Must-reads: May 14, 2016

Posted on by Brad DeLong

Should Reads:

Must-read: Peter Dorman: “Issues with Econ 101 at Three Levels”

Posted on by Brad DeLong

Must-Read: Peter Dorman: Issues with Econ 101 at Three Levels: “The debate about what’s right/wrong with introductory economics…

…which has raged intermittently since the financial crisis, is back again…. There are three aspects to what people like or don’t like (often the latter) with Econ 101. The first is pedagogy… lectures vs workshops and projects… marching through models and exploring applications and empirical debates… behind it all, whether the main purpose is to induce students to accept particular economic doctrines or to cultivate critical thinking…. The second is the intellectual content… the gap between standard 101 content and the current trajectory of the discipline is arguably wider than it has been in generations. The third is the state of economics itself…. If Econ 101 takes a narrow, unrealistic line on utility and human decision-making, it could just mean that the limitations of that view are more obvious at that level than they are higher up…. These three dimensions overlap and influence one another…

Must-read: Roger Farmer: “Pricing Assets in an Economy with Two Types of People”

Posted on by Brad DeLong

Must-Read: Roger Farmer: Pricing Assets in an Economy with Two Types of People: “This paper constructs a general equilibrium model…

…with two types of people, where asset price fluctuations are caused by random shocks to the price level that reallocate consumption across generations…. Asset prices are volatile and price-earnings ratios are persistent, even though there is no fundamental uncertainty and financial markets are sequentially complete. I show that the model can explain a substantial risk premium while generating smooth time series for consumption and financial assets across types. In my model, asset price fluctuations are Pareto inefficient and there is a role for treasury or central bank intervention to stabilize asset prices.

Must-read: Tim Duy: Fed Watch: Fed Speak, Claims

Posted on by Brad DeLong

Must-Read: I confess I could understand FOMC participants wanting to raise interest rates right now if projected growth over 2016 was 3.5% or higher. But we have a first quarter of 0.8% and a second quarter of 2.3%: we may well not even get to 2.0% this year.

I confess I understand FOMC participants worrying about “imbalances” created by extremely-low interest rates, but:

  1. If they are worried about extremely-low real interest rates, they need to be all-in pressuring the Congress for more expansionary fiscal policy.

  2. If they are worried about extremely-low nominal interest rates, they need to be all-in pressuring their colleagues for a higher inflation target.

It’s the absence of either of those two from the Fed hawks–and the Fed moderates–that has me greatly concerned:

Tim Duy: Fed Watch: Fed Speak, Claims: “The Fed is not likely to raise rates in June…

…But not everyone at the Fed is on board with the plan. Serial dissenter Kansas City Federal Reserve President Esther George repeated her warnings that interest rates are too low…. Boston Federal Reserve President Eric Rosengren… reiterated his warning that financial markets just don’t get it….

I would suggest that the failure of policymakers to better manage the economy at turning points is not because it is impossible, but because they have overtightened in the latter stage of the cycle, forgetting to pay attention to the lags in policy they think are so important during the early stages of the cycle….

Bottom Line: Ultimately, I suspect the FOMC will not find sufficient reason in the data before June to convince the Fed that growth is sufficiently strong to justify a hike. Hence I anticipate that they will pass on that opportunity to raise rates. Look for an opportunity in September…. I doubt, however, that most on the Fed are pleased that market participants have already priced out a June hike on the basis of the April employment report…. They do not see the outcome as already preordained.

Must-reads: May 13, 2016

Posted on by Brad DeLong

Should-reads:

Must-read: Dan Drezner: “Five Known Unknowns about the Next Generation Global Political Economy”

Posted on by Brad DeLong

Must-Read: Ah. The very smart Dan Drezner being very smart again. Brookings is surely not paying him enough…

My belief: (1) and (4) are known unknowns that will have their effects not over the next generation but over generations 2 through 4–they will shape history between 25 and 100 years from now, not between now and 25 years from now. The historical experiences of post-WWII Western Europe and East Asia strongly suggest that (2) is not a thing; the historical experiences of pretty much everybody else and every other era suggests that (2) is very much a thing. A breakdown of the doux commerce benefits (3) of the international division of labor is not to be anticipated, for the benefits are so great–but then this was an argument Norman Angell made with powerful force in the decade before WWI. And (5) strikes me as a very unlikely known unknown–representative democracy’s great advantage is that the citizens are aware that at some level they chose these clowns, and in a world in which divine right and the mandate of heaven are gone that is a very powerful stabilizing advantage.

So I would say: (2) is a thing. Focus on (2). And focus on the possibilities of (1) and (4) for longer-run forecasting exercises.

Dan Drezner: Five Known Unknowns about the Next Generation Global Political Economy: “The commonality to the known unknowns is the intersection of economic questions with non-economic questions that economists take as given…

…The next generation world economy will de- pend crucially on the answers to the follow- ing ve questions:

  1. Has the accelerated growth experienced by the developed world since the start of the Industrial Revolution come to an end?….

