Must-Read: Andrew Golis: Comments Are Usually Garbage. We’re Adding Comments to This.!

Posted on by Brad DeLong

Must-Read: Andrew Golis: Comments Are Usually Garbage. We’re Adding Comments to This.!: “Comments, on most websites most of the time, are garbage…

…When comments are garbage, so are our communities. The conversations we have allow us to explore ideas and stories, and to build relationships. Comments form conversations, and conversations form communities. So when we started This. (a network where you can share just 1 link a day), we knew two things: 1. the first version of the site wouldn’t have comments, and 2. we’d only add them when we thought we could devote the time and attention to succeeding where others have failed…. Over the course of the next 6 months, we’ll build what we think will be a powerful new way to comment…. This first step is pretty rudimentary: simple text comments below a shared link. But it comes with 3 unique elements…. 1. Members can opt out…. 2. Conversations get their own notifications page…. 3. No Assholes…. We think conversations will allow our members to form into a fun, smart-as-hell community. We can’t wait to unveil what we’ve got coming in the weeks and months ahead. As always, we work best when we hear from our members. Have thoughts? See bugs? Have a suitcase full of cold hard cash in need of a new home? Email me.

How the U.S. housing boom hid weaknesses in the labor market

Posted on by Bridget Ansel
Construction worker Miguel Fonseca carries lumber as he works on a house frame for a new home in Chula Vista, Calif.

The share of workers ages 25 to 54 with a job has been on an overall decline since 2000. This decline hit prime-age workers without a college degree particularly hard, in what is now called the “great employment sag” and during which increased competition from abroad evidently pushed down manufacturing employment. Interestingly, though, this employment sag could have been worse for those displaced manufacturing workers because the housing bubble in the 2000s may have actually helped mask employment losses.

This is the argument made in a new Journal of Economics Perspectives article by Kerwin Kofi Charles and Erik Hurst of the University of Chicago and Matthew Notowidigdo of Northwestern University. The authors believe that the decline in prime-age employment could be due to cyclical factors such as recessions or more structural, long-term trends including globalization and technological change. They cite good evidence that cyclical forces did a lot to depress the employment rate of prime-age workers, but the enduring depressed levels suggest longer-term trends where the importance of manufacturing employment and the share of prime-age men without college degrees becomes clear.

Charles, Hurst and Notowidigdo detail the relationship between share of prime-age, non-college-educated men working in manufacturing, working in construction, and those not employed. The combined share of these three series seems to stay relatively constant at about 50 percent, with increases in construction employment offset by declines in manufacturing employment or declines in non-employment. So perhaps increased demand for construction workers during the housing bubble offset the declines in manufacturing employment.

Looking at trends in employment across metropolitan areas in the United States, the three authors find evidence that the construction industry did end up hiring workers who left the manufacturing sector. Areas with higher housing demand during the housing bubble increased the employment share of prime-age, non-college-educated men. Looking at individual data on workers who were let go from manufacturing firms, the authors find evidence that workers living in areas with stronger housing demand were more likely to be re-employed. The employment sag would have been greater if not for the increased demand from the housing bubble.

The results of this paper support the larger idea that declining employment and labor force participation among prime-age men is primarily a result of declining demand for the types of labor that many of them traditionally provided. If such a long-term structural change in the economy is still at the heart of this change, then U.S. monetary and fiscal policy – policies used to solve cyclical problems – might have a hard time boosting the employment rates of these workers. But some slack does remain in the labor market. Continued support for the current recovery would help in some ways. At the same time, the construction industry could be helped out by investments in infrastructure or policies that encourage housing development in high-need areas. Figuring out how to boost demand for these specific workers remains a key challenge for the U.S. labor market.

Working mothers with infants and toddlers and the importance of family economic security

Posted on by Kavya Vaghul
Anne Quirk and her 11-month-old son Kieran play in the front yard of their home in Providence, R.I.

Overview

For families in the United States with children ages five and under—whether in married- or single-parent homes—mothers have been essential to bolstering economic security. Mothers’ increased working hours helped stabilize and boost family income. In the face of decreasing economic security, though, these large increases in hours worked by mothers, especially in households with young children who require physical and emotional care and nurturing, comes at a price: time.

As more mothers spend their days outside of the home trying to deliver much-needed financial stability, we need to understand the consequences of their work. As Heather Boushey documents in her book, “Finding Time: The Economics of Work-Life Conflict,” families now rely on those added hours and earnings of women. But for different types of families the transformations in the women’s role at home and at work mean different things. Especially for families with an infant or pre-school aged child, the challenges of how to address work-life conflicts can be acute. Without sufficient social infrastructure to help while parents are at work —such as paid family leave, paid sick days, flextime, predictable schedules, childcare, or universal high-quality prekindergarten programs—families are increasingly struggling to balance economic security with caregiving at home.

