Must-Reads: July 17, 2016

Posted on by Brad DeLong

Should Reads:

Must-Read: Atif R. Mian, Amir Sufi, and Emil Verner: Household Debt and Business Cycles Worldwide

Posted on by Brad DeLong

Must-Read: Atif R. Mian, Amir Sufi, and Emil Verner: Household Debt and Business Cycles Worldwide: “An increase in the household debt to GDP ratio in the medium run…

…predicts lower subsequent GDP growth, higher unemployment, and negative growth forecasting errors in a panel of 30 countries from 1960 to 2012…. Low mortgage spreads predict an increase in the household debt to GDP ratio and a decline in subsequent GDP growth when used as an instrument. The negative relation between the change in household debt to GDP and subsequent output growth is stronger for countries that face stricter monetary policy constraints as measured by a less flexible exchange rate regime, proximity to the zero lower bound, or more external borrowing. A rise in the household debt to GDP ratio is contemporaneously associated with a consumption boom followed by a reversal in the trade deficit as imports collapse. We also uncover a global household debt cycle that partly predicts the severity of the global growth slowdown after 2007. Countries with a household debt cycle more correlated with the global household debt cycle experience a sharper decline in growth after an increase in domestic household debt.

Must-Read: Quentin Skinner: Liberty Before Liberalism and All That

Posted on by Brad DeLong

Must-Read: Quentin Skinner: Liberty before Liberalism and All That: “The Digest of Roman Law[‘s]… fundamental distinction drawn at [its] outset…

…is between the liber homo, the free person, and the servus or slave…. A slave is someone who is in potestate, in the power of a master. The contrast is with someone who is sui iuris, able to act in their own right…. Sallust, Livy and Tacitus… answer… that if you are subject to the arbitrary will of anyone else, such that you are dependent on their mere goodwill, then you may be said to be living in servitude, however elevated may be your position in society. So, for example, Tacitus speaks of the servitude of the entire senatorial class under the Emperor Tiberius, so wholly subject were they to his lethal caprice….

Hobbes changes his mind…. Freedom is not absence of dependence; it is simply absence of external impediments to motion…. The only sense we can make of the idea of human liberty is to think of it as the freedom of an object to move. On this account, you are unfree if your movements are impeded by external impediments, but free if you are able to move without being obstructed…. He maintains… that the main reason why people obey the law is that they are more frightened of the consequences of disobedience. But as he now argues, fear does not take away freedom. Freedom, according to Hobbes’s new definition, is taken away only by external and physical impediments to motion. But fear is not an external impediment. On the contrary, fear is a motivating force….

I am very stuck by the extent to which Marx deploys, in his own way, a neo-Roman political vocabulary. He talks about wage slaves, and he talks about the dictatorship of the proletariat. He insists that, if you are free only to sell your labour, then you are not free at all. He stigmatises capitalism as a form of servitude. These are all recognizably neo-Roman moral commitments…. We tend to think of freedom essentially as a predicate of actions. But the earlier tradition took freedom essentially to be the name of a status, that of a free person by contrast with a slave…. For a neo-Roman thinker, many of the situations that in a market society are regarded as free–even as paradigmatically free–would appear as examples of servitude. The predicament of de-unionised labour, of those who live in conditions of economic dependence, of those in particular who live in dependence on violent partners, and of entire citizen-bodies whose representative assemblies have lost power to executives–all these would appear to a neo-Roman theorist to be examples of being made to live like slaves.

Must-Read: Elizabeth Stanton: Negishi Welfare Weights: The Mathematics of Global Inequality

Posted on by Brad DeLong

Must-Read: This seems to me to be not quite right. If, say, individuals’ utility is logarithmic in lifetime wealth, then Negishi welfare weights construct the social welfare function by weighting each person’s utility by their lifetime wealth and then adding up individual utilities.