  2. Are there hard constraints on the ability of the developing world to converge to developed-country living standards?… The theory is that developing countries have lower incomes primarily because they are capital-deficient and because their economies operate further away from technological frontier… [thus] there are some growth advantages to “economic backwardness”…. This intuitive logic, however, is somewhat contradictd by the “middle income trap” [of] Barry Eichengreen, Donghyun Park, and Kwanho Shin… that as an economy’s GDP per capita hits close to $10,000, and then again at $16,000, growth slowdowns commence…. In fact, more countries that were middle income in 1960 had become relatively poorer than had joined the ranks of the rich economies…. Eichengreen, Park and Shin suggest that “slowdowns coincide with the point in the growth process where it is no longer possible to boost productivity by shifting additional workers from agriculture to industry and where the gains from importing foreign technology diminish.”…

  3. Will geopolitical rivalries or technological inovation alter the patterns of economic interdependence?… The Kantian triad of more democracies, stronger multilateral institutions, and greater levels of cross-border trade is well known…. The liberal logic is straightforward. The benefits of cross-border exchange and economic interdependence act as a powerful brake on the utility of violence in international politics…. Interdependence can also tamp down con icts that would otherwise be likely to break out during a great power transition. Of the 15 times a rising power has emerged to challenge a ruling power between 1500 and 2000, war broke out 11 times. Despite these odds, China’s recent rise to great power status has elevated tensions without leading to anything approaching war…. Instead, both China and the United States have taken pains to talk about the need for a new kind of great power relationship…. Will this be true for the next generation economy as well?…

  4. Will income and wealth inequality persist going forward, to the point when political externalities cannot be ignored?…

  5. Will an alternative economic ideology supplant free-market capitalism as a viable universal model for large parts of the world?… The liberal capitalist model looks somewhat shopworn…. Elected leaders like Hungary’s Viktor Orbán have said explicitly that “liberal democratic states can’t remain globally competitive,” and that it is better to create “an illiberal new state” inspired by Russia and China. The issue is not whether Orbán is actually correct, but that he is publicly willing to articulate such an alternative. Such disdain among political leaders re ects populist trends across the developing world—including the United States—that show waning faith in democracy. Similarly, disillusionment has set in with the Washington Consensus set of neoliberal economic policies…. At the same time, some commentators are beginning to articulate an alternative model… enthusiasm in some quarters for the way that authoritarian states deploy a mix of sovereign wealth funds, state-owned enterprises, policy development banks, and national oil companies to accelerate economic development, buy off dissent, and promote technology transfer… a rise in “authoritarian capitalism” or “state capitalism.”…

Arguments from authoritarian strongmen can be discounted as self-serving. Support from Western pundits are more worrisome but can also be dismissed.158 Political theorists making the case for “political meritocracy” are harder to dismiss. Daniel Bell argues that meritocratic principles for selecting leaders based on virtue, social skills, and intellectual ability can produce superior forms of governance in theory. In practice, he argues that China’s current political model—“democracy at the bottom, experimentation in the middle, and meritocracy at the top”—is superior to Western liberal democracy as practiced. Bell goes on to observe that his political views are “quite middle-of-the-road among academics living and working in China.” Whether Bell is correct in his praise of meritocracy is not the point; what matters is that political theorists are putting forward arguments in favor of nondemocratic political models that could be universal in application…

Weekend reading: “Friday the 13th” 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

After the U.S. housing bubble popped, consumer expenditures dropped a considerable amount and haven’t recovered as strongly as in past recoveries. A new paper looks at how much of that pullback was due to the huge drop in housing prices, and how much was due to the amount of debt that households had.

The Panama Papers have increased interest in offshore wealth. But while most of the stories about the leak have been about individuals, U.S. corporations also keep quite a bit of cash offshore. Kimberly Clausing of Reed College explains how profit shifting is a problem for the U.S. corporate income tax base.

Economists and policymakers are increasingly coming to the conclusion that the United States’ incarceration policy has more costs than benefits. And many of these costs may be understated due to measurement issues caused by how we treat incarcerated people in statistics.

The seeming deterioration of the Beveridge curve has some economists concerned about the state of the U.S. labor market. But we should remember in economics that we’re usually interested in where curves cross other curves. Taking a broader look should assuage some concerns about the labor market.

Links from around the web

The broad U.S. labor market is steadily improving as job growth continues to cut into joblessness. But the labor market isn’t strong for many segments of the population. Patricia Cohen looks at the situation of young workers without college degrees. [nyt]

One of the charges against the Federal Reserve’s extraordinary efforts to revive the economy is that the central bank increased wealth inequality by propping up asset prices. But a look at some data suggests just the opposite. Narayana Kocherlakota argues that wealth inequality increased because the Fed didn’t ease enough. [bloomberg view]

“Perhaps the most overlooked aspect of economic inequality has been the role that firms play in it.” Walter Frick looks at how rising differences between firms have implications for inequality and what the role of competition may be in these trends. [hbr]

The U.S. economy is faced with a significant question: Where will the new, high-paying jobs of the future come from? Eduardo Porter argues that the country has been in this situation before, that government action helped create prosperity, and that it can do it again. [nyt]

Consumption is an understudied economic concept when it comes to inequality and mobility. But a new note from the Federal Reserve Bank of New York looks at how much households move up and down the consumption ladder over the course of their lifetime. [liberty street economics]

Friday figure

Figure from “Profit shifting and U.S. corporate tax policy reform,” by Reed College’s Kimberly Clausing.