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Working mothers with young children and family economic security (pdf)

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This issue brief builds on the findings from “Finding Time” and explores how women’s increased hours of work and higher earnings have affected the incomes for families with young children. We unpack the role that women have played in helping stabilize family incomes across married-parents and single-parents with children age five or younger. Our findings are telling:

  • Across the board, married-parent families with young children have higher incomes than single-parent families, although between 1979 and 2013 both married- and single-parent families increased their incomes at similar low rates.
  • While in both 1979 and 2013 women from married-parent families worked more hours than single-mothers with young children, both groups of women saw similar and significant increases in their hours of work across all income groups.
  • The rise in women’s hours have been important for trends in family income. Between 1979 and 2013, in both married- and single-parent families, women’s earnings from higher wages and added hours have been positive across all income groups. In fact, for families with young children, women’s earnings from more working hours in particular was substantially large.

The changing role of women and the composition of families

Over the past four decades in United States, the composition of families with children has changed markedly. Most importantly, there is an increase in diversity of family types. There is no longer a dominant “typical” family, especially not one with a breadwinning father, a care-taking mother, and their dependent children. Instead, there is a wide array of family types. Our definition of who comprises a family now—more than ever before—has expanded to include singles living alone, biologically unrelated individuals, or even a boarder who joins in on family dinner and helps out with homework.

Trends in marriage and fertility have both contributed to greater family complexity. Marriage (if it happens at all) happens later in life, and the median age of first marriage is now 29 for men and 27 for women—higher than at any point since the 1950s. And, of course, same sex marriage is now legal across the nation. At the same time, many women are delaying childbearing and the typical woman has her first child now at age 26. Further, children are increasingly being born into families with unmarried parents; in 2014, 40.3 percent of all births in 2014 were to an unmarried mother. What this means is that there is more complexity of family types.

A second set of changes is who works and what this looks like across the income spectrum. While it used to be that most children were raised in married-couple families, be they at the top or the bottom of the income ladder. Now, however, while families at the top continue to raise children inside marriage—typically with both parents holding down a fairly high-paying job—children in families at the bottom of the income distribution—and now many in the middle—are living with a single, working parent, most often a mother. (See Figure 1.)

Figure 1

 

While families have become more complex, incomes have become more unequal. Faced with greater economic insecurity, families had to find ways to cope. One strategy was for women to increase their engagement with the economy. Initially, the “American wife” with school-age children migrated to the workforce, and soon after those with even younger children joined in. As women became more integrated into the workforce, they eventually became their families’ breadwinners, with two-thirds now either the main breadwinner or sharing that responsibility with their husband.

Using data from the Current Population Survey, we chronicle how family incomes changed between 1979 and 2013 for low-income, middle-class, and professional families by family type. Specifically, we decompose these changes over time into differences in male earnings, female earnings from higher wages, female earnings from more hours worked, and other sources of income, which include Social Security and pensions. (See Box.)

Defining income groups and family types

The analysis in this issue brief follows the same methodology presented in “Finding Time.” For ease of composition, we use the term “family” throughout the brief even though the analysis is done at the household level. We split households in our sample into three income groups:

  • Low-income households are those in the bottom third of the income distribution, earning less than $25,440 per year in 2015 dollars.
  • Professional households are those in the top fifth of the income distribution who have at least one household member with a college degree or higher; these households have an income of $71,158 or higher in 2015 dollars.
  • Everyone else falls in the middle-class category.

In this issue brief, we also refer to two different family types who have “young” (age five or less) children:

  • Married-parent families: The parents are married and at least one own young child is present in the household. (Unfortunately, at this time, the data limit our analysis heterosexual couples only.) Within these households, other, older children or adults, related or not and including adult-age children may be present and may contribute to the family’s income. Most families in this category, however, have two parents and their children alone.
  • Single-parent families: Either the mother alone or the father alone and at least one young child is present within the household. Within the household, there are no other adults related or unrelated adults who have earnings from a job or income from other sources.

Our sample only includes working-age families, where at least one person in the household is between the ages of 16 and 64.

In the United States, only 19.1 percent of families have a child under age six. Table 1 shows the distribution of married parent and single-parent families across the income spectrum with and without one or more young children at home. Due to small sample sizes for certain groups, we were unable to conduct our analysis for a variety of family types, but we can break down the shares of different types of families by income group. For the purposes of this analysis, we select households where both parents are married from the “both parents only” and “both parents living with other adults” categories to get our “married-parent” families. For our “single-parent” families, we select households from the “single-parent” category. These are bolded in Table 1.

Table 1

 

Table 2 breaks down the sample for this analysis, showing the share of each of these family types across the three income groups for 2013. Notably, the share of single-parent families decrease as we move up the income ladder. We exclude single-parent families with young children from our analysis of professional families as the sample size is too small.

Table 2

 

Setting some context

Before turning to the decomposition analysis, let’s first set some broad context for how family incomes and women’s hours changed between 1979 and 2013 for low-income, middle-class, and professional families with young children.

How did income change between 1979 and 2013 for families with young children?

Between 1979 and 2013, while married-parent families had higher family income than single-parent families with young children, both types of families saw similar rates of growth in their income. (See Figure 2.)

Figure 2

 

Low-income families

Figure 2 shows that between 1979 and 2013, low-income families with young children—both married and unmarried—saw a slight rise in their incomes. Married-parent families with young children earned substantially more than single-parent families. In 1979, low-income married-parent homes, on average, brought in $32,965 annually compared to the $22,443 earned by single-parent families with children age five and under. By 2013, these disparities still persisted, with married-parent families earning $36,606 and single-parent families earning $21,848 annually.