This produces policies that are different from those that would “be optimal only in a world in which global income redistribution cannot and will not take place”. It is the case, even if global income distribution cannot and will not take place, that good government policies maximize the benefit weighting their effects on each person’s utility equally. But with Negishi welfare weights government policies are evaluated by multiplying their effect on an individual’s utility by that individual’s wealth before performing a utilitarian sum:

Elizabeth A. Stanton: Negishi Welfare Weights: The Mathematics of Global Inequality: “The importance of making transparent the ethical assumptions used in climate-economics models cannot be overestimated…

…Negishi weighting is a key ethical assumption at work in climate-economics models, but one that is virtually unknown to most model users. Negishi weights freeze the current distribution of income between world regions; without this constraint, IAMs that maximize global welfare would recommend an equalization of income across regions as part of their policy advice. With Negishi weights in place, these models instead recommend a course of action that would be optimal only in a world in which global income redistribution cannot and will not take place. This article describes the Negishi procedure and its origin in theoretical and applied welfare economics, and discusses the policy implications of the presentation and use of Negishi-weighted model results, as well as some alternatives to Negishi weighting in climate-economics models.

Must-Read: Sarah Bloom Raskin (2013): Aspects of Inequality in the Recent Business Cycle

Posted on by Brad DeLong

Must-Read: Sarah Bloom Raskin (2013): Aspects of Inequality in the Recent Business Cycle: “An issue of growing saliency…

…how… economic marginalization and financial vulnerability, associated with stagnant wages and rising inequality, contributed to the run-up to the financial crisis and how such marginalization and vulnerability could be relevant in the current recovery…. I want to zero in on the question of whether inequality itself is undermining our country’s economic strength according to available macroeconomic indicators….

I will argue that at the start of this recession, an unusually large number of low- and middle-income households were vulnerable to exactly the types of shocks that sparked the financial crisis… 30 years of very sluggish real-wage growth… unusually large share of their wealth in housing… debt…. exposure to house prices had increased dramatically. Thus, as in past recessions, suffering in the Great Recession–though widespread–was most painful and most perilous for low- and middle-income households, which were also more likely to be affected by job loss and had little wealth to fall back on. Moreover, I am persuaded that because of how hard these lower- and middle-income households were hit, the recession was worse and the recovery has been weaker. The recovery has also been hampered by a continuation of longer-term trends that have reduced employment prospects for those at the lower end of the income distribution and produced weak wage growth….

I want to explore these issues today because the answers may have implications for the Federal Reserve’s efforts to understand the recession and conduct policy in a way that contributes to a stronger pace of recovery…. I hope my remarks spur more inquiry and discussion. I should also note that the views I express are my own…. To be sure, the increase in mortgage debt prior to the recession occurred across all types of households. But it was families with modest incomes and wealth largely in their homes that were the most vulnerable to subsequent drops in home values…. Given these developments, when house prices fell, household finances were struck a devastating blow. The resulting fallout magnified this initial shock, ushering in the Great Recession….

About two-thirds of all job losses in the recession were in middle-wage occupations–such as manufacturing, skilled construction, and office administration jobs–but these occupations have accounted for less than one-fourth of subsequent job growth…. It is not only the occupational and industrial distribution of the new jobs that poses challenges for workers and their families struggling to make ends meet, but also the fact that many of the jobs that have returned are part time or make use of temporary arrangements popularly known as contingent work. The flexibility of these jobs may be beneficial for workers who want or need time to address their family needs. However, workers in these jobs often receive less pay and fewer benefits than traditional full-time or ‘permanent’ workers, are much less likely to benefit from the protections of labor and employment laws, and often have no real pathway to upward mobility in the workplace….

My approach of starting with inequality and differences across households is not a feature of most analyses of the macroeconomy, and the channels I have emphasized generally do not play key roles in most macro models…. The narrative I have emphasized places economic inequality and the differential experiences of American families, particularly the highly adverse experiences of those least well positioned to absorb their ‘realized shocks,’ closer to the front and center of the macroeconomic adjustment process…. Circumstances–the outsized role of housing wealth in the portfolios of low- and middle-income households, the increased use of debt during the boom, and the subsequent unprecedented shocks to the housing market–may have attenuated the effectiveness of monetary policy during the depths of the recession. Households that have been through foreclosure or have underwater mortgages or are otherwise credit constrained are less able than other households to take advantage of the lower interest rates, either for homebuying or other purposes. In my view, these effects likely clogged some of the channels through which monetary policy traditionally works…

