Must-Read: : The Puzzling Aversion to Expansionary Fiscal Policy: ‘Low interest rates are not really low’, or something…
Must-Read: Jason Furman: Is This Time Different? The Opportunities and Challenges of Artificial Intelligence
Must-Read: Super-smart–naturally intelligent, one might say…
: Is This Time Different? The Opportunities and Challenges of Artificial Intelligence: “I see little reason to believe that the economic impact of AI will be very different from previous technological advances…
…But unlike many of the optimists, I do not find that similarity fully comforting, as technological advances in recent decades have brought tremendous benefits but have also contributed to increasing inequality and falling labor force participation. However, as I will emphasize this morning, the effects of technological change on the workforce are mediated by a wide set of institutions, and as such, policy choices will have a major impact on actual outcomes. AI does not call for a completely new paradigm for economic policy—for example, as advocated by proponents of replacing the existing social safety net with a universal basic income (UBI) —but instead reinforces many of the steps we should already be taking to make sure that growth is shared more broadly. But before turning to concerns about some of the possible side effects from AI, I want to start with the biggest worry I have about it: that we do not have enough of AI. Our first, second and third reactions to just about any innovation should be to cheer it—and ask how we get more of it, the issue I will discuss first in my remarks. But I will then discuss the potential labor market downsides of AI. Finally, I will conclude with the role of public policy in addressing these issues…
Must-Read: Ken Rogoff (2015): Debt Supercycle, Not Secular Stagnation
Must-Read: For a year and a half now I have been trying to understand what this passage means, especially the “in a world where regulation has sharply curtailed access for many smaller and riskier borrowers, low sovereign bond yields do not necessarily capture the broader ‘credit surface’ the global economy faces”. In a world in which n + g > rsafe, why isn’t issuing more safe debt, rolling it over forever, and spending the resources buying useful stuff not win-win ex ante for everyone? Who are supposed to be the losers from this, in the sense that acting on these price signals reduces well being because they are “distorted” and “do not necessarily capture the broader ‘credit surface’ the global economy faces”?
(2015): Debt Supercycle, Not Secular Stagnation: “Low real interest rates mask an elevated credit surface…
…What about the very low value of real interest rates? Low rates are often taken as prima facie by secular stagnation proponents, who argue that only a chronic demand deficiency could be responsible for steadily driving down the global real interest rate. The steady decline of real interest rates is certainly a puzzle, but there are a host of factors. First, we do not actually observe the true economic real interest rate; that would require a utility-based price index that is extremely difficult to construct in a world of rapid change in both the kinds of goods we consume and the way we consume them. My guess is that the true real interest rate is higher, and perhaps this bias is larger than usual. Correspondingly, true economic inflation is probably considerably lower than even the low measured values that central banks are struggling to raise.
Perhaps more importantly, in a world where regulation has sharply curtailed access for many smaller and riskier borrowers, low sovereign bond yields do not necessarily capture the broader ‘credit surface’ the global economy faces (Geanokoplos 2014). Whether by accident or design, banking and financial market regulation has hugely favoured low-risk borrowers (governments and cash-heavy corporates), knocking out other potential borrowers who might have competed up rates. Many of those who can borrow face higher collateral requirements. The elevated credit surface is partly due to inherent riskiness and slow growth in the post-Crisis economy, but policy has also played a large role. Many governments, particularly in Europe, have rammed down the throats of pension funds, banks, and insurance companies. Financial repression of this type not only effectively taxes middle-income savers and pensioners (who receive low rates of return on their savings) but also potential borrowers (especially middle-class consumers and small businesses), which these institutions might have financed to a greater extent if they were not required to be so overweight in government debt.
Surely global interest rates are also affected by the massive balance sheet expansions that most advanced-country central banks have engaged in. I don’t believe this is as important as the other effects I have discussed (even if most market participants would say the reverse). Global quantitative easing by advanced countries and sterilised intervention operations by emerging markets have also surely had a very large impact on bringing down market volatility measures.
The fact that global stock market indices have hit new peaks is certainly a problem for the secular stagnation theory, unless one believes that profit shares are going to rise massively further…
Weekend reading: “June jobs day” edition
This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth has published this week and the second is work we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.
Equitable Growth round-up
Equitable Growth released its latest round of working papers on Tuesday, with this round focused on the connections between economic and political inequality. The papers cover a number of topics including the shortage of working class political candidates, how inequality influences which topics become major social concerns, the amount of “bias” in economic issues that the U.S. Congress addresses, the relationship between public opinion and tax progressivity, and how school experiences shape political inequality.
Kavya Vaghul discusses many of these papers as well as other related research and argues that a loop effect between economic and political inequality is hindering efforts to implement policies that will create more equitable economic growth.
David Howell, an economist at the New School and a 2014 Equitable Growth grantee, argues that the current debate about minimum wages in the United States is done a disservice by the focus on the ensuring the minimum wage doesn’t decrease employment.
What’s the best path to getting more innovation: getting more out of current innovators or creating more innovators? A new study shows that changes to education and inequality could help boost the number of new innovators in the United States.
Well-diversified mutual funds are great for the investors in the funds. But a line of recent research argues they’ve caused problems for competition in the U.S. economy. A new paper looks at how mutual funds have may be partially responsible for higher CEO pay.
The Bureau of Labor Statistics released new data on the state of the labor market in June. Equitable Growth staff highlight a few key graphs using data from today’s release.
Links from around the web
Employment growth for workers without any college education since the end of the Great Recession in mid-2009 has been all but nonexistent as a share of all job growth. Is this because there is less demand for this workers? Ernie Tedeschi argues that changes in supply due to demographic changes explain a lot of this trend. [medium]
“It’s hard to know whom you can trust anymore—at least that’s the attitude of many Americans today. Therein lies a crucial challenge for the world’s largest economy.” Betsey Stevenson argues policy in the United States should work to restore trust to help economic performance. [bloomberg view]
“You don’t want rules made entirely for people that have something, at the expense of people who don’t.” Conor Dougherty writes about how zoning laws are forces for higher inequality and lower economic growth in the United States. [nyt]
This week the yield on a 10-year U.S. Treasury bond fell to an all-time low. Matt O’Brien puts this development into context as long-term bond yields are so low—negative even—for so many high-income countries. [wonkblog]
Paul Krugman reviews a new book by Mervyn King, the former Governor of the Bank of England. The former central banker focuses less on his time at the helm of the bank during the financial crisis and more on the evolution of the field of economics, to varying effects. [new york review of books]
Friday figure
Figure from “Equitable Growth’s Jobs Day Graphs: June 2016 Report Edition” by Equitable Growth staff
Equitable Growth’s Jobs Day Graphs: June 2016 Report Edition
Earlier this morning, The U.S. Bureau of Labor Statistics released new data on the U.S. labor market during the month of June. Below are five graphs compiled by Equitable Growth staff highlighting important trends in the data.
The share of prime-age workers with a job ticked up to 77.8 percent, but it’s still below its low point during the last expansion.
Annual wage growth for production and nonsupervisory workers held steady at 2.4%, showing no sign of accelerating in nominal wage growth.
Involuntary part-time employment fell dramatically after a jump in May, but is still above pre-recession levels.
The official unemployment rate increased to 4.9%, but the broader U-6 rate declined to 9.6%.
The overall unemployment rate has been on the decline, but the level varies tremendously by race.
Photo credit: Tony Dejak, AP Photo
Must-Read: Antonio Fatás and Lawrence H. Summers: The Permanent Effects of Fiscal Consolidations
Must-Read: : The Permanent Effects of Fiscal Consolidations: “The global financial crisis has permanently lowered the path of GDP in all advanced economies…
…At the same time, and in response to rising government debt levels, many of these countries have been engaging in fiscal consolidations that have had a negative impact on growth rates. We empirically explore the connections between these two facts by extending to longer horizons the methodology of Blanchard and Leigh (2013) regarding fiscal policy multipliers. Our results provide support for the presence of strong hysteresis effects of fiscal policy. The large size of the effects points in the direction of self-defeating fiscal consolidations as suggested by DeLong and Summers (2012). Attempts to reduce debt via fiscal consolidations have very likely resulted in a higher debt to GDP ratio through their long-term negative impact on output.
Must-Read: Jonathan Chait: Why ‘Fix the Debt’ Just Can’t Quit Paul Ryan
Must-Read: I concur with Jonathan Chait here: “Fix the Debt” has lost its way, and does not look like it will ever be able to find it again. People funding it and working for it should be well advised to go and find something else more productive to do with their money and time…
: Why ‘Fix the Debt’ Just Can’t Quit Paul Ryan: “Last week, House Republicans released a plan for a gigantic, regressive tax cut…
…Since gigantic tax cuts increase the budget deficit, you would think an organization devoted to the singular mission of reducing the deficit would oppose it. But no. The anti-deficit lobby Fix the Debt released a statement of qualified praise, which I ridiculed. Fix the Debt responds with a new, brief defense of its position. What its argument actually reveals is its denial about the state of the Republican Party. Here is the relevant portion of Fix the Debt’s response:
We don’t endorse the plan, but we do welcome it because it puts tax reform on the agenda in Washington. It also moves in the right direction by eliminating or limiting many of the tax breaks that complicate the tax code and shrink the tax base. Tax reform should contribute to deficit reduction, and definitely not increase deficits. We hope that the new plan will spur discussion and bipartisan negotiation on reform that will simplify the tax code, make the country more competitive, and help to fix the debt.
The nub of the argument is that the Republican plan, while admittedly imperfect, ‘moves in the right direction.’ But if you define the right direction as reducing the debt, then the plan doesn’t move in the right direction. It moves in the wrong direction. The Republican plan is for massive cuts in tax rates, including the complete elimination of the estate tax. It is true that the proposal gestures vaguely in the direction of closing loopholes and expenditures, but it does not define what these would be. What’s more, the plan’s authors have made clear that the proposal will be a net tax cut.
So how can Fix the Debt claim that a plan to increase the debt can ‘help to fix the debt’? It can only be understood as an extension of the organization’s dysfunctional enabling relationship…. During President Obama’s first term, anti-deficit activists came up with a plan that they hoped would induce Republicans to abandon their fanatical opposition to higher tax revenue. First, they would get Democrats to support cuts to Social Security and Medicare as part of the trade. And second, the higher revenue would come not in the form of tax-rate increases but instead by reducing loopholes and [tax] expenditures…. In reality, Republicans refused to go for this deal. They didn’t just refuse once. They refused time after time. In 2010, the Simpson-Bowles commission came up with a plan that traded revenue-increasing tax reform for cuts to retirement programs, and leading Republicans like Paul Ryan all rejected the deal. Then, in 2011, Obama tried to strike a similar bargain with House Republicans when they held the debt ceiling hostage, but they rejected it again. That standoff led to the creation of a ‘supercommittee’ that was tasked with creating another version of the revenue-increasing tax-reform-for-retirement-cuts deal, which predictably failed again. And then, when the Bush tax cuts were set to expire at the end of 2012, the Obama administration hoped the pressure of an imminent tax increase would force Republicans to make some version of the deal, but once again they refused, instead using their leverage to minimize the tax hit on upper-income households…. The debt-hawk theory on how Republicans could be induced to give up their fanatical opposition to higher revenue failed….
Conceding that this is the Republican position would subvert Fix the Debt’s entire theory of change. So instead the group continues to reside in a fantasy world where the GOP can be coaxed into doing the thing it has proven extensively it won’t do. In this fantasy world, a Republican using the words ‘tax reform’ means a step toward ‘discussion’ and ‘bipartisan negotiation’ and, ultimately, a result that would be the precise opposite of what Republicans actually want to do.
Must-Reads: July 8, 2016
Should Reads:
- : China’s innovation economy a real estate bubble in disguise?
- : Follow the Money
- : Introduction to the #WakandaSyllabus
- Must-Watch: Federal Reserve Bank of Boston: 60th Economic Conference: ‘October 14-15, 2016: The Elusive ‘Great’ Recovery: Causes and Implications for Future Business Cycle Dynamics…
- Brainstorming About Teaching Economic History Next Year…
- Ian Morris: Why the West Rules–for Now: The Patterns of History, and What They Reveal About the Future: The Economic History Research Frontier: A Great Recent Books Approach
Must-Read: Larry Summers: A Remarkable Financial Moment
Must-Read: : A Remarkable Financial Moment: “10 and 30 year interest rates today reached all time low levels of 1.32 percent and 2.10 percent…
…Record low 10 year interest rate were also registered in Germany, France, Switzerland and Australia. Notably Swiss 50 year interest rates are now for the first time negative. Rates out 15 years are negative in Germany and 9 years in France. Such rates would have seemed inconceivable a decade ago and very unlikely even a couple of years ago…. Extraordinarily low rates reflect both subtarget expected inflation even over long horizons and very low real interest rates…. Remarkably the market does not now expect a full Fed tightening until early 2019. This is despite all the Fed speeches expressing optimism about the economy and a desire to normalize interest rates… very low long term real rates, sluggish growth expectations, concerns about the ability even over the fairly long term to get inflation to average 2 percent, and a sense that the Fed and the world’s major central banks will not be able to normalize financial conditions in the foreseeable future….
Policymakers still have not made sufficiently radical adjustments in their world view to reflect this new reality of a world where generating adequate nominal GDP growth is likely to be the primary macroeconomic policy challenge for the next decade. Having the right world view is essential if there is to be a chance of making the right decisions. Here are the necessary adjustments…. Neutral real interest rates are likely close to zero going forward…. Second, as counterintuitive as it is to central bankers who came of age when the inflation of the 1970s defined the central banking challenge, our problem today is insufficient inflation…. Evidence from markets and some surveys suggests that inflation expectations are becoming unhinged to the downside…. In a world where interest rates over horizons of more than a generation are far lower than even pessimistic projections of growth, traditional thinking about debt sustainability needs to be discarded…. The conditions Brad Delong and I set out in 2012 for expansionary fiscal policy to pay for itself are much more easily satisfied today than they were at that time.
Fourth, the traditional suite of structural policies to promote flexibility are not especially likely to be successful in the current environment…. In the presence of chronic excess supply structural reform has the risk of spurring disinflation rather than the contributing to a necessary increase in inflation. There is in fact a case for strengthening entitlement benefits so as to promote current demand…. Traditional OECD-type recommendations cannot be right as both a response to inflationary pressures and deflationary pressures. They were more right historically than they are today…. Treatments without accurate diagnosis have little chance success. We need to begin with a much clearer diagnosis of our current malaise than policymakers have today. The level of interest rates provides a very strong clue.
Must-Read: Paul De Grauwe and Yuemei Ji: Animal Spirits and the Optimal Inflation Target
Must-Read: : Animal Spirits and the Optimal Inflation Target: “Low inflation targets can cause economies to hit the zero lower bound during deflationary periods caused by even mild shocks…
…In such circumstances, central banks lose their ability to stimulate the economy. This column assesses the risk of this happening using a model that endogenises self-perpetuating optimism and pessimism in the economy. Given agents’ intrinsic chronic pessimism during times of recession, central banks should raise their inflation targets to 3 or 4% to preserve their ability to stimulate the economy when needed.