The gap in average annual income between married-parent and single-parent family types can be often—but not always—explained by simple addition: Married-couples, now more than ever before, often have two sources of income. Although low-income single-parent families had a smaller annual income, on average, than married-parent families, between 1979 and 2013, both their incomes grew at relatively small rates (1.9 percent and 11.0 percent, respectively). These rates of income growth for families with young children indicate that income stalled.

Middle-class families

Figure 2 also shows that for middle-class families with young children, income rose between 1979 and 2013. As was the case for families across the low-income group, middle-class married-parent families with young children earned more, on average, in 1979 and 2013 than single-parent families. Yet, despite earning more, married-parent families’ income had similar rates of growth to single-parent families’; between 1979 and 2013, both married- and single-parent families with children age five and under grew their incomes by 26.4 percent and 29.0 percent, respectively.

Professional families

Across the board, Figure 2 also shows that between 1979 and 2013, professional families with young children have seen their incomes soar, and married-families with young children, in particular, have seen outstanding gains. In 1979, professional married couple families with young children earned, on average, $143,099. By 2013, their average annual income had grown by 65.2 percent to $236,400. The gap between married-parent professional families’ income and low-income and middle-class families’ income has widened markedly over the past four decades.

How did women’s working hours change between 1979 and 2013 for families with young children?

Taking a look at the hours that women from different families and income groups work gives us some insight into why families with young children increased their incomes between 1979 and 2013. Across the board, over the past four decades, women from married-parent and single-parent families grew their hours of work markedly. (See Figure 3.)

Figure 3

 

Low-income families

Figure 3 shows that in 1979, mothers of young children (and other working women) in married-couple families worked 590 hours annually (about 11.4 hours per week) and single-mothers worked 394 hours (7.6 hours per week). By 2013, women from both low-income married- and single-parent families with young children had grown their annual hours of work by 67.0 percent and 89.8 percent to 937 hours (18.0 hours per week) and 747 hours (14.4 hours per week), respectively.

Middle-class families

Just like women from low-income families, Figure 3 shows that women from middle-class families with young children greatly increased their hours at work between 1979 and 2013. In 1979, women from middle-class married-parent and single-parent families with children age five and under worked an annual average of 965 hours (or 18.6 hours per week) and 343 hours (6.6 hours per week), respectively. In 2013, women from married-parent families with young children had increased their hours of work by 58.1 percent to 1,525 hours annually (29.3 hours weekly), and mothers in middle-class single-parent families had more than doubled their hours (an increase of 114.5 percent) to 736 (14.2 hours weekly).

Professional families

Again, like we noted for other income groups, for professional families, women from homes with children age five and under had large increases in their hours of employment. Figure 3 shows that among professional families in 1979, women in married-couple families worked an annual average of 1,072 hours (20.6 hours per week), growing their hours by 67.0 percent to 1,791 annually (34.4 hours weekly) by 2013.

Though mothers (and other women) in professional married-couple families work more hours than middle-class and low-income, the rates of increase are relatively comparable across the board, corroborating the narrative that more and more women with young children have joined the workforce.

Decomposing the changes in income for families with young children

In Figure 2, we saw that between 1979 and 2013, across the board, married-parent families have higher incomes but similar rates of increase in income to single-parent families with young children. Figure 3 highlights that women from families with young children have been working more hours and perhaps have seen some of the largest increases in their hours at work.

Given these broad trends, a natural question arises about how the large increases in women’s hours relate to the large increases in family income for these families with young children. To unpack this correlation, we decompose the changes in families’ average household income between 1979 and 2013 into male earnings, female earnings, and income from other non-employment-related sources, which include Social Security and pensions and other sources.

Specifically, we divide female earnings into two parts: the portion due to women working more hours per year and that due to women earning more per hour. To calculate female earnings stemming directly from the additional hours worked, we take the difference between the 2013 female earnings and the hypothetical earnings of women if they earned 2013 hourly wages but worked the same hours as women did in 1979. (For more on how we did this calculation, please see our Methodology.) We find that within families with young children across the income ladder, the added hours of mothers have near single-handedly been a large and positive factor for income growth for low-income and middle-class families while women’s earnings overall have outweighed men’s positive earnings at the top. (See Figure 4.)

Figure 4

 

Low-income families

Figure 4 shows that for low-income families with young children, both women’s earnings from more hours and from higher wages protected against falling family incomes between 1979 and 2013. For married- and single-parent families with children five and under, men’s earnings pulled income down at varying degrees. Men in married-parent families and fathers in single-parent families lost $1,748 and $1,938 in earnings between 1979 and 2013, respectively.

In contrast, women’s added hours and higher pay boosted incomes in both low-income family groups. For low-income married-parent families with young children, women’s higher wages increased family incomes by an average of $1,013 while women’s added hours grew family income by an average of $3,541. Single-parent families saw similar substantial gains in mother’s economic contributions: Between 1979 and 2013, women’s higher wages contributed $224 to earnings and added hours boosted incomes by $4,114.

