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

What I Saw and Did Not See About the Macroeconomic Situation Eight Years Ago: Hoisted from the Archives

Posted on by Brad DeLong

Hoisted from the Archives from June 2008J. Bradford DeLong (June 2008): The Macroeconomic Situation, with added commentary:

Looking back, what did I get right or wrong back eight years ago when I was talking about the economy? I said:

  • That the best way to think about things was that we were in a 19th-century financial crisis, and so we should look way back to understand things (RIGHT)
  • That a recession had started (RIGHT), which would probably be only a short and shallow recession (WRONG!!!!)
  • That the Federal Reserve understood (MAYBE) that it has screwed the pooch by failing to prudentially regulate shadow banks, especially in the housing sector (RIGHT), but that it would shortly fix things (MAYBE).
  • That the Federal Reserve was still trying to raise interest rates (RIGHT).
  • That the Federal Reserve should not be trying to raise interest rates (RIGHT), because the tight coupling between headline inflation today and core inflation tomorrow that it feared and expected had not been seen for 25 years (RIGHT).
  • That central bank charters are always drawn up to make financial markets confident that they are tightly bound not to give in to pressure and validate inflation (RIGHT).
  • That, nevertheless, when the rubber hit the road and financial crisis came there was ample historical precedent that central banks were not strictly bound by the terms of their charters–that they were guidelines and not rules (RIGHT).
  • That the Federal Reserve understood these historical precedents (WRONG) and would, with little hesitation, take actions ultra vires to avoid a major financial and economic collapse (WRONG).
  • That there was a long-standing tradition opposed to central banks’ taking action to stem financial crisis and depression–a Marx-Hayek-Mellon-Hoover axis, if yo will (RIGHT).
  • That this axis thought that business cycle downturns were always generated by real-side imbalances that had to be faced via pain and liquidation–could not be papered over by financial prestidigitation (RIGHT).
  • But that this axis was wrong: business cycle downturns, even those to a large degree generated by real-side imbalances, could be papered over by financial prestidigitation (RIGHT).
  • That even though the Fed and the Treasury believed that interest rates should still go up a little bit, they were also engaged in unleashing a huge tsunami of financial liquidity upon the economy (RIGHT).
  • That this liquidity tsunami was appropriate as an attempt to maintain full employment response to the collapse in construction and to the great increase in financial risk (RIGHT).
  • That this liquidity tsunami would do the job, and the recession would be short and shallow (WRONG!!!!!!!!)
  • That the runup in oil prices was not a speculative bubble that would be rapidly unwound (RIGHT).
  • That the runup in oil prices was a headwind for real growth (RIGHT).
  • That the dollar was headed for substantial depreciation (WRONG).
  • That the housing price and housing construction shocks to the economy were still ongoing (RIGHT).
  • That for those with a long time horizon equities were fairly valued, offering higher returns than other asset classes, if risky returns (RIGHT).
  • That asset prices would fluctuate (RIGHT).

But I did not, even in June 2008, understand (a) how bad the derivatives books of the major money-center banks were, and (b) how weak the commitment of central banks to doing whatever was necessary to stabilize the growth path of nominal GDP was.

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Must-Read: James Pethokoukis: The Magical Thinking of America’s Pro-Brexit Conservatives

Posted on by Brad DeLong

Must-Read: James Pethokoukis: The Magical Thinking of America’s Pro-Brexit Conservatives: “Lawrence Kudlow called Brexit a ‘Thatcher moment’ that could put Britain ‘on the pro-growth path of free-market supply-side policies’…

…The Wall Street Journal … explained… ‘now more than ever Britain will need supply-side economic policies that reassure investors and make Britain a growth model for Europe.’… By detaching from the EU regulatory superstate, an unchained Britain would return to its risk-taking, free-trading roots. London would become a sort of Hong Kong on the Thames, England a Texas on the North Sea. With the Voldemort of Brussels vanquished, free-market magic could be unleashed. Economicus growthus leviosa! Or not.

