Must-Read: Martin Wolf: David Cameron, the Ex-Prime Minister, Took a Huge Gamble and Lost

Posted on by Brad DeLong

Must-Read: The very sharp Martin Wolf sees structural recession in Britain’s near future.

People minimizing risk are going to leave Britain. People who would otherwise locate in Britain and are risk-shy are going to pause and wait and see. The Bank of England needs to drop the value of the pound by enough to try to maintain full employment in Britain–but not by so much as to make investors feel that investments in Britain are unsafe and so lose the pound its exorbitant privilege.

As Keynes wrote at the beginning of his Tract on Monetary Reform back in 1923:

I dedicate this book, humbly and without permission, to the Governors and Court of the Bank of England, who now and for the future has a much more difficult and anxious task entrusted to them than in former days…

Martin Wolf: Brexit: David Cameron, the Ex-Prime Minister, Took a Huge Gamble and Lost: “The fearmongering of Boris Johnson, Michael Gove, Nigel Farage, The Sun and the Daily Mail has won…

…The UK, Europe, the west and the world are, this morning, damaged. The UK is diminished and will, quite possibly, end up divided. Europe has lost its second-biggest and most outward-looking power. The hinge between the EU and the English-speaking powers has been snapped…. It is, above all, a victory of the disappointed and fearful…. The geography of the outcome reveals that this has also been a revolt of the provinces against a prosperous and globalised London. It is also a revolt against the establishment…. The UK might not be the last country to suffer such an earthquake….

The UK is now at the beginning of an extended period of uncertainty that, in overwhelming probability, foreshadows a diminished future. The Conservatives… will have to do what the Brexiters failed so egregiously to do during their mendacious campaign, namely, map out a strategy and tactics for unravelling the UK’s connections with the EU. This will probably consume the energies of that government and its successors over many years. It will also involve making some huge decisions… [abandon] membership of the single market. At best, the UK might participate in a free trade area in goods. Meanwhile, the rest of the EU, already burdened with so many difficulties, will have to work out its own negotiating positions. I expect them to be tough ones….

The UK economy is going to be reconfigured. Those businesses that have set up in the UK to serve the entire EU market from within must reconsider their position…. Manufacturers… will have to consider how to readjust…. Many will ultimately wish to relocate. Businesses who depend on their ability to employ European nationals must also reshape their operations…. In the short term, however, it will be difficult for businesses to make such decisions sensibly…. This uncertainty has always been the most obvious result of a vote to leave….

The UK’s decision to join the EU was taken for sound reasons. Its decision to leave was not. It is likely to be welcomed by Ms Le Pen, Mr Trump and Vladimir Putin. It is a decision by the UK to turn its back on the great European effort to heal its divisions. It is, for me, among the saddest of hours.

Weekend reading: “Heading for the Brexits” 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 ideas of turn-of-the-last century Swedish economist Knut Wicksell have suddenly become quite relevant for monetary policy. The Fed is currently thinking through how high interest rates have to go before they can stop hiking. Figuring out the natural rate of interest is key to that endeavor.

The last several years have seen a rethinking in the benefits of free capital flows between countries. They may play a role in inflating speculative bubbles and push down short-term natural interest rates. In other words, it may contribute to secular stagnation.

The share of prime-age men in the United States with a job or actively searching for one has been on the decline for more than 50 years. What’s behind the decline? Evidence points to a decline in demand for labor from less-educated men.

Programs such as unemployment insurance are designed to insure workers against some of the pains of losing a job. But unemployment insurance and other so called automatic stabilizers also help boost economic growth during downturns by putting money in the hands of those who will spend it most readily.

Increased consolidation of health care providers has been touted as a way to increase efficiency in the health care industry. But there are downside as well, Nisha Chikhale writes, including higher prices.