The changes in “other income” are also of interest. For low-income married-parent families, other income grew by $860, but for single-parent families, other income decreased by $1,997. For single-parent families, this decrease in reliance on other sources of income—which could include federal transfers such as supplemental nutrition assistance and Temporary Assistance for Needy Families as well as Social Security benefits—indicates that these policies may not be adequately supportive or sensitive to the needs of parenting alone.

Middle-class families

Across the board, middle-class families, like low-income families, saw positive increases in their income largely due to the contributions of women and their increased labor force participation. Figure 4 shows that for both middle-class married- and single-parent families of young children, male earnings made a relatively small, positive addition of $1,205 and $3,706, respectively.

Women’s earnings, in contrast, were positive and large. Women’s earnings from higher wages added $6,041 and $2,768 for married-parent and single-parent families, respectively. The additions due to women’s added hours at work were more impressive, as women from married- and single-parent homed secured an additional $11,380 and $11,482, respectively.

Other income across the the two middle-class family types with also helped increase income.

Professional families

As we saw in Figures 2 and 3, not only do mothers in professional married-parent families with young children work the longest hours but also their family incomes have also grown considerably. These changes are well-captured when we decompose family income, where we find that both women’s added earnings from higher wages and hours are important. At the same time, we see that men have made near-equal contributions to their families’ income growth, as well.

Figure 4 shows that between 1979 and 2013, men in professional married-parent families with young children added $39,540 to family income. Despite the immense boost from male earnings, female earnings added the most to family income—a total of $52,738, which breaks down into $21,965 from higher wages and $30,773 from more hours worked.

Conclusion

Our findings tell is that working mothers with children ages five and under are indispensable to their families’ bottom line. So what does that mean for the other indispensable role played by mothers—as caregivers? Policymakers need to consider how a full panoply of policies, such as universal high-quality childcare and prekindergarten programs, paid family and medical leave, and flexible scheduling at work can help them balance the lives of these mothers as productive members of our workforce and caregivers.

It’s not enough just to have these policies in place, though. How we address the time-squeeze on U.S. families must be sensitive to the changing definitions of what it means to be a family in the United States and what that tangibly means for the way in which they give care.

—Heather Boushey is the Executive Director and Chief Economist at the Washington Center for Equitable Growth and the author of the book from Harvard University Press, “Finding Time: The Economics of Work-Life Conflict.” Kavya Vaghul is a Research Analyst at Equitable Growth.

Acknowledgements

The authors would like to thank John Schmitt, Ben Zipperer, Dave Evans, Ed Paisley, David Hudson, and Bridget Ansel. All errors are, of course, ours alone.

Methodology

The methodology used for this issue brief is identical to that detailed in the Appendix to Heather Boushey’s “Finding Time: The Economics of Work-Life Conflict.”

In this issue brief, we use the Center for Economic and Policy Research extracts of the Current Population Survey Annual Social and Economic Supplement for survey years 1980 and 2014 (calendar years 1979 and 2013). The CPS provides data on income, earnings from employment, hours, and educational attainment. All dollar values are reported in 2015 dollars, adjusted for inflation using the Consumer Price Index Research Series available from the U.S. Bureau of Labor Statistics. Because the Consumer Price Index Research Series only includes indices through 2014, we used the rate of increase between 2014 and 2015 in the Consumer Price Index for all urban consumers from the Bureau of Labor Statistics to scale up the Research Series’ 2014 index value to a reasonable 2015 index estimate. We then used this 2015 index value to adjust all results presented.

For ease of composition, throughout this brief we use the term “family,” even though the analysis is done at the household level. According to the U.S. Census Bureau, in 2014, two-thirds of households were made up of families, defined as at least one person related to the head of household by birth, marriage, or adoption.

We divide our sample into three income groups—low-income, middle-class, and professional households—using the the definitions outlined in “Finding Time.” For calendar year 2013, the last year for which we have data at the time of this analysis, we categorized the income groups as follows:

  • Low-income households are those in the bottom third of the size-adjusted household income distribution. These households had an income of below $25,440 (as compared to $25,242 and below for 2012). In 1979, 28.3 percent of all households were low-income, increasing to 29.7 percent in 2013. These percentages are slightly lower than one third because the cut-off for low-income households is based on household income data that includes persons of all ages, while our analysis is limited to households with at least one person between the ages of 16 and 64. The working-age population (16 to 64) typically has higher incomes than older workers, and as a result, the working-age population has somewhat fewer households that fall into this low-income category.
  • Professionals are those households that are in the top quintile of the size-adjusted household income distribution and have at least one member who holds a college degree or higher. In 2013, professional households had an income of $71,158 or higher (as compared to $70,643 or higher in 2012). In 1979, 10.2 percent of households were considered professional, and by 2013, this share had grown to 16.8 percent.
  • Everyone else falls in the middle-class category. For this group, the household income ranges from $25,440 to $71,158 in 2013 (as compared to $25,242 to $70,643 in 2012); the upper threshold, however, may be higher for those households without a college graduate but with a member who has an extremely high-paying job. This explains why within the middle-income group, the share of households exceeds 50 percent: The share of middle-income households declined from 62 percent in 1979 to 53.4 percent in 2013.