This is the sort of magical, fantastical thinking all too common in the Republican Party and among American conservatives… why Donald Trump can offer a $10 trillion tax cut plan that would need to quintuple GDP growth to break even–all with scant criticism from many leading voices on the right…. Even if you doubt the potential for long-term damage–permanently slower economic growth, the disintegration of the EU–the short-term post-Brexit picture is pretty ugly…. A 2017 recession as likely. Not to mention that disentangling from the EU might consume British politics and policy for years. And all for what, exactly? The U.K…. ranks ninth for global competitiveness, says the World Economic Forum. And it ranks 10th… on the Index of Economic Freedom…. Britain is already a relatively well-run, free-trading nation…. Never has so much been risked for potentially so little.

Must-Read: Brad Setser: Post-Brexit

Posted on by Brad DeLong

Must-Read: Post-Brexit vote, in Europe at least: It is not the Great Recession. Odds are that it is not the Lesser Depression. Odds are that it is the Longer Depression…

Brad Setser: Follow the Money: “A few thoughts, focusing on narrow issues of macroeconomic management…

…The U.K. has been… supplying the rest of Europe with demand—something other European countries need. This… will shape the economic fallout. The fall in the pound is a necessary part of the U.K.’s adjustment… will spread the pain from a downturn in British demand to the rest of the euro area. Brexit uncertainty is thus a sizable negative shock to growth in Britian’s euro area trading partners, not just to Britain itself… knock[ing] a cumulative half a percentage point off euro area growth over the next two years…. The euro area… has fiscal capacity to counteract this shock…. The euro area could provide a fiscal offset, whether jointly, through new euro area investment funds or simply through a shift in say German policy on public investment and other adjustments to national policy…. [But] I would bet that the euro area’s aggregate fiscal impulse will be negative in 2017—exactly the opposite of what it should be when a surplus region is faced with a shock to external demand….

The euro area would also benefit from additional focus on the enduring overhang of private debt…. Euro area banks should have been recapitalized years ago, with public money if needed…. But in key countries they were not…. And Europe’s new banking rules are now creating additional incentives for delay…. Putting public funds into the banks does not addresses popular concerns about the way the global economy works. Forcing retail investors to take losses in the name of new European rules does not obviously build public support for ‘more’ Europe. Keeping bad loans at inflated marks on the balance sheet of weak banks undermines new lending, and makes it hard for private demand growth to offset the impact of fiscal consolidation. There is no cost-free option, economically or politically….

A conception of the euro area that focuses on the application of common rules with only modest sharing of fiscal risks… designed… too restrictively, with too much deference to Germany’s desire to avoid being stuck with other countries’ bills…. Something will need to give, eventually.

Must-Read: Heather Boushey and Kavya Vaghul: Working Mothers with Infants and Toddlers and the Importance of Family Economic Security

Posted on by Brad DeLong

Must-Read: If an intelligence vast, warm, and sympathetic from a planet orbiting a distant star were to scrutinize the United States today, it would be puzzled. Raising the next generation is one of two or three most important tasks any civilization that is going to survive must perform. Arranging society so that the proper resources are devoted to one task is thus one of the principal problems that any non-dysfunctional societal socio-economic system must address. Yet there has been a sharp drop over the past generation in the share of society’s resources that flow to mothers of young children either through within-household or within-kin group transfers from those who have not given birth or through entitlements–e.g., AFDC–provided by society as a whole, with SCHIP and the expansion of EITC being the only factors cushioning the impact of other social and economic changes.

An intelligence vast, warm, and sympathetic from a planet orbiting a distant star would probably conclude that we have, collectively, gone mad in our decision that the raising of young children is a less important part of the collective work of society than was previously held to be the case:

Heather Boushey and Kavya Vaghul: Working Mothers with Infants and Toddlers and the Importance of Family Economic Security: “WOver 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…. 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…. 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…. 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…