Links from around the web

The Great Recession ended seven years ago this month and yet portions of the United States still have not recovered to the employment rates they had in 2007. And these areas of the country don’t seem likely to reach that level for years. Ana Swanson writes about a paper by economist Danny Yagan at the University of California-Berkeley on this troubling trend. [wonkblog]

What’s behind the rise in wealth inequality? Scottish economist and Nobel Laureate James Mirrlees argues that the random nature of investment returns is a significant cause. And that this fact supports the notion that policymakers might want to tax very high rates of returns on capital to reduce wealth inequality. [contemporary economic policy]

Twenty years ago. U.S. policymakers radically reformed the federal welfare system, then known as Aid for Families with Dependent Children. After two decades with the new Temporary Assistance for Needy Families program in operation, has the replacement program been a success? Dylan Matthews investigates. [vox]

Does slower productivity growth in the United States mean that the interest rates will necessarily be low in the future? The former chief economist at the International Monetary Fund, Olivier Blanchard, says no. [piie]

A strange discrepancy in data series about job openings—the U.S. government-created Job Openings and Labor Turnover Survey and the Conference Board Help Wanted Online series – has appeared in recent months. Given that the Conference Board’s data goes into a Federal Reserve measure of the labor market, this divergence matters. And it seems to be, in part, because Craigslist has been raising prices. [fed notes]

Friday figure

Figure from “What’s behind the decline in male labor force participation in the United States?” by Nick Bunker

Must-Reads: June 24, 2016

Posted on by Brad DeLong

Should Reads:

Must-Read: Ria Misra: No, Now This Is Officially the Hottest Earth Has Ever Been [UPDATING]

Posted on by Brad DeLong

Must-Read: Courtesy of Erik Loomis of Lawyers, Guns, and Money: Yes, it is hot. But it’s a dry heat. Why do you ask?:

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Ria Misra: No, Now This Is Officially the Hottest Earth Has Ever Been [UPDATING]: “It’s getting pretty hard to keep track of all the heat records we’ve been breaking recently, isn’t it?…

…Don’t worry, we’re here to help. NOAA’s latest data reveal we just wrapped up the hottest winter the U.S. has ever seen—just like last summer (which also broke its season record), last year (another record-smasher), the year before that, and a whole chain of recent individual hottest months, knocking each out one after the other like dominoes. It’s almost like there’s a pattern in all this, isn’t it? Almost as though our planet was locked into some sort of terrible, human-induced cycle of gradual warming…. Anyway, we’ll be back to update you here next month (or shortly thereafter)….

UPDATE April 19, 2:12 pm: Sorry, February, you thought you were pretty hot, but March laughs at your attempts at hot temperatures. According to NOAA’s latest data, the new hottest month ever was this March, marking the 11th consecutive month in a row that record has been broken…. UPDATE May 18, 1:15 pm: Congratulations, humanity—we did it! (It, in this case, being cooking our planet into a slow rolling boil.) NOAA’s latest climate update reveals that we just wrapped up the hottest April ever recorded. That gives us twelve consecutive months—a full year—in which every single month set a new temperature record. Will next month make thirteen? Probably! See you then, my warm friends. UPDATE June 20, 8:45 am: And here we are at lucky number 13 of the hottest consecutive months ever recorded—if by ‘luck’ you mean an unstoppably rising heat wave, accompanied by an unsavory mix of both droughts and floods. (Note: This is no one’s definition of luck.)

Must-Read: Jamelle Bouie: Is American Really in an Anti-Establishment Rage?

Posted on by Brad DeLong

Must-Read: Jamelle Bouie: Is American Really in an Anti-Establishment Rage?: “The same people who disapprove of Congress will readily re-elect most members to the House and Senate…

…Just 24 percent of Americans described themselves as ‘angry’ about the federal government…. Forty-seven percent said they were dissatisfied, which is similarly low compared with previous surveys…. 85 percent of Americans said they were satisfied [with the economy]…. The number of Americans who say they are personally worse off has taken a sharp decline since the last presidential election…. Layoffs are down… job openings are up; earnings are up…. For all the talk of anger and dissatisfaction in the Democratic primary, it’s also true that a majority of Democrats back the establishment candidate…. And while there’s plenty of evidence for the case that Americans are angry with the political system—in a November survey from NBC News and the Wall Street Journal, 54 percent said the system was ‘stacked’ against them—this doesn’t jibe with the fact that most Democrats are fine with Hillary Clinton as their nominee or that—before Trump won—most Republicans were fine with a conventional candidate as theirs….

Despite this, Americans also insist they’re angry about the political system and dismayed at the country’s direction. And while primary electorates are far from representative of Americans at large, the obvious popularity of figures like Bernie Sanders and Donald Trump speaks to something…. Voters aren’t uniformly frustrated or frustrated in the same ways, and whatever anger and frustration they have doesn’t translate to broad support for either of the candidates who seek to harness it. What we should do, instead, is try to pinpoint the nature of the most salient kinds of anger and frustration. On the right, the most important dynamic is racial resentment and white status anxiety…. On the left, we’re looking at the rumblings of a generation hit hardest by the Great Recession caught in the winds of rising global inequality. And insofar as nonwhites are frustrated with their place in society, it likely owes to moments of highly visible and still consequential discrimination…. But even this complicates the question of discontent. Blacks and Latinos saw the worst of the recession and the recovery: Among Americans, they have the strongest case for disrupting the system. And yet they back Hillary Clinton, who is running for modest gains over the status quo…

Must-Read: John Tang: The Engine and the Reaper: Industrialization and Mortality in Early Modern Japan

Posted on by Brad DeLong

Must-Read: John Tang: The Engine and the Reaper: Industrialization and Mortality in Early Modern Japan: “Economic development leads to improved health over time due to increased access to medical treatment, sanitation, and income…

…but in the short run the relationship may be negative given disease exposure from market integration. Using a panel dataset of vital statistics for Meiji Japan, I find mortality rates increased during the country’s early industrialization, with railroad access accounting for over five percent of average mortality between 1886 and 1893. Estimates from a triple-differences framework indicate that communicable disease mortality accounts for 91 percent of the additional incidence, which suggests that improved transport may have operated as a vector for transmission.

Must-Read: Barry Ritholtz: Lending to Poor People Didn’t Cause the Financial Crisis

Posted on by Brad DeLong

Must-Read: One of the forms racism takes in America today is the belief that whenever anything goes wrong it must have given money away to poor, shiftless Black people. Today this song is being reprised by–who else?–Larry Kudlow and Steven Moore.

The very sharp Barry Ritholtz does the intellectual garbage cleanup:

Barry Ritholtz: Lending to Poor People Didn’t Cause the Financial Crisis: “Lawrence Kudlow and Stephen Moore have revived an idea… that really should have been put to rest long ago…

…They lay the blame for the credit crisis and Great Recession on the Community Reinvestment Act, a 1977 law designed in part to prevent banks from engaging in a racially discriminatory lending practice known as redlining. The reality is, of course, that the CRA wasn’t a factor…. Here’s the heart of the Kudlow and Moore case:

The seeds of the mortgage meltdown were planted during Bill Clinton’s presidency. Under Clinton’s Housing and Urban Development (HUD) secretary, Andrew Cuomo, Community Reinvestment Act regulators gave banks higher ratings for home loans made in ‘credit-deprived’ areas. Banks were effectively rewarded for throwing out sound underwriting standards and writing loans to those who were at high risk of defaulting. If banks didn’t comply with these rules, regulators reined in their ability to expand lending and deposits.

They then argue that this was part of a broader campaign to make loans to unqualified low-income folk, which in turn caused the crisis…. The CRA… simply says that if you open a branch office in a low income neighborhood and collect deposits there, you are obligated to do a certain amount of lending in that neighborhood. In other words, you can’t open a branch office in Harlem and use deposits from there to only fund loans in high-end Tribeca. A bank must make credit available on the same terms in both neighborhoods. In other words, a ‘red line’ can’t be drawn around Harlem….

Showing that the CRA wasn’t the cause of the financial crisis is rather easy. As Warren Buffett pal Charlie Munger says, ‘Invert, always invert.’ In this case, let’s assume Moore and Kudlow are correct…. What would that world have looked like?…. (a) Home sales and prices in urban, minority communities would have led the national home market higher, with gains in percentage terms surpassing national figures. (b) CRA mandated loans would have defaulted at higher rates. (c) Foreclosures in these distressed urban CRA neighborhoods should have far outpaced those in the suburbs. (d) Local lenders making these mortgages should have failed at much higher rates. (e) Portfolios of banks participating in the Troubled Asset Relief Program should have been filled with securities made up of toxic CRA loans. (f) Investors looking to profit should have been buying up properties financed with defaulted CRA loans. (g) And Congressional testimony of financial industry executives after the crisis should have spelled out how the CRA was a direct cause, with compelling evidence backing their claims.

Yet none of these things happened. And they should have, if the CRA was at fault…. If that isn’t enough to dismiss the claim, consider this: Where did mortgages, especially subprime mortgages, default in large numbers? It wasn’t Harlem, Philadelphia, Baltimore, Chicago, Detroit or any other poor, largely minority urban area covered by the CRA. No, the crisis was worst in Florida, Arizona, Nevada and California. Indeed, the vast majority of the housing collapse took place in the suburbs and exurbs…. What’s more, many of the lenders that made the subprime loans that contributed so much to the collapse were private non-bank lenders that weren’t covered by the CRA. Almost 400 of these went bankrupt soon after housing began to wobble. I have called the CRA blame meme ‘the big lie’–and with good reason. It’s an old trope, tinged with elements of dog-whistle politics, blaming low-income residents in the inner cities regardless of what the data show…

Let’s see how much of the media picks up on this dog megaphone, and presents it to the public as trustworthy information intermediaries should…

Must-Reads: June 23, 2016

Posted on by Brad DeLong

Should Reads:

Making automatic stabilizers more effective for the next U.S. recession

Posted on by Bridget Ansel
Job applicants wait in a long line at a job fair in San Jose, Calif.

When the next recession hits, policymakers can take steps right then and there to fight the economic downturn. The Federal Reserve can lower interest rates and the legislative and executive branches can deploy fiscal stimulus by cutting taxes or boosting spending. But another way to counteract a recession relies on steps taken before economic growth begins to turn downward, relying on so called automatic stabilizers, which trigger on when the economy worsens. Think of unemployment insurance, which laid off workers collect, or the Supplemental Nutrition Assistance Program, which is eligible for workers under a certain income threshold.

These automatic programs were designed as forms of social insurance to help people weather the shock of losing a job. But they also boast the benefit of increasing consumer spending and therefore dampening the severity of a recession just as it begins to occur and then throughout the downturn. If policymakers considered these effects in designing these programs, would their design change? That’s the question considered in a new paper.

The paper, released earlier this week by the National Bureau of Economic Research, looks at the optimal design of both unemployment insurance and the income tax in light of their ability to act as automatic stabilizers. The two authors, Alisdair McKay of Boston University and Ricardo Reis of Columbia University, investigate how the generosity of unemployment insurance and the progressivity of the tax system would change if policymakers took into account their recession-fighting abilities. Would more generous unemployment insurance put more money into the hands of suddenly unemployed workers who are likely spend it? Might it also enable workers to save less out of fear of losing their jobs? Similarly, would a more progressive tax structure keep more money in the hands of those, again, most likely to spend it?

McKay and Reis build a model that is matched to data from the United States in recent decades to help figure out the answer to these questions. What they find is that an optimal unemployment insurance system would be more generous once we consider its automatic stabilizer role. In fact, a more munificent program derived from the model would be quite significant. The optimal “replacement rate,” or how much of a worker’s wage the benefit replaces, jumps from 36 percent to 49 percent once the program’s recession-fighting attributes are considered.

In contrast, the progressivity of the tax system doesn’t change much in their model. The optimal progressivity of the tax system doesn’t really influence factors that might help fight recessions.

Part of McKay and Reis’s efforts to the fit the model to U.S. data makes the assumption that unemployment insurance doesn’t have a significantly large effect on the unemployment rate. There’s good evidence for that proposition. And empirical work finds compelling evidence that unemployment insurance played a significant role as an automatic stabilizer during the Great Recession back in 2007 to 2009 and in previous recessions.

The next U.S. recession is probably not just around the corner. But it’s never too early to start preparing. If policymakers want to give themselves (or their future colleagues) a running start, they should take a look at strengthening automatic stabilizers such unemployment insurance and consider how other types of automatic-stabilizer programs might help the broader U.S. economy when it eventually takes another tumble.