Note that all cut-offs above are displayed in 2015 dollars, using the inflation adjustment method presented earlier.

In our analysis, we limit the universe to persons with non-missing, positive income of any type. This means that even if a person does not have earnings from some form of employment but does receive income from Social Security, pensions, or any other source recorded by the CPS, they are included in our analysis.

These data are decomposed into income changes between 1979 and 2013 for low-income, middle-class, and professional families. The actual household income decomposition uses a simple shift-share analysis to find the differences in earnings between 1979 and 2013 and calculate the extra earnings due to increased hours worked by women.

To do this, we first calculate the male, female, and other earnings by the three income categories. To calculate the sex-specific earnings per household, we sum the income from wages and income from self-employment for men and women, respectively. The amount for other earnings is derived by subtracting the male and female earnings from total household earnings. We average the household, male, female, and other earnings by each income group for 1979 and 2013, and take the differences between the two years to show the raw changes in earnings by each income group.

To find the change in hours, for each year by household, we sum the total hours worked by men and women. We average these per-household male and female hours, by year, for each of the three income groups.

Finally, we calculate the counterfactual earnings of women. We use the 2013 earnings per hour for women and multiply it by the 1979 hours worked by women. Finally, we subtract this counterfactual earnings from the female earnings in 2013, arriving at the female earnings due to additional hours.

We repeated this analysis for families of different family types that had children age five and below (young children). The first family type we analyze was married-parent families—households that have both a mother and father who are married and their own young child. These married-parent households may also include older children or adults, both related and unrelated, including adult children, some of whom may be earning and contributing to household income.

The second family type we observed was single-parent families—households where either a mother and her own young child or a father and his young child is present. This family type excludes other adults if they are contributing personal income of any type to household income. Because of small household sample sizes, single-parent families were excluded from the analysis of professional families. While these family type categories do dissect some of the nuance in family structures, we acknowledge that they are oversimplifications of complex family inter-relationships and that they do not capture the diversity of family types that exist today. However, breaking the categories down smaller does not give us enough of a sample size for our analysis.

One important point to note is that because of the nature of this shift-share analysis, the averages don’t exactly tally up to the raw data. Therefore, when presenting average income, we use the sum of the decomposed parts of income. While economists typically show median income, for ease of composition and the constraints of the decomposition analysis, we show the averages so that the data are consistent across figures. Another important note is that we make no adjustments for changes over time in topcoding of income, which likely has the effect of exaggerating the increase in professional families’ income relative to the other two income groups.

Must-Read: Dietrich Vollrath: The Persistence of “Technology”

Posted on by Brad DeLong

Must-Read: If you have not been reading Dietrich Vollrath’s weblog on economic growth, you should. He has been teaching the world a masterclass in understanding the patterns and determinants of economies’ long-run growth trajectories:

The Persistence of Technology Dietrich Vollrath

Dietrich Vollrath: The Persistence of “Technology”: “Diego Comin, Bill Easterly, and Erick Gong… ‘Was the Wealth of Nations Determined in 1000BC?…

…there is a surprising amount of explanatory power in technology measures from 1500AD….

CEG document… that technology levels are incredibly persistent…. CEG… pull out binary measures of technological use for different ethnic/cultural groups. Did your group use wheeled wagons in 1500? Yes? You get a 1. Did you use paper? No? You get a zero. Did you produce steel? No? You get a zero. Average these 0/1 measures across the different measures of technology, and you get an overall score…. Their Figure 2 gives you essentially the whole thrust of the paper. They use the ethnic group technology measures, assign each country a technology level based on the highest scoring ethnic group in their country, and then adjust the country level scores based on the fact that country populations are different in 2002 from in 1500…. They regress 2002 current income per capita on technology levels in past years, they find significant effects. This holds for technology in 1000BC, 0AD, and 1500AD…. Take the 1500AD result in column (3)…. If the technology index goes from 0[.5] ([half] technologies) to 1 ([three fifths of] the original technologies), log income per capita goes up by 2 log points, or by 3…. Also notice the R-squared, which is 50% for the 1500AD results….

CEG… establish that old technology levels have predictive power for current income per capita. They are not looking for explanatory power…. Ultimately, you might want to argue that we want strict causal explanations for why some countries are rich in 2002. But an explanatory paper like this is valuable…. Knowing that anything in 1500AD has strong predictive power for incomes today is informative. It tells us that we have to look back to 1500AD for at least some of those causal forces…. It isn’t the technology in 1500AD per se that matters…. This is an indicator of some kind of variation in culture or institutions (or something else?) that matters… [and] is telling us to something about how powerful those cultural/institutional factors are.

Must-Reads: June 28, 2016

Posted on by Brad DeLong

Should Reads:

Which Thinkers Will Define Our Future?: Live at Project Syndicate

Posted on by Brad DeLong

Over at Project Syndicate: Which Thinkers Will Define Our Future?: BERKELEY – Several years ago, it occurred to me that social scientists today are all standing on the shoulders of giants like Niccolo Machiavelli, John Locke, Adam Smith, Alexis de Tocqueville, Max Weber, and Émile Durkheim.