  • Congressional Budget Office (2011), Trends in the Distribution of Household Income between 1979 and 2007 (PDF) (Washington: CBO, October).
  • Orazio P. Attanasio and Guglielmo Weber (2010), ‘Consumption and Saving: Models of Intertemporal Allocation and Their Implications for Public Policy,’ Journal of Economic Literature, vol. 48 (September), pp. 693-751.
  • Dirk Krueger and Fabrizio Perri (2006), ‘Does Income Inequality Lead to Consumption Inequality? Evidence and Theory,’ Review of Economic Studies, vol. 73 (January), pp. 163-93
  • Mark A. Aguiar and Mark Bils (2011), ‘Has Consumption Inequality Mirrored Income Inequality?’ NBER Working Paper Series 16807 (Cambridge, Mass.: National Bureau of Economic Research, February)
  • Orazio Attanasio, Erik Hurst, and Luigi Pistaferri (2012), ‘The Evolution of Income, Consumption, and Leisure Inequality in the US, 1980-2010,’ NBER Working Paper Series 17982 (Cambridge, Mass.: National Bureau of Economic Research, April).
  • Marianne Bertrand and Adair Morse (2013), ‘Trickle-Down Consumption,’ NBER Working Paper Series 18883 (Cambridge, Mass.: National Bureau of Economic Research, March).
  • Jason DeBacker, Bradley Heim, Vasia Panousi, and Ivan Vidangos (2011), ‘Rising Inequality: Transitory or Permanent? New Evidence from a U.S. Panel of Household Income 1987-2006,’ Finance and Economics Discussion Series 2011-60 (Washington: Board of Governors of the Federal Reserve System, December).
  • Raghuram Rajan (2010), Fault Lines: How Hidden Fractures Still Threaten the World Economy (Princeton, N.J.: Princeton University Press)
  • Michael Kumhof and Romain Ranciere (2011), ‘Inequality, Leverage and Crises,’ CEPR Discussion Paper 8179 (London: Centre for Economic Policy Research, January)
  • Michael D. Bordo and Christopher M. Meissner (2012), ‘Does Inequality Lead to a Financial Crisis?’ NBER Working Paper Series 17896 (Cambridge, Mass.: National Bureau of Economic Research, March)
  • Neil Bhutta (2011), ‘The Community Reinvestment Act and Mortgage Lending to Lower Income Borrowers and Neighborhoods,’ Journal of Law and Economics, vol. 54 (November), pp. 953-83
  • Neil Bhutta (2012), ‘GSE Activity and Mortgage Supply in Lower-Income and Minority Neighborhoods: The Effect of the Affordable Housing Goals,’ Journal of Real Estate Finance and Economics, vol. 45 (June), pp. 238-61.
  • Atif Mian, Kamalesh Rao, and Amir Sufi (2011), ‘Household Balance Sheets, Consumption, and the Economic Slump (PDF),’
  • Karen Dynan (2012), ‘Is a Household Debt Overhang Holding Back Consumption?’ Brookings Papers on Economic Activity, Spring, pp. 299-358.
  • Rudiger Ahrend, Jens Arnold, and Charlotte Moeser (2011), ‘The Sharing of Macroeconomic Risk: Who Loses (and Gains) from Macroeconomic Shocks,’ OECD Economics Department Working Papers 877 (Washington: OECD Publishing, July).
  • Carmen DeNavas-Walt, Bernadette D. Proctor, and Jessica C. Smith (2012), Income, Poverty, and Health Insurance Coverage in the United States: 2011 (PDF), U.S. Census Bureau Current Population Reports P60-243 (Washington: U.S. Government Printing Office, September).
  • National Employment Law Project (2012), ‘The Low-Wage Recovery and Growing Inequality,’ Data Brief, report (New York: NELP, August), http://nelp.3cdn.net/8ee4a46a37c86939c0_qjm6bkhe0.pdf.
  • See Nir Jaimovich and Henry E. Siu (2012), ‘The Trend Is the Cycle: Job Polarization and Jobless Recoveries,’ NBER Working Paper Series 18334 (Cambridge, Mass: National Bureau of Economic Research, August)
  • Christopher L. Foote and Richard W. Ryan (2012), ‘Labor-Market Polarization over the Business Cycle,’ Public Policy Discussion Paper 12-8 (Boston: Federal Reserve Bank of Boston, December).
  • U.S. Department of Labor, Commission on the Future of Worker-Management Relations (1994), ‘Contingent Workers,’ in Fact Finding Report.
  • Steven J. Davis and Till von Wachter (2011), ‘Recessions and the Costs of Job Loss,’ Brookings Papers on Economic Activity, Fall, pp. 1-55.
  • Jesse Rothstein (2012), ‘The Labor Market Four Years into the Crisis: Assessing Structural Explanations,’ ILRReview, vol. 65 (July), figure 11, p. 486.