The shifting fate of the U.S. labor market

Posted on by Bridget Ansel

In the wonkier corners of the internet, the release of new data from the monthly Job Openings and Labor Turnover Survey usually produces a graph that can be a bit bewildering to neophytes: the Beveridge curve. It shows the relationship between the U.S. unemployment rate and the job openings rate with the movement in the relationship sketched out over time.

The curve has garnered attention in recent years, however, because it “shifted out” after the Great Recession and hasn’t moved back yet. (See Figure 1.) This change in the curve caused some economists and analysts to believe that structural changes in the labor market shifted the equilibrium unemployment rate up.

The number of job openings seems to be quite out of line with hiring. But with unemployment hovering around 5 percent and wage growth still tepid, what does the shift tell us about the state of the labor market?

A shift out in the Beveridge curve could be a sign that firms are becoming pickier about who they hire, either due to changes in their preferences or because the available workers don’t fit their standards. That’s why the current shift has sparked concerns about a “skills mismatch” in the labor market.

But the shift now is due entirely to the increased share of workers who have been unemployed for longer than 27 weeks. (See Figure 2.) The long-term unemployed curve seemed to be shifting back late in 2015, until an increase in the labor force participation rate arrested the shift.

But if looking at just one line seems to be a bit simplistic for understanding the labor market, that’s because it is. As Andrew Figura and David Ratner of the Board of Governors of the Federal Reserve System pointed out last year, the Beveridge Curve only describes where flows in and out of unemployment are consistent with a given vacancy rate. But by itself  it doesn’t determine the equilibrium unemployment and openings rates. For that, we also need to understand the job creation curve, the demand of firms for job openings at a given unemployment rate. (Check out Figura and Ratner’s depiction here.) The two economists make a convincing argument that changes in labor’s bargaining power and the increase in the profit share of income have made companies more willing to create job openings.

Why should we care about all these curves moving around? Take another look at Figura and Ratner’s figure. The place where the Beveridge curve and the job creation curve intersect determines the equilibrium unemployment rate, where the unemployment rate is consistent with the rates of job finding and leaving and firms are satisfied with the level of vacancies. Even though the labor share has gained a bit in recent months, the labor share is still below previous levels, and therefore it seems the job creation curve has moved in a direction where firms will create more job openings now for a given level of unemployment. The lower labor share implies that we have much further to go in pushing unemployment down to its natural rate.

Another question is what happens to the Beveridge curve. If the unemployment rate for long-term unemployed workers continues to stall, then the overall curve may not shift back to its previous spot. This would mean unemployment may be near its equilibrium rate right now. But if the curve does start shifting back (down and to the left), that means the equilibrium rate is lower than before and unemployment can go significantly below 5 percent. Clearly, we should keep an eye on these shifts.

Must-read: Timothy B. Lee: “Some thoughts on the end of economic growth”

Posted on by Brad DeLong

Must-Read: Timothy B. Lee: Some thoughts on the end of economic growth: “Technological progress in a particular industry often has diminishing returns…. Clothing is the best example…

A larger and larger fraction of the value people get from the clothing they buy… reflects social factors rather than economic ones…. A similar point can be made about food…. Most of the value of a restaurant meal comes from factors that can’t easily be improved by technology…. So families have been spending a shrinking share of their incomes on basic necessities…. During the 20th century, there was a steady stream of new inventions — cars, televisions, washing machines, refrigerators, telephones, electric lighting, personal computers, and so forth — that soaked up peoples’ growing disposable income. Over the last 30 years, this process has continued for information technology…. But outside of the IT sector, significant new inventions have been few and far between….

A century ago, rich people could spend their money on a wide variety of technological luxury goods — electric lighting, telephones, automobiles, indoor plumbing — that substantially improved their quality of life. Today, very wealthy people have private jets, but otherwise it’s hard to think of examples of major technologies that are available to them but not to Americans with more modest incomes. Instead, wealthy people spend money on… positional goods… and labor-saving services…. We’re running out of room for technological improvements in most areas of economic life, with three big exceptions: IT, medicine… transportation… energy….

We should expect a gradual slowdown in productivity growth rates…. This could be seen as a pessimistic take, but the optimistic way to think about it is that Americans in the top half of the income distribution have arrived: we’re getting pretty close to the highest level of material comfort and security that it’s possible for a human civilization to have. Our children and grandchildren probably won’t enjoy a much higher standard of living than we do, but that’s mostly because it’s hard to imagine what a much higher standard of living would look like.