One thing they all have in common is that their primary focus was on the social, political, and economic makeup of the Western European world between 1450 and 1900. Which is to say, they provide an intellectual toolkit for looking at, say, the Western world of 1840, but not necessarily the Western world of 2016. What will be taught in the social theory courses of, say, 2070? What canon – written today or still forthcoming – will those who end their careers in the 2070s wish that they had used when they started them in the late 2010s? Read MOAR at Project Syndicate

Time to Play Whack-a-Mole with the Expansionary-Austerity Confidence-Fairy Zombie Once Again!

Posted on by Brad DeLong

Four readings on the expansionary austerity zombie:

Reading #1: Paul Krugman (2015):

Paul Krugman: Views Differ on Shape of Macroeconomics (2015): “The doctrine of expansionary austerity…

…the claim that slashing spending would actually boost demand and employment, because it would have such positive effects on confidence that this would outweigh the direct drag–was immensely popular among policymakers in 2010, as the great turn toward austerity began. But the statistical underpinnings of the doctrine fell apart under scrutiny: the methods Alberto Alesina used to identify changes in fiscal policy did not, it turned out, do a very good job, and more careful work found that historically austerity has in fact been contractionary after all. Moreover, the experience of austerity programs seemed to confirm what Keynesians new and old had warned from the beginning–that the negative effects of austerity are much larger under conditions where they cannot be offset by conventional monetary policy. So at this point research economists overwhelmingly believe that austerity is contractionary (and that stimulus is expansionary)…. For now at least expansionary austerity has virtually collapsed as a doctrine taken seriously by researchers. Nonetheless, Simon Wren-Lewis points us to Robert Peston of the BBC declaring

I am simply pointing out that there is a debate here (though Krugman, Wren-Lewis and Portes are utterly persuaded they’ve won this match–and take the somewhat patronising view that voters who think differently are ignorant sheep led astray by a malign or blinkered media).

Wow. Yes, I suppose that ‘there is a debate’ — there are debates about lots of things, from climate change to evolution to alien spaceships hidden in Area 51. But to suggest that this debate is at all symmetric is just wrong — and deeply misleading to one’s audience. As for the claim that it’s somehow patronizing to suggest that voters are ill-informed when (a) macroeconomics is a technical subject, and (b) the media have indeed misreported the state of the professional debate — well, this is sort of an economic version of the line that one must not suggest that the Iraq war was launched on false pretenses, because this would be disrespectful to the troops. If you’re being accused of misleading reporting, it’s hardly a defense to say that the public believed your misinformation — more like a self-indictment…

The question to which “expansionary austerity” was relevant was never: can one substantially reduce the budget deficit without risking substantial recession? The answer to that was always yes: if fiscal contraction is supported by monetary expansion a outrance the decline in government purchases from spending reductions and in consumption spending from tax increases can be offset and more than offset by higher exports and higher investment spending. That is and has been standard Keynesian doctrine since the 1950s, at least. (Cf. the Economic Report of the President chapter that Robert Solow drafted in the early 1960s.)

The novelty of Alesina’s claim was not that monetary offset can neutralize the short-run contractionary effect of fiscal austerity. It was, rather, that summoning the Confidence Fairy could and many times had neutralized the short-run contractionary effect of fiscal austerity.

The question to which “expansionary austerity” purported to give the answer was: At the zero lower bound, where attempts to stimulate the economy through expansionary monetary policy have greatly reduced traction and are fraught, is the connection between lower deficits and more optimistic business animal spirits strong enough that one can one substantially reduce the budget deficit without risking substantial recession?

And back in 2010 Alberto Alesina very strongly said that the answer to that was “yes”: Reading #2:

Alberto Alesina: Fiscal Adjustments: Lessons from Recent History

Many even sharp reductions of budget deficits have been accompanied and immediately followed by sustained growth rather than recessions even in the very short run. These are the adjustments which have occurred on the spending side and have been large, credible and decisive…. Governments which have initiated thorough and successful fiscal adjustment policies have not systematically suffered at the polls… especially… when the electorate has perceived the sense of urgency of a crisis or in some cases in the presence of an external commitment. On the contrary, fiscally-loose governments have suffered losses at the polls…. Thus relatively painless (economically and politically) fiscal adjustments might be possible; whether government will take the opportunity remains to be seen…

“Many” and “even sharp” have been “immediately followed” because adjustments that “have been large, credible and decisive” and “have occurred on the spending side” have summoned the Confidence Fairy. Thus governments should “take the opportunity” for the “relatively painless (economically and politically) fiscal adjustments” that “might be possible” via expansionary austerity.

This was pretty much completely wrong. Many of Alesina’s adjustments were not policy adjustments at all–but rather unplanned side-effects of booms driven by other factors. The rest appeared, to me at least, to be due to the kind of expansionary monetary policy offset that the Clinton administration had planned and carried out over 1993-6 and that was not possible at the zero lower bound.

Nevertheless, it appears that Alesina is sticking to his guns here: Reading #3:

Alberto Alesina (2016) Fiscal Policy and Austerity: “Well, I think Paul Krugman has rather extreme views…

…But more importantly, he talks about his views as if they were obviously true, and anybody who would disagree with him was obviously wrong. And he exaggerates. And that I really prefer not to go into a discussion about his quotes.

But I think that the idea that the work about austerity that I and others have done has been discredited is wrong. In fact, the IMF, in 2010 wrote a rather pointed criticism about my work…. [The IMF’s] second point is whether whether there are cases where spending cuts accompanied by other policies can be expansionary, and the confidence argument that he makes fun of is actually confidence, one of the many aspects; and we can elaborate on that. But I think that there are several episodes in which fiscal spending cuts have been accompanied not by a recession, but by an expansion. So, I think that those kind of statements by Krugman are trying to push a view which is respectable but they are not proven by the facts. Or at least they are not supported by research….

I do think that confidence is important, because we have empirical evidence suggesting that when there are spending cuts, the confidence of investors actually goes up, and the confidence of consumers goes down very little; while with tax increases, confidence of both consumers and business investors goes down quite a bit in many countries. So confidence has played a role. And then, there are many–as I said, austerity plans are a combination of many, many other policies. So, it matters what monetary policy does. It matters that sometimes, particularly in European countries, when there is a crisis and austerity is called for, then there is a productive opportunity to engage in other so-called “structural reform”–labor market reform and goods market reform, liberalization of various sectors, which help and that indeed has spurred growth. And of course monetary policy matters–we are saying in a situation which monetary policy is supportive and expansionary, that helps fiscal adjustment. So these are just the more important of many other factors which are left out from the basic Keynesian model…

My view: Alberto should simply not be saying this. If you want to claim that the Confidence Fairy channel–rather than the monetary offset channel–is important, you bring forward at least one regression or at least one case study in which a sharp, large, credible, and decisive policy of fiscal austerity has been rapidly followed by a substantial improvement in business confidence which then immediately drives sustained growth. If you don’t have that regression or that channel–if what you have is monetary-policy offset plus misspecification of your right hand-side variable–you do not have an economic argument.

Reading #4:

Franklin Delano Roosevelt (1933): First Inaugural Address: “our distress comes from no failure of substance. We are stricken by no plague of locusts…

…Compared with the perils which our forefathers conquered because they believed and were not afraid, we have still much to be thankful for. Nature still offers her bounty and human efforts have multiplied it. Plenty is at our doorstep, but a generous use of it languishes in the very sight of the supply. Primarily this is because rulers of the exchange of mankind’s goods have failed through their own stubbornness and their own incompetence, have admitted their failure, and have abdicated…. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence. They know only the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish…

Must-Read: Jared Diamond: Agriculture: The Worst Mistake in the History of the Human Race

Posted on by Brad DeLong

Must-Read: How poor were the bulk of our post-Neolithic pre-Commercial Revolution Agrarian-Age ancestors, anyway?

Jared Diamond: Agriculture: The Worst Mistake in the History of the Human Race: “One straight forward example of what paleopathologists have learned from skeletons…

…concerns historical changes in height. Skeletons from Greece and Turkey show that the average height of hunger-gatherers toward the end of the ice ages was a generous 5’9″ for men, 5’5″ for women. With the adoption of agriculture, height crashed, and by 3000 B. C. had reached a low of only 5’3″ for men, 5’ for women. By classical times heights were very slowly on the rise again, but modern Greeks and Turks have still not regained the average height of their distant ancestors.

Diamond appears to be referring to the work of J. Lawrence Angel here…

The extremely scanty guesses collected by Clark (2007) tell us that 5’4″ is not a bad guess for post-Neolithic pre-Commercial Revolution average adult-male heights in temperate Eurasia…

Cf: Greg Clark (2007): A Farewell to Alms: A Brief Economic History of the World (Princeton: Princeton University Press: 0691141282) http://amzn.to/1Tc5pCq:

James s Kindle for Mac 4 A Farewell to Alms A Brief Economic History of the World Princeton Economic History of the Western World

Must-Read: Paul Krugman (2015): Insiders, Outsiders, and U.S. Monetary Policy

Posted on by Brad DeLong

Must-Read: As I periodically say, there are two rules that would have made me much smarter had I adopted them back in, say, 1996:

  1. Paul Krugman is right.
  2. If you think Paul Krugman is wrong, consult rule #1.

May I have unanimous consent on the proposition that Paul Krugman was right back at the start of 2015 on this issue?:

Paul Krugman (2015): Insiders, Outsiders, and U.S. Monetary Policy: “I ran into Olivier Blanchard over breakfast… in Hong Kong…

…Many of the people who either make monetary policy or comment on it from fairly influential perches are members of what you might call the 1970s Cambridge mafia… most of this group shares fairly similar views…. Which brings me to the point. Unusually, Olivier and I do have a significant disagreement right now, over US monetary policy…. I’m very worried that the Fed may be gearing up to raise rates too soon; he’s sanguine, considering the risk of a Japan-type trap in the US minimal and the case for a rate hike this year solid…. Our disagreement… is part of a wider split…. There’s a surprisingly sharp divide over near-term US monetary policy. And the divide seems to depend on one thing: whether the economist in question is currently in a policy position….

So why this divide? We don’t have access to different facts; we don’t, in any fundamental sense, have different economic models. It’s an uncertain world, but why do those in office come down on one side of that uncertainty, while those outside come down on the other? Well, even smart, flexible people can fall prey to incestuous amplification. And I worry that this is what is happening to the insiders. On the whole, it seems less likely for the outsiders, although it’s true that the Keynesian econoblogs form what amounts to a tight ongoing discussion group…. But if you ask me, there’s a worrying complacency among the insiders right now, and I would urge them to consider the potential consequences if they’re wrong.

And this is why I find myself worrying that this today is also much too sanguine. The very sharp Olivier Blanchard argues that it is not too sanguine:

Our goal was less ambitious and more realistic. It was to see if the eurozone could function and handle shocks without further political integration if political realities made it impossible for the time being. Our answer is a qualified yes, but it is surely not an endorsement of a do-nothing strategy…

But I think back to the start of 2015. And I remember the two rules that would have made me look like a fracking genius if I had been smart enough to adopt them back in 1996…

Must-Read: Tim Duy: Fed Once Again Overtaken by Events

Posted on by Brad DeLong

Must-Read: That the Brexit crisis would happen was unforeseeable. That the odds were strongly that some negative shock would hit the global economy was very foreseeable indeed. And yet the Fed since 2014 has been actively making sure that it is unprepared.

10 Year Treasury Constant Maturity Rate FRED St Louis Fed

Starting with Bernanke’s abandonment in 2013 of a policy bias toward further expansion and acceptance of a need for interest rate normalization and the resulting Taper Tantrum, there has been a dispute between the markets and the Fed. The markets have expected the Federal Reserve to try to normalize interest rates and fail, as the economy turns out to be too weak to sustain higher rates. The Federal Reserve has always expected to be able in less than a year or so to successfully liftoff from zero and embark on a tightening cycle, raising interest rates by about one percentage point per year.

The markets have been right. Always:

Tim Duy: Fed Once Again Overtaken By Events: “A July hike was already out of the question before Brexit, while September was never more than tenuous…

…Now September has moved from tenuous to ‘what are you thinking?’… as market participants weigh the possibility of a rate cut…. Internally they are probably increasingly regretting the unforced error of their own–last December’s rate hike…. Uncertainty looks to dominate in the near term. And market participants hate uncertainty. The subsequent rush to safe assets… is evident…. Direct action depends on the length and depth of the financial turmoil currently underway. I think the Fed is far more primed to deliver such action than they were a year ago. And that… will minimize the domestic damage from Brexit.

The Fed began 2015 under the direction of a fairly hawkish contingent that viewed rate hikes as necessary to be ahead of the curve on inflation. Better to raise preemptively than risk a sharper pace of rate hikes in the future…. [But] asset markets were telling exactly the opposite, that there was far less accommodation than the Fed believed. Fed hawks were slow to realize this, and, despite the financial turmoil of last summer, forced through a rate hike in December. I think this rate hike had more to do with a perceived need to be seen as ‘credible’ rather than based in economic necessity. I suspect doves followed through in a show of unity for Chair Janet Yellen. They should have dissented.

Markets stumbled again in the early months of 2016, and, surprisingly, Fed hawks remained undeterred. Federal Reserve Vice Governor Stanley Fischer scolded financial market participants for what he thought was an overly dovish expected rate path. And even as recently as prior to the June meeting, Fed speakers were highlighting the possibility of a June rate hike, evidently with the only goal being to force the market odds of a rate hike higher. But I think that as of the June FOMC meeting, the hawkish contingent has been rendered effectively impotent…. I suspect the Fed will be much more responsive to the signal told by the substantial drop in long-term yields that began last Friday (as I write the 10 year is hovering about 1.46%) then they may have been a year ago….

I expect some or all of…. Forward guidance I. Fed speakers will concur with financial market participants that policy is on hold until the dust begins to settle…. Forward guidance II…. Watch for the balance of risks to reappear – it seems reasonable to believe they have shifted decidedly to the downside. Forward guidance III. This would be an opportune time for Chicago Federal Reserve President Charles Evans to push through Evans Rule 2.0. No rate hike until core inflation hits 2% year-over-year…. Forward guidance IV. A lower path of dots in the next Summary of Economic projections to validate market expectations…. Rate cut. Former Minneapolis Federal Reserve President Narayana Kocherlakota argues that the Fed should just move forward with a rate cut in July. I concur…. If all else fails. If some combination of 1 through 5 were to fail, the Fed will turn to more QE and/or negative rates…

I am thinking of Stan Fischer on January 5, 2016 on interest rates:

Well, we watch what the market thinks, but we can’t be led by what the market thinks. We’ve got to make our own analysis. We make our own analysis, and our analysis says that the market is underestimating where we are going to be. You know, you can’t rule out that there is some probability they are right because there’s uncertainty. But we think that they are too low…

Even though the markets had been right and the Fed wrong for the previous three years, as of January 2016 Fischer was claiming that market expectations were irrationally pessimistic and that the Fed understood the state of the economy.

I would very much like to hear Stan Fischer give a speech early next month laying out how he has over the past six months marked to market his beliefs about the state of the economy and the correct economic model.