Must-Read: Avidit Acharya, Matthew Blackwell, and Maya Sen: The Political Legacy of American Slavery

Posted on by Brad DeLong

Must-Read: Fruit of a badly-poisoned tree…

Avidit Acharya, Matthew Blackwell, and Maya Sen: The Political Legacy of American Slavery: “We show that contemporary differences in political attitudes across counties in the American South…

…in part trace their origins to slavery’s prevalence more than 150 years ago. Whites who currently live in Southern counties that had high shares of slaves in 1860 are more likely to identify as a Republican, oppose affirmative action, and express racial resentment and colder feelings toward blacks. We show that these results cannot be explained by existing theories, including the theory of contemporary racial threat. To explain the results, we offer evidence for a new theory involving the historical persistence of political attitudes. Following the Civil War, Southern whites faced political and economic incentives to reinforce existing racist norms and institutions to maintain control over the newly freed African American population. This amplified local differences in racially conservative political attitudes, which in turn have been passed down locally across generations.

Must-Reads: May 21, 2016

Posted on by Brad DeLong

Must-Read: Simon Wren-Lewis: Helicopter Money and Fiscal Policy

Posted on by Brad DeLong

Must-Read: What I often hear: “Expansionary fiscal policy increases the burden of the national debt. That’s the reason expansionary fiscal policy is too risky. Helicopter money–social credit–is expansionary fiscal policy. But expansionary fiscal policy is too risky. Hence helicopter money is too risky.”

Stupid or evil? Simon Wren-Lewis does some intellectual garbage collection:

Simon Wren-Lewis: Helicopter Money and Fiscal Policy: “John Kay and Joerg Bibow think additional government spending on public investment is a good idea…

…We can have endless debates about whether HM is more monetary or fiscal. While attempts to distinguish… can sometime clarify… ultimately… HM is what it is. Arguments that… use definitions to… conclude that central banks should not do HM because it’s fiscal are equally pointless. Any HM distribution mechanism needs to be set up in agreement with governments, and existing monetary policy has fiscal consequences which governments have no control over…..

At this moment in time… public investment should increase in the US, UK and Eurozone. There is absolutely no reason why that cannot be financed by issuing government debt…. HM does not stop the government doing what it wants with fiscal policy. Monetary policy adapts to whatever fiscal policy plans the government has, and it can do this because it can move faster than governments…. Kay… also suggests that HM is somehow a way of getting politicians to do fiscal stimulus by calling it something else. This seems to ignore why fiscal stimulus ended. In 2010 both Osborne and Merkel argued we had to reduce government borrowing immediately because the markets demanded it. HM… avoids the constraint that Osborne and Merkel said prevented further fiscal stimulus…. Many argue that these concerns about debt are manufactured… deficit deceit. HM, particularly in its democratic form, calls their bluff….

There is a related point in favour of HM that both Kay and Bibow miss. Independent central banks are a means of delegating macroeconomic stabilisation. Yet that delegation is crucially incomplete, because of the lower bound for nominal interest rates. While economists have generally understood that governments can in this situation come to the rescue, politicians either didn’t get the memo, or have proved that they are indeed not to be trusted with the task. HM is a much better instrument than Quantitative Easing, so why deny central banks the instrument they require to do the job they have been asked to do?

Weekend reading: “Production innovation” 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

Central banks have long been in the business of buying bonds to fight economic downturns. But what if they bought stocks? This fairly radical idea is suggested by the economic research of Roger Farmer.

Long hours are sometimes seen as the sign of hard work and a job well done. But that’s not necessarily true. In a new report, Heather Boushey and Bridget Ansel look into the effects of long work hours on economic growth and inequality.

A new rule concerning equity crowdfunding was designed in the hope of boosting entrepreneurship and possibly letting someone besides institutional investors and the rich get access to the high-growth investments. The final rule announced this week seems unlikely to do either.

Speaking of final rules, the Department of Labor finalized its rule concerning overtime work, raising the threshold for eligible salaried workers to just over $47,000, significantly increasing the amount of workers covered. Bridget Ansel argues the new rule is good economics and good business.

As income has flowed more and more to the households at the top of the income ladder, it makes sense that companies would target where the money is going. A new working paper argues that the higher levels of income inequality has affected where product innovation is happening.

