

Must-Reads; August 23, 2016

Posted on by Brad DeLong

Should Reads:

Must-Read: Brad Setser: IMF Cannot Quit Fiscal Consolidation (in Asian Surplus Countries)

Posted on by Brad DeLong

Must-Read: Ummm… Maury… What’s going on in there?

Brad Setser: IMF Cannot Quit Fiscal Consolidation (in Asian Surplus Countries):

In theory, the IMF now wants current account surplus countries to rely more heavily on fiscal stimulus and less on monetary stimulus…

This shift makes sense in a world marked by low interest rates, the risk that surplus countries will export liquidity traps to deficit economies, and concerns about contagious secular stagnation…. In practice, though, the Fund seems to be having trouble actually advocating fiscal expansion in any major economy with a current account surplus. Best I can tell, the Fund is encouraging fiscal consolidation in China, Japan, and the eurozone. These economies have a combined GDP of close to $30 trillion. The Fund, by contrast, is, perhaps, willing to encourage a tiny bit of fiscal expansion in Sweden (though that isn’t obvious from the 2015 staff report) and in Korea—countries with a combined GDP of $2 trillion….

Take the Fund’s advice on Japan. The first consumption take hike—from 5 to 8 percent—didn’t go that well. Consumption never recovered, and the economy lost momentum. But rather than reconsider consumption tax based consolidation, the Fund wants Japan to double down and commit to raise the consumption tax to 15 percent (rather than 10 percent)…. That isn’t exactly a call to use the fiscal arrow to relaunch Japanese demand growth….

Japan is a hard case. It has an unusually high level of public debt. It also has an unusually low interest rate on that debt. And fiscal risks are reduced so long as the stock of debt actually held by the public is falling fast: Think of a 5 percent of GDP fiscal deficit and annual purchases by the Bank of Japan (BoJ) of 15 percent of GDP…. And what of Korea?… There is no real evidence the Fund wants a significant, sustained fiscal loosening in Korea, even though Korea has low government debt, no fiscal deficit to speak of and a $100 billion-plus current account surplus (7-8 percent of Korea’s GDP)….

Bottom line: if the Fund wants fiscal expansion in surplus countries to drive external rebalancing and reduce current account surpluses, it actually has to be willing to encourage major countries with large external surpluses to do fiscal expansion. Finding limited fiscal space in Sweden and perhaps Korea won’t do the trick. 20 or 30 basis points of fiscal expansion in small economies won’t move the global needle. Not if China, Japan, and the eurozone all lack fiscal space and all need to consolidate over time.