Must-Reads: July 13, 2016

Posted on by Brad DeLong

Should Reads:

A graphical update on the latest data on the U.S. jobs market

Posted on by Bridget Ansel

The monthly Employment Situation report from the U.S. Bureau of Statistics contains a lot of information about the U.S. labor market, but this data is not the only useful source of information about the jobs market in the United States. Yesterday morning, the agency released the Job Openings and Labor Turnover Survey, or JOLTS, data for May 2016. This lesser-known data set looks at the flows of the labor market—hiring, firing, and job switching. Below are a few graphs highlighting interesting and important trends evident in the data.

First of all, the relationship between job openings and the unemployment rate—known as the Beveridge curve seems to have shifted after the Great Recession ended in mid-2009. Outward shifts in the curve are often interpreted as increases in structural unemployment as employers can’t find adequate workers in the labor market. If that were true, then we’d expect wage growth to accelerate significantly as job openings increased. But wage growth hasn’t been particularly strong and most of the increase in real wage growth has been due to low inflation

Looking more closely at the JOLTS data, the entirety of shift in the Beveridge curve appears to be due to the extraordinarily high unemployment rate for those out of a job for more than 27 weeks.

But has this relationship changed for other labor market flow data? Let’s look at the relationship between hiring and the unemployment rate. As the graph below shows, it really hasn’t changed since the end of the recession. For a given strength of the labor market (measured by the unemployment rate), employers don’t seem to have changed their hiring rates.

The relationship between quits and the unemployment rate hasn’t changed much either. For a given unemployment rate, workers are leaving jobs at about the rate we think they would have given previous data.

So, for a given unemployment rate, employers are hiring workers to join the firm at their usual rate and workers are leaving firms at an expected rate then clearly something has changed with how firms post job openings.  The focus, then, should be less on the employees side when it comes to labor market problems and more on the employer side.

Must-Read: Jack Ayer: Khlopotat’

Posted on by Brad DeLong

Must-Read: On central planning, or perhaps simply on bureaucracy:

Jack Ayer: Khlopotat’: “Another Teffi, except this is actually a translator’s note on what might be the perfect Russianism:

Here we are translating khlopotat’, a common Russian word for which there is no English equivalent. Elsewhere, in passages where Teffi draws less attention to this verb, we have translated it in different ways: ‘apply for,’ ‘try to obtain,’ ‘procure,’ etc. In ‘Moscow: the Last Days,’ an article she published in Kiev in October 1918, Teffi explains the word: ‘Incidentally, there is no equivalent to this idiotic term khlopotat’ in any other language in the world. A foreigner will say, ‘I’ll go and get the documents.’ A Russian, ‘I must hurry and start to khlopotat’ with regard to the documents.’ The foreigner will go to the appropriate institution and obtain what he needs. The Russian will go to three people he knows for advice, to two more who can ‘pull strings’, then to the institution—but it’ll be the wrong one—then to the right institution—but he’ll keep on knocking at the wrong doors until it’s too late. Then he’ll start everything all over again and, when he’s finally brought everything to a conclusion, he’ll leave the documents in a cab. This whole process is what is described by the word khlopotat’. Such work, if carried out on behalf of a third party, is highly valued and well paid’ (Teffi v strane vospominanii, pp. 167–70).’

from ‘Memories: From Moscow to the Black Sea (New York Review Books Classics)’ by Teffi, Edythe Haber, Robert Chandler, Anne Marie Jackson, Irina Steinberg.

Must-Read: Tony Barber: A Renewed Nationalism Is Stalking Europe

Posted on by Brad DeLong

Must-Read: Tony Barber: A Renewed Nationalism Is Stalking Europe: “Part of the appeal of rightwing populism is that it hammers away relentlessly on the theme that mainstream political parties…

…especially since the end of the Cold War, are almost indistinguishable from each other and offer no proper choice. Not without reason, the parties are depicted as corrupt and detached…. But… they have no economic policies beyond an iconoclastic rage at the euro, free trade and foreigners alleged to be parasites on the welfare state. The new nationalism, in its radical rightist colours, has no credible solutions for a modern Europe that, despite all its troubles, must pin its hopes for a better future on mutual co-operation and an open face to the world…

Must-Watch: Sheryl Sandberg (2011): Barnard College Commencement

Posted on by Brad DeLong

Must-Watch: Sheryl Sandberg (2011): Barnard College Commencement: “Women all over the world, women who are exactly like us except for the circumstances into which they were born…