Must-Read: Richard Mayhew: Medicare Reimbursement, Public Options and Medicare Buy-In

Posted on by Brad DeLong

Must-Read: Richard Mayhew: Medicare Reimbursement, Public Options and Medicare Buy-In: “There has been a flurry of liberal health wonk reform proposals this week…

…@HuffPostPol: Clinton formally endorses public option and Medicare for under-55s by @citizencohn http://huff.to/29vZ1Td

…I want to see details just exactly what is meant by the Clinton proposal as it can range from aggressive administrative action small ball (as we talked about in February) to another whack at the legislative pinata…. But before I do a long wonk dive, I just want to re-iterate a very simple point. Most liberal health policy goals have a very simple summary: get more people on insurance that pays providers rates that are closer to Medicare rates than commercial large group rates. Large group rates pay providers between 40% and 100% more than Medicare for physical health service. Moving the entire employer sponsored coverage universe to paying Medicare like rates would knock 30% off of the current bill. We see this in Exchange…. Plans that are profitable tend to be paying providers Medicare plus a little bit while offering narrow networks. We see this in the proposal to move the Medicare buy-in age to 55. We see this in the proposal to have a public option…. All of these efforts are just different ways to achieve an underlying goal of reducing provider compensation by lowering the average payment per service by having more people move from high payment to provider coverage to Medicare based pricing. Everything else is details. Those details matter a lot, but the core policy thrust is fairly simple.

Must-Watch: Robert Skidelsky et al.: Too Much Maths, Too Little History: The Problem of Economics

Posted on by Brad DeLong

Must-Watch: Robert Skidelsky et al.: Too Much Maths, Too Little History: The Problem of Economics: “The debate hosted by the LSE Economic History Department…

…in collaboration with the LSESU Economic History Society and the LSESU Economics Society. . Speakers: Lord Robert Skidelsky & Dr. Ha-Joon Chang; Prof. Steve Pisckhe & Prof. Francesco Caselli. Chair – Professor James Foreman-Peck:

The LSE is currently the only institution to have a separate EH department. We want to encourage students and academics alike to rethink the methodologies used to explain how our world works.

Do we use the theoretical and econometrical method to create models with assumptions to distil the complexities of human nature and produce measurable results? Or do we use the historical process of considering all factors to provide a more holistic explanation? More importantly, which method should be adopted to better understand increasingly complex economic phenomena in the future?

We are striving to provide our students breadth that exceeds their current theoretical studies. Hence, whilst we recognise the importance of economic history in allowing us to become closer to the truth and produce more intricate portrayal of events, the significance of models and mathematics remains to be emphasised.

Indeed, we wish to have this controversially named debate in order to both highlight the tension between the two disciplines and to produce a more nuanced overview in defence of the future of Economics.

Must-Reads: July 15, 2016

Posted on by Brad DeLong

Should Reads:

Must-Watch: Barry Ritholtz: Ha-Joon Chang: Economics Is For Everyone!

Posted on by Brad DeLong

Must-Watch: Barry Ritholtz: Ha-Joon Chang: Economics Is For Everyone!: “Really interesting stuff…

…legendary economist Ha-Joon Chang in a mind-blowing RSA Animate…. explains why every single person can and SHOULD get their head around basic economics. He pulls back the curtain on the often mystifying language of derivatives and quantitive easing, and explains how easily economic myths and assumptions become gospel. Arm yourself with some facts, and get involved in discussions about the fundamentals that underpin our day-to-day lives: