Must-Reads: July 3, 2016

Posted on by Brad DeLong

Should Reads:

Must-Read: Duncan Weldon: Five Thoughts on Brexit

Posted on by Brad DeLong

Must-Read: Duncan Weldon: Five Thoughts on Brexit:

  1. British politics now has a big dose of Syriza thinking. ‘Respect our democratic mandate’ doesn’t work when you’re dealing with 27 other democratically elected governments.
  2. I have no idea what the final settlement looks like. No one does.
  3. We won’t get any clarity in the next few months. The Tory leadership contest will at best give a small signal, but really it’s noise. The next PM will be selected by a membership of leave supporters and the candidates will pitch to that. All will offer a fantasy that the EU is unlikely to agree to.
  4. British politics is in flux. The next Tory leader faces having to make a tough choice: disappoint the membership and traditional Tory voters or lose the City. The broad coalition of social conservatives and economic liberals that form the party may not be able to survive this choice. Labour faces similar pressures. Handled badly, this go see a UKIP surge – not into power but into a much stronger position in Parliament.
  5. Finally – I think the UK’s actions will ultimately be good for EU unity. Others will be less inclined to follow our example if it is painful (and that’s without the additional problems of leaving Schengen or the euro). It isn’t hard to imagine the Eurozone doubling down now and building the kind of institutions that the zone needs to work.

Must-Read: Paul Krugman: Trade and Jobs: A Note

Posted on by Brad DeLong

Must-Read: Ah. I’ve been waiting for Paul Krugman to write up something like this…

I think that he is, of course, correct. The estimated effects of the China shock on individual regions and labor markets is solid. Their aggregating up is fatally flawed pre-2008…

Paul Krugman: Trade and Jobs: A Note: “Trade and jobs… The big story in the academia/policy space…

…Autor et al… estimated large losses from Chinese import penetration…. But… some conceptual issues… are important for interpreting the results…. I would begin by posing a counterfactual: what would U.S. employment look like if we had pursued policies such as Trump tariffs that prevented the large trade deficits in manufacturing we actually have?… A balanced expansion of imports and imports would have, to a first approximation, no effect on manufacturing value added, and an effect on employment only to the extent that import-competing industry is more labor-intensive than exports…. [So] what matters is the manufacturing trade deficit… $600 billion in 2014. How much manufacturing did that deficit displace?… About $360 billion…. 2 million jobs.

OK, what about the effect on overall employment?… If monetary and fiscal policy are used to achieve a target level of employment–as they generally were prior to the 2008 crisis–then a first cut at the impact on overall employment is zero. That is, trade deficits meant 2 million fewer manufacturing jobs and 2 million more in the service sector. Since 2008, of course, we’ve been in a liquidity trap, with the Fed either unable or unwilling to hit its targets and fiscal policy paralyzed by ideology, so trade deficits are in practice a major drag on overall employment…. So, how big a deal is displacement of 2 million manufacturing jobs? Not trivial…. But… absent the trade deficit… we would have roughly 11.5 percent of the work force in manufacturing, rather than the actual 10. Compare this with the realities of the past: more than 20 percent in manufacturing in the late 1970s, more than 25 percent in the 1960s….

Autor and various co-authors… do… a bottom-up approach…. The impact of the China shock on employment, wages, and so on at the regional level… beautiful work. But what they do next is to apply the implied coefficient from this analysis to the aggregate effects of the China shock. And that’s much more dubious–especially when, in the second paper, they purport to estimate the effects on overall employment. In general, you can’t do that: applying estimates of partial regional effects to the overall aggregate exposes you to huge possible fallacies of composition. And in this case the crucial issue is monetary and fiscal response. Up through 2007… [their results] should be seen as jobs shifted out of manufacturing to other sectors, not total job loss…

Must-Reads: July 2, 2016

Posted on by Brad DeLong

Should Reads:

Must-Read: Ryan Avent: Everything Is Not OK

Posted on by Brad DeLong

Must-Read: Ryan Avent: Everything Is Not OK: “Things might or might not be ok in the long run….

…[But] in the short run, there is plenty to worry about…. Yields around the world were already extraordinarily low before the Brexit vote. In the days immediately after they plummeted. While equities have risen, bond yields have not. The yield on the 10-year US Treasury is 30 basis points below where it was on June 23rd. The real yield is close to zero. The 10-year gilt yield is below 1%. The yield on 10-year bonds in Germany, France and the Netherlands are basically zero. Falling yields on safe assets indicate some combination of falling expectations for growth, falling expectations for inflation and a rising risk premium….

The range of possibilities has widened, and the odds of quite a bad outcome have increased. Worryingly, central banks have very little room to respond…. Neither short- nor long-term rates can be pushed much lower. The best hope for effective monetary stimulus is asset purchases designed to weaken a country’s currency. But not everyone can depreciate simultaneously…. Quantitative easing everywhere could help if it boosted expectations for growth and inflation. But at the zero lower bound and with little hope of massive fiscal stimulus, central banks might well struggle to raise animal spirits. In a world of very low inflation and very low interest rates, people only have to cling a little more tightly to their money to tip economies into recession…

Must-Read: Kevin O’Rourke: Markets and States are Complements

Posted on by Brad DeLong

Must-Read: Kevin O’Rourke: Markets and States are Complements: “Globalisation produces both winners and losers… can lead to an anti-globalisation backlash… [in the] late 19th… the late 20th… [and] the early 21st century…

…What, if anything, [can] governments… do[?]… Dani Rodrik’s finding that more open states had bigger governments in the late 20th century comes in…. Markets expose workers to risk, and that government expenditure of various sorts can help protect them…. Michael Huberman showed that this correlation between states and markets was present before 1914 as well: countries with more liberal trade policies tended to have more advanced social protections of various sorts, and this helped maintain political support for openness…. If the Tories had really wanted to maintain support for the EU, investment in public services and public housing would have been the way to do it…. It wouldn’t have satisfied the xenophobes, but not all anti-immigrant voters are xenophobes…. If the English want continued Single Market access, they will have to swallow continued labor mobility. There are complementary domestic policies that could help in making that politically feasible. We will have to wait and see what the English decide. But there are also lessons for the 27 remaining EU states…

Must-Read: Brainwrap: West Virginia Sues Federal Government for Trusting West Virginia

Posted on by Brad DeLong

Laurence Silberman: West Virginia Sues Federal Government for Trusting West Virginia: “The President… announced the federal government would hold off on enforcing the statutory requirements…

…Accordingly, HHS sent a letter to the States announcing a ‘transitional policy,’ allowing health insurers with certain conditions3 to continue policies that would be outlawed under the statute for a period of a year (later extended for another three years). That left the States holding the bag. They had to decide whether to enforce or not to enforce the very conditions that the federal government determined to abandon for the transitional period. West Virginia initially decided to enforce, but after HHS extended the transitional period, West Virginia opted to decline to enforce the mandates…

Brainwrap: West Virginia Sues Federal Government for Trusting West Virginia: “As far as I can tell, WV Republicans were hoping that the blame for the initial cancellations…

…(from the POV of those whose plans were cancelled) would fall upon President Obama, and that the blame for extending the plans (from the POV of the insurance carriers who had been hoping to pick up some market share from the cancelled enrollees) would also fall upon President Obama. The problem is that Obama/HHS left it up to the states, which means that the fallout for both decisions–whether positive or negative–lay at the feet of the state, not the feds. This apparently led to some amount of embarrassment in the WV corridors of power, I take it. Put another way, West Virginia sued President Obama for trusting West Virginia to make the right decision about how to handle the situation.

Weekend reading: Celebrating U.S. independence edition

Posted on by Nick Bunker

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

The focus on research on income inequality has mostly been on rising inequality within firms. But newly updated research shows that inequality between firms is just as important contributor to rising inequality as intra-firm inequality.

The decline of manufacturing employment in the United States has been a big contributor to the decline in prime-age male employment since 2000. Yet the decline could have been worse during the housing bubble as the construction boom employed more of these workers.

Heather Boushey and Kavya Vaghul released a new issue brief this week and their findings show that working mothers with children ages five and under are indispensable to their families’ bottom line.

Debates about wage rigidity seem like the heights of academic minutia. But the answer to whether wages are rigid or not has important implications for how we think about the labor market during economic downturns.

Emmanuel Saez updates his research on the U.S. income distribution for 2015. Income growth for the bottom 99 percent was quite strong at 3.9 percent, its fast pace in 17 years. The top 1 percent also saw fast income growth, at a 7.7 percent annual rate.

Links from around the web

“In fact, all racial groups are in below-average pre-K except whites.” Jonathan Rothwell looks at the racial disparities in access to high-quality pre-K programs. [brookings]

Recent research highlights how non-compete agreements have become overly prevalent in today’s labor market. As Steve Lohr writes, several states, including Massachusetts, are looking to rein in non-competes. [nyt]

The recent focus in Europe may be on the Brexit referendum (and soccer pitches in France), but the situation in Greece remains dire. Matthew Klein writes about the massive dissaving going on in the Greek economy. [ft alphaville]

As wealthy Americans start to move back into city centers, the changing demographics of who lives in city centers is returning to an old trend. Emily Badger reports on research showing how the rich were once the ones living at the center of cities. [wonkblog]

Economic clusters offer the promise of revitalizing regions and boosting economic growth. But can policymakers actually intentionally create them? Noah Smith looks at what we know and what we don’t know. [bloomberg view]

Friday figure

Figure from “Working mothers with infants and toddlers and the importance of family economic security” by Heather Boushey and Kavya Vaghul.

U.S. top one percent of income earners hit new high in 2015 amid strong economic growth

Posted on by David Evans

The top 1 percent income earners in the United States hit a new high last year, according to the latest data from the U.S. Internal Revenue Service. The bottom 99 percent of income earners registered the best real income growth (after factoring in inflation) in 17 years, but the top one percent did even better. The latest IRS data show that incomes for the bottom 99 percent of families grew by 3.9 percent over 2014 levels, the best annual growth rate since 1998, but incomes for those families in the top 1 percent of earners grew even faster, by 7.7 percent, over the same period. (See Figure 1.)

Figure 1

Overall, income growth for families in the bottom 99 percent was good again in 2015 as it had been last year, marking the second year of real recovery from the income losses sparked by the Great Recession of 2007-2009. After a large decline of 11.6 percent from 2007 to 2009, real incomes of the bottom 99 percent of families registered a negligible 1.1 percent gain from 2009 to 2013, and then grew by 6.0 percent from 2013 to 2015. Hence, a full recovery in income growth for the bottom 99 percent remains elusive. Six years after the end of the Great Recession, those families have recovered only about sixty percent of their income losses due to that severe economic downturn.

In contrast, families at or near the top of the income ladder continued to power ahead. These families at or near the top of the income ladder did substantially better in 2015 than those below them. The share of income going to the top 10 percent of income earners—those making on average about $300,000 a year—increased to 50.5 percent in 2015 from 50.0 percent in 2014, the highest ever except for 2012. The share of income going to the top 1 percent of families—those earning on average about $1.4 million a year—increased to 22.0 percent in 2015 from 21.4 percent in 2014.

Income inequality in the United States persists at extremely high levels, particularly at the very top of the income ladder. Figure 1 shows that the incomes (adjusted for inflation) of the top 1 percent of families grew from $990,000 in 2009 to $1,360,000 in 2015, a growth of 37 percent. In contrast, the incomes of the bottom 99 percent of families grew only by 7.6 percent–from $45,300 in 2009 to $48,800 in 2015. As a result, the top 1 percent of families captured 52 percent of total real income growth per family from 2009 to 2015 while the bottom 99 percent of families got only 48 percent of total real income growth. This uneven recovery is unfortunately on par with a long-term widening of inequality since 1980, when the top 1 percent of families began to capture a disproportionate share of economic growth.

The 2015 numbers on income have been built using the new filling-season statistics by size of income published by the Statistics of Income division of the IRS. These statistics can be used to project the distribution of incomes for the full year. We have used these new statistics to update our top income share series for 2015, which are part of our World Top Incomes Database. These statistics measure pre-tax cash market income excluding government transfers such as the disbursal of the earned income tax credit to low-income workers.

Timely statistics on economic inequality are key to understanding whether and how inequality affects economic growth. Policymakers in particular need to grasp whether past efforts to raise taxes on the wealthy—in particular the higher tax rates for top U.S. income earners enacted in 2013 as part of the 2013 federal budget deal struck by Congress and the Obama Administration—are effective at slowing income inequality.

The latest data from the IRS suggests the 2013 reforms proved to be fleeting in terms of reducing income inequality. There was a dip in pre-tax income earned by the top one percent in 2013, yet by 2015 top incomes are once again on the rise—following a pattern of growing income inequality stretching back to the 1970s.

—Emmanuel Saez in a professor of economics at the University of California-Berkeley and a member of the Washington Center for Equitable Growth’s steering committee.

Photo by Steve Johnson, via flickr