…[lack] basic human rights. Compared to these women, we are lucky…. We are equals under the law. But the promise of equality is not equality…. Men run the world…. I recognize that [today] is a vast improvement from generations in the past…. But… women became 50% of the college graduates in this country in 1981, 30 years ago. Thirty years is plenty of time for those graduates to have gotten to the top of their industries, but we are nowhere close to 50% of the jobs at the top. That means that when the big decisions are made, the decisions that affect all of our worlds, we do not have an equal voice at that table. So today, we turn to you. You are the promise for a more equal world…. Only when we get real equality in our governments, in our businesses, in our companies and our universities, will we start to solve… gender equality. We need women at all levels, including the top, to change the dynamic, reshape the conversation, to make sure women’s voices are heard and heeded, not overlooked and ignored…

http://barnard.edu/headlines/transcript-and-video-speech-sheryl-sandberg-chief-operating-officer-facebook

Must-Read: Nick Rowe: Adding More Periods to Diamond-Dybvig: Fear of Illiquidity, Not Insolvency

Posted on by Brad DeLong

Must-Read: Nick Rowe: Adding More Periods to Diamond-Dybvig: Fear of Illiquidity, Not Insolvency: “We simply add an extra time period…. It’s a friendly amendment…

…Agents are ex ante identical. Each agent has an endowment of apples. There is a costless storage technology for apples. There is also an investment technology (planting apples in the ground) which gives a strictly positive rate of return at maturity, but a negative rate of return if you cancel the investment before maturity. Each agent has a 10% probability of becoming impatient (getting the munchies) and wanting to eat all his apples this period. Those probabilities are independent across agents, and there is a large number of agents, so exactly 10% of agents will become impatient each period. Getting the munchies is private information….

Standard Diamond-Dybvig… has… an initial period where agents lend their apples to the bank; a second period where 10% of agents get the munchies and ask for their apples back; and a third period when the investment matures. Banks exist to provide insurance against risk of munchies by pooling assets; normal insurance won’t work because the information is private…. Make it a 4 period model:

  1. An initial period where agents lend their apples to the bank;
  2. A second period where 10% of agents get the munchies and ask for their apples back;
  3. A third period where another 10% of agents get the munchies and ask for their apples back; and
  4. A fourth period when the investment matures….

The bank credibly commits that it will never cancel an investment before maturity, and stores 20% of apples in reserve. In the good equilibrium… only agents who get the munchies ask for their apples back. Now suppose there is a… run on the bank in the second period…. An agent who does not have the munchies in the second period will rationally join that run on the bank, falsely claiming that he does have the munchies… [because] he might get the munchies in the third period, and if the bank suspends redemptions he will be unable to satisfy his future cravings, so he wants to join the line before the bank runs out of stored apples, so he can store apples at home…. Even if people are 100% confident that the bank is solvent, there can still be bank runs if people cannot predict their own future needs for liquidity, and fear that the bank might become illiquid…. Having a deposit in an illiquid bank is functionally not the same as having a deposit in a liquid bank, even if both are solvent…

Brexit: I Think Paul Krugman Is Confused Here…

Posted on by Brad DeLong
Interest Rates Government Securities Treasury Bills for United Kingdom© FRED St Louis Fed

Bearing in mind what has happened to me almost every single time since 1997 when I have concluded that Paul Krugman is wrong…

The key, I think, is something hidden in Paul’s column. It is the fact that the effect of pretty much any shock depends on what the private financial market and the public monetary and fiscal policy response to it is:

Paul Krugman: Still Confused About Brexit Macroeconomics: “OK, I am still finding it hard to understand the near-consensus among my colleagues…

…about the short- and medium-term effects of Brexit…. [While] Brexit will make Britain somewhat poorer in the long run, it’s not completely obvious why this should lead to a recession in the short run…. So let me give an example of the kind of analysis that I think should raise eyebrows: BlackRock…. “‘Our base case is we will have a recession’, Richard Turnill, chief investment strategist at the world’s largest asset manager, told reporters…. ‘There’s likely to be a significant reduction of investment in the UK,’ he said, adding that Brexit will ensure political and economic uncertainty remains high…

When we say ‘uncertainty’, what do we mean? The best answer I’ve gotten is that for a while, until things have shaken out, firms won’t be sure where the good investment opportunities in Britain are, so there will be an option value to waiting… Brexit might have seriously adverse effects on service exports from the City of London. This would mean that investment in, say, London office buildings would become a bad idea. On the other hand, it would also mean a weaker pound, making investment in industrial properties in the north of England more attractive. But you don’t know how big either effect might be. So both kinds of investment are put on hold, pending clarification.

OK, that’s a coherent story, and it could lead to a recession next year. At some point, however, this situation clarifies. Either we see financial business exiting London, and it becomes clear that a weak pound is here to stay, or the charms of Paris and Frankfurt turn out to be overstated, and London goes back to what it was. Either way, the pent-up investment spending that was put on hold should come back. This doesn’t just mean that the hit to growth is temporary: there should also be a bounce-back…. But that’s not what BlackRock, or almost anyone else, seems to be saying; they’re projecting lower growth as far as the eye can see. They could be right. But I still don’t see the logic. It seems to me that ‘uncertainty’ is being used as a catchall for ‘bad stuff’.

When asset managers–indeed, when anyone anywhere in the world who is not a trained economist–uses the phrase “more uncertainty”, they do not mean what me trained (or mistrained) economists mean: they do not mean that the future distribution of the random variable has a larger variance but the same mean. What they mean, instead, is that the distribution has a larger and longer lower tail. The variance is up and the mean is lower. The principal thing they see as pushing down investment in the near future is the fear of this lower tail–not capitalizing on the option value of waiting until more knowledge comes in.

Back in 1992 Britain exited the ERM. ERMexit had two effects: (1) a small reduction in the desirability of locating in Britain to serve the continental European market because one now faced exchange rate risk, and (2) a large easing of conventional monetary policy and thus lower interest rates and a lower value of the pound because the Bank of England no longer had to maintain the pound at an overvalued parity. The result: boom.

Today Brexit looks to have two effects: (1) a large reduction in the desirability of locating in Britain to serve the continental European market, and (2) ???? (we are not going to get a large easing of conventional monetary policy):

Interest Rates Government Securities Treasury Bills for United Kingdom© FRED St Louis Fed

In a proper neoclassical flex-price zero-debt world that was, somehow, at the zero lower bound on nominal interest rates, the response to Brexit would be to bounce the real value of the pound down and to bounce the internal price level down and follow that bounce with higher inflation. The much more strongly negative real interest rate produced by the price level bounce-down-followed-by-inflation would cushion the decline in investment. And the boost to exports from the bounced-down real value of the pound would soak up workers exiting investment-goods industries and maintain full employment.

Of course, the proper neoclassical flex-price zero-debt world is one in which the full operation of Say’s Law is a metaphysical necessity, and so full employment is always attained. We, however, do not live in a proper neoclassical flex-price zero-debt world. It is the job of fiscal and monetary authorities to follow policies that push real prices–real exchange rates, real interest rates, real wage levels–to the values that would obtain in such a world, and so preserve full employment. We can imagine:

*1. Expansion of government purchases: preserve full employment by replacing I with G. Not going to happen in any Britain ruled by anything like this generation of Tories.
2. A helicopter drop: the Bank of England buys bonds for cash, cancels the bonds, and the government cuts taxes by the amount of cancelled bonds. Might happen even with this generation of Tories if they were less thick. But they seem to be very thick indeed.
3. Continued whimpers from Mark Carney that he would not chase away the Inflation-Expectations Imp were she to somehow appear. Not likely to be effective.
4. Everybody becomes so terrified about the safety of their assets in Britain that the real value of the pound bounces low enough that expanding exports soak up all of labor exiting from investment-goods industries.

Paul seem to be betting that (4) is a real live high-probability possibility: the short-term safe real interest rate is pinned at -2%/year for the foreseeable future, but the pound will bounce low enough for expanded exports to preserve full employment. It could happen–the world is a surprising place. But that possibility seems to me to be a tail possibility, not something that should be at the core of one’s forecast.

Technological change and the future demand for labor

Posted on by Bridget Ansel
Photo of Jason Furman, the Chairman of the White House Council of Economic Advisers.

Jason Furman, chairman of the President’s Council of Economic Advisers gave a speech last week on the “opportunities and challenges” presented by artificial intelligence. The potential challenges of artificial intelligence are, to put it in the terms of some recent economic policy conversations, problems posed by the “rise of the robots.” The question at the heart of the debate is how concerned should we humans be about the impact of future technological change on our economy and society? Will we all be thrown out of work? Will new technologies make production so easy that economic growth absolutely booms? Or, perhaps more realistically, will something in between happen?

The answer lies, to an extent, on how technological growth affects demand for labor in the United States and around the world.

First, a nod to Furman’s point that a few more robots might be a good thing for the economy writ large at this point. Insofar as more artificial intelligence would boost productivity, the introduction of more “robots” would give the U.S. economy and those of other high-income countries a much needed boost in productivity growth. How much further “AI” innovation could deliver in an economy where the diffusion of innovation may be a major factor holding back productivity is up for debate.

Yet most of the concerns about the rise of the robots are centered on distributional concerns. The robots might boost productivity growth and therefore the growth of economic output, but will they displace large swaths of workers? Maybe permanently? This first fear—that robots will massively displace labor across manufacturing and services industries—is a concern because in the future additional capital investment in all manner of robots may well supplant labor rather than supplement it. If robots can essentially replace a large chunk of labor, then businesses will stop hiring workers and instead replace them with robots. Imagine an economy-wide version of robots on factory floors.

Past experience with technological change, Furman argues, shows that new technologies don’t reduce demand for all labor, but rather shift the composition of demand for workers. Massachusetts Institute of Technology economist David Autor agrees, arguing that commentators overstate the ability of robots to substitute for labor and forget how capital acts as a complement to labor. Other research shows that capital and labor complement each other, so that more capital accumulation or declining costs of investment actually raise the share of income accruing to labor.

Yet advances in artificial intelligence definitely change the kind of  skills that labor needs to supplement the next generation of robots. This kind of deep technological change could reduce demand for, say, middle-skilled workers while boosting demand for less-skilled workers and more highly-skilled workers. The overall level of labor demand might not change, but the overall composition of the earnings distribution could well result in more income inequality. Of course, technology isn’t the only thing that affects the distribution of income—labor market institutions such as union membership also play a significant role.

The extent to which future technological change affects the distribution of income will probably rest on how it impacts the overall demand for labor as well as the kind of skills that become more valuable in the future. There is some evidence that overall demand for skilled labor is on the decline, but how long this recent trend continues and how much technology is responsible for it are open questions.

Must-Reads: July 12, 2016

Posted on by Brad DeLong

Should Reads:

Must-Read: Dean Baker: George Will and the Fed: Do Low Interest Rates Redistribute Upward?

Posted on by Brad DeLong

Must-Read: Low interest rates redistribute wealth upward, but they do not redistribute income upward. Rather, in the present they create not income but capital gains on old capital owned by rich, and in the future they reduce income on new capital investments made by the rich.

And these effects are overwhelmed, at least in a low-inflation environment, by the benefits of lower interest rates in creating a higher-pressure fuller-employment economy.

Dean Baker: George Will and the Fed: Do Low Interest Rates Redistribute Upward?: “George Will… complain[s] that the Federal Reserve Board is redistributing upward with its low interest rate policy…

…Since this is a source of confusion that extends well beyond Will, it is worth taking a few minutes to address this issue directly…. The argument is that the higher asset prices are helping the rich at the expense of the rest of us…. People who have a more valuable asset can only benefit in terms of current consumption if they borrow against or sell it, but by itself the higher asset value doesn’t do anything for them….

Lower interest rates affect the economy through several channels. Probably the most important one in this downturn is the reduction in mortgage interest burdens as millions of new homeowners were able to get low interest rate mortgages and tens of millions of existing homeowners refinanced at lower interest rates. This is real money…. Investment is at least somewhat higher today than it would be if the Fed had not pursued its low interest rate policy. There is a similar story with state and local governments that borrow to finance infrastructure…. This applies to the federal government as well…. The sum total of these effects has likely been to reduce the unemployment rate by 1.0-2.0 percentage points compared to a situation in which the Fed was not doing anything to try to boost the economy. The effect of lower unemployment is higher redistributive to those at the middle and bottom end of the income ladder. It leads to both a shift from capital to labor and also a shift to less-educated workers since their unemployment rates fluctuate most during the business cycle….

When we hear George Will being concerned about giving the rich money, it’s worth asking questions. In this case, we find that the policy in question is giving more people jobs, making it harder for people like Will to find good help and giving workers more bargaining power so that they can get higher wages. It is not in any meaningful way redistributing income upward.