Links from around the web

One economic trend is like the weather: “everybody complains about productivity growth but nobody does anything about it.” Jared Bernstein asks a number of economists, included Equitable Growth’s Heather Boushey, about ideas to actually do something about productivity growth. [on the economy]

“GDP is a useful but limited measure. The problem is not with GDP, but with people who might see it as a comprehensive measure of well-being. It isn’t.” Dean Baker argues against including environmental or equity concerns in our common measure of economic output. [beat the press]

More and more attention is being paid to concerns about competition in the economy and the role of antitrust policy. Izabella Kaminska wonders if monopolism isn’t on the rise because all business strategies are now focused on claiming the monopolist throne for themselves. [ft alphaville]

The U.S. economy, at least measured in terms of the speed of output growth, may have had its best days in its past. Potential economic growth seems to be approaching outright stagnation and, as Eduardo Porter points out, policy needs to do something to help boost growth. [nyt]

Policymakers also have a problem in the short-term when it comes to economic growth. Members of the Federal Reserve’s policymaking committee have been giving signs they may raise interest rates again soon. Ryan Avent argues such a move would an incautious mistake. [free exchange]

Friday figure

Figure from “Overworked America” by Heather Boushey and Bridget Ansel

Must-read: Ryan Avent: “The Fed Ruins Summer: America’s Central Bank Picks a Poor Time to Get Hawkish”

Posted on by Brad DeLong

Must-Read: And agreement on my read of the Federal Reserve from the very sharp Ryan Avent. Nice to know that I am not crazy, or not that crazy…

Ryan Avent: The Fed Ruins Summer: America’s Central Bank Picks a Poor Time to Get Hawkish: “THE… Federal Reserve… ha[s] been desperate to hike rates, often…

…keen to begin hiking in September, but were put off when market volatility threatened to undermine the American recovery. In December they managed to get the first increase on the books, and committee members were feeling cocky as 2016 began; Stanley Fischer, the vice-chairman, proclaimed that it would be a four-hike year… and here we are in mid-May with just the one, December rise behind us. But the Fed… is ready to give higher rates another chance…. Every Fed official to wander within range of a microphone warned that more rate hikes might be coming sooner than many people anticipate. And yesterday the Fed published minutes from its April meeting which were revealing:

Most participants judged that if incoming data were consistent with economic growth picking up…then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June….

[But] worries about runaway inflation are based on a view of the relationship between inflation and unemployment that looks shakier by the day…. Global labour and product markets are glutted… a global glut of investable savings too…. The Fed does not have cause to try to push inflation down. Its preferred measure of inflation continues to run below the Fed’s 2% target, as it has for the last four years. Somehow the Fed seems not to worry about what effect that might have on its credibility. All that undershooting has depressed market-based measures of inflation expectations…. If the Fed’s goal is to hit the 2% target in expectation, or on average, or most of the time, or every once in a while, or ever again, it might consider holding off on another rate rise until the magical 2% figure is reached. You know, just to make sure it can be done.

But the single biggest, overwhelming, really important reason not to rush this is the asymmetry of risks facing the central bank. Actually, the Fed’s economic staff explains this well; from the minutes:

The risks to the forecast for real GDP were seen as tilted to the downside, reflecting the staff’s assessment that neither monetary nor fiscal policy was well positioned to help the economy withstand substantial adverse shocks. In addition, while there had been recent improvements in global financial and economic conditions, downside risks to the forecast from developments abroad, though smaller, remained. Consistent with the downside risk to aggregate demand, the staff viewed the risks to its outlook for the unemployment rate as skewed to the upside.

The Fed has unlimited room to raise interest rates…. It has almost no room to reduce rates…. Hiking now is a leap off a cliff in a fog; one could always wait and jump later once conditions are clearer, but having jumped blindly one cannot reverse course if the expected ledge isn’t where one thought it would be…

I Continue to Fail to Understand Why the Federal Reserve’s Read of Optimal Monetary Policy Is so Different from Mine…

Posted on by Brad DeLong

Does you think this looks like an economy where inflation is on an upward trend and interest rates are too low for macroeconomic balance?

Personal Consumption Expenditures Chain type Price Index FRED St Louis Fed Graph Personal Consumption Expenditures Excluding Food and Energy Chain Type Price Index FRED St Louis Fed

Mohamed El-Erian says, accurately, that the Federal Reserve is much more likely than not to increase interest rates in June or July: Mohamed El-Erian: Federal Reserve Is Torn: “”Moves in financial conditions as a whole are making [the Fed]…

…more confident about going forward [with interest-rate hikes,] and they were worried that the markets were underestimating the possibility of a rate hike this year and they wanted to do something about it…. In the end, what’s clear is a hike will definitely happen this year…. If the Fed unambiguously signals that it will move, you will see a stronger dollar and that… will have consequences on other markets…

Olivier Blanchard (2016), [Blanchard, Cerutti, and Summers (2015)2, Kiley (2015), IMF (2013), and Ball and Mazumder (2011) all tell us this about the Phillips Curve:

  • The best estimates of the Phillips Curve as it stood in the 1970s is that, back in the day, an unemployment rate 1%-point less than the NAIRU maintained for 1.5 years would raise the inflation rate by 1%-point, and that a 1%-point increase in inflation would raise future expected inflation by 0.8%-points.
  • The best estimates of the Phillips as it stands today is that, here and now, an unemployment rate 1%-point less than the NAIRU maintained for 5 years would raise the inflation rate by 1%-point, and that a 1%-point increase in inflation would raise future expected inflation by 0.15%-points.
Www bradford delong com 2016 01 must read olivier blanchard says that he and paul krugman differ not at all on the analytics but rather substantially html

In only 6 of the last 36 months has the PCE core inflation rate exceeded 2.0%/year. I keep calling for someone to present me with any sort of optimal-control exercise that leads to the conclusion that it is appropriate for the Federal Reserve to be raising interest rights right now.

Civilian Employment Population Ratio FRED St Louis Fed

I keep hearing nothing but crickets…

My worries are compounded by the fact that the Federal Reserve appears to be working with an outmoded and probably wrong model of how monetary policy affects the rest of the world under floating exchange rates. The standard open-economy flexible-exchange rate models I was taught at the start of the 1980s said that contractionary monetary policy at home had an expansionary impact abroad: the dominant effect was to raise the value of the home currency and thus boost foreign countries’ levels of aggregate demand through the exports channel. But [Blanchard, Ostry, Ghosh, and Chamon (2015)][6] argue, convincingly, that that is more likely than not to be wrong: when the Fed or any other sovereign reserve currency-issuer with exorbitant privilege raises dollar interest rates, that drains risk-bearing capacity out of the rest of the world economy, and the resulting increase in interest-rate spreads puts more downward pressure on investment than there is upward pressure on exports.

It looks to me as though the Fed is thinking that its desire to appease those in the banking sector and elsewhere who think, for some reason, that more “normal” and higher interest rates now are desirable is not in conflict with its duty as global monetary hegemon in a world afflicted with slack demand. But it looks more likely than not that they are in fact in conflict.

[6]: Blanchard, Jonathan D. Ostry, Atish R. Ghosh, and Marcos Chamon

How high levels of inequality might change what innovation we see

Posted on by David Hudson

When asked why he robbed banks, Willie Sutton reportedly replied, “Because that’s where the money is.” That dictum is apt for more than just bank robbery, though. If you’re running a business, it makes sense to target your efforts and products to large and growing markets. Perhaps that market is large because of the number of people in it or because of the amount of money the people in the market have. The rise of income inequality in the United States—an increase in the relative amount of money some people have—has made some researchers and analysts wonder if this change in potential markets affects innovation. Maybe the rise in inequality has spurred companies into innovating more for households at the top of the income distribution? Well, a new research paper finds such a result.

The new research comes from a working paper from Harvard University Ph.D. student Xavier Jaravel. The intent of the paper is to look at who has gained the most from the innovations in consumer products from 2004 to 2013. As Jaravel points out, if product innovation has focused more on consumers at the top of the income ladder, then prices will probably end up being lower.

Jaravel got access to scanner data that gives him access not only to data on the prices of goods that individuals buy but also to information about their quality and the incomes of the consumer. What he ends up finding is this: As incomes increased at the top (above $100,000 a year to be exact), more consumer goods targeted toward those consumers entered the market. This increase in the supply of goods ended up driving down the price of these goods. (For those concerned about which way causality is flowing here, Jaravel offers two statistical tests to tease out the causal effect of increases in market size on product innovation and finds that his findings hold in both cases.)

The impact of these price drops is fairly significant. Jaravel finds that the average annual inflation rate over the time period studied for households making more than $100,000 a year was 0.65 percentage points lower than that for those making less than $30,000. As inflation rates go, that’s a fairly significant difference. Over a five-year period, that’s about a 3-percentage-point difference in cumulative inflation.

This finding also has relevance for the amount of inflation-adjusting income inequality in the United States. If products have become relatively cheap for households at the top, then their incomes have actually grown even more than we thought. In other words, inequality has increased more than we previously thought based on research that assumes that all households, rich and poor, face the same inflation rate.

More intriguingly still, if Jaravel’s findings hold up and hold to areas outside of consumer goods, then it means inequality may well shape the path of innovation. Many economists are concerned about the pace of innovation, but maybe we should all be thinking about the beneficiaries of innovation. Sure, innovation may trickle down in some cases (think cell phones), but maybe we might want to see some innovation focused right from the beginning on pressing issues facing a broad swath of the population. What good are cheaper consumer goods if they’re only for a select few?

(featured photo credit: iStock/Anatoly